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Free Tax Filing For Low Income

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Free Tax Filing For Low Income

Free tax filing for low income 4. Free tax filing for low income   Foreign Earned Income and Housing: Exclusion – Deduction Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Who Qualifies for the Exclusions and the Deduction? RequirementsTax Home in Foreign Country Bona Fide Residence Test Physical Presence Test Waiver of Time Requirements U. Free tax filing for low income S. Free tax filing for low income Travel Restrictions Foreign Earned Income Foreign Earned Income ExclusionLimit on Excludable Amount Choosing the Exclusion Foreign Housing Exclusion and DeductionHousing Amount Foreign Housing Exclusion Foreign Housing Deduction Married Couples Form 2555 and Form 2555-EZForm 2555-EZ Form 2555 Topics - This chapter discusses: Who qualifies for the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, The requirements that must be met to claim either exclusion or the deduction, How to figure the foreign earned income exclusion, and How to figure the foreign housing exclusion and the foreign housing deduction. Free tax filing for low income Useful Items - You may want to see: Publication 519 U. Free tax filing for low income S. Free tax filing for low income Tax Guide for Aliens 570 Tax Guide for Individuals With Income from U. Free tax filing for low income S. Free tax filing for low income Possessions 596 Earned Income Credit (EIC) Form (and Instructions) 1040X Amended U. Free tax filing for low income S. Free tax filing for low income Individual Income Tax Return 2555 Foreign Earned Income 2555-EZ Foreign Earned Income Exclusion See chapter 7 for information about getting these publications and forms. Free tax filing for low income Who Qualifies for the Exclusions and the Deduction? If you meet certain requirements, you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction. Free tax filing for low income If you are a U. Free tax filing for low income S. Free tax filing for low income citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. Free tax filing for low income However, you may qualify to exclude from income up to $97,600 of your foreign earnings. Free tax filing for low income In addition, you can exclude or deduct certain foreign housing amounts. Free tax filing for low income See Foreign Earned Income Exclusion and Foreign Housing Exclusion and Deduction, later. Free tax filing for low income You also may be entitled to exclude from income the value of meals and lodging provided to you by your employer. Free tax filing for low income See Exclusion of Meals and Lodging, later. Free tax filing for low income Requirements To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must meet all three of the following requirements. Free tax filing for low income Your tax home must be in a foreign country. Free tax filing for low income You must have foreign earned income. Free tax filing for low income You must be one of the following. Free tax filing for low income A U. Free tax filing for low income S. Free tax filing for low income citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Free tax filing for low income A U. Free tax filing for low income S. Free tax filing for low income resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Free tax filing for low income A U. Free tax filing for low income S. Free tax filing for low income citizen or a U. Free tax filing for low income S. Free tax filing for low income resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. Free tax filing for low income See Publication 519 to find out if you are a U. Free tax filing for low income S. Free tax filing for low income resident alien for tax purposes and whether you keep that alien status when you temporarily work abroad. Free tax filing for low income If you are a nonresident alien married to a U. Free tax filing for low income S. Free tax filing for low income citizen or resident alien, and both you and your spouse choose to treat you as a resident alien, you are a resident alien for tax purposes. Free tax filing for low income For information on making the choice, see the discussion in chapter 1 under Nonresident Alien Spouse Treated as a Resident . Free tax filing for low income Waiver of minimum time requirements. Free tax filing for low income   The minimum time requirements for bona fide residence and physical presence can be waived if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. Free tax filing for low income This is fully explained under Waiver of Time Requirements , later. Free tax filing for low income   See Figure 4-A and information in this chapter to determine if you are eligible to claim either exclusion or the deduction. Free tax filing for low income Tax Home in Foreign Country To qualify for the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, your tax home must be in a foreign country throughout your period of bona fide residence or physical presence abroad. Free tax filing for low income Bona fide residence and physical presence are explained later. Free tax filing for low income Tax Home Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Free tax filing for low income Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. Free tax filing for low income Having a “tax home” in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes. Free tax filing for low income If you do not have a regular or main place of business because of the nature of your work, your tax home may be the place where you regularly live. Free tax filing for low income If you have neither a regular or main place of business nor a place where you regularly live, you are considered an itinerant and your tax home is wherever you work. Free tax filing for low income You are not considered to have a tax home in a foreign country for any period in which your abode is in the United States. Free tax filing for low income However, your abode is not necessarily in the United States while you are temporarily in the United States. Free tax filing for low income Your abode is also not necessarily in the United States merely because you maintain a dwelling in the United States, whether or not your spouse or dependents use the dwelling. Free tax filing for low income “Abode” has been variously defined as one's home, habitation, residence, domicile, or place of dwelling. Free tax filing for low income It does not mean your principal place of business. Free tax filing for low income “Abode” has a domestic rather than a vocational meaning and does not mean the same as “tax home. Free tax filing for low income ” The location of your abode often will depend on where you maintain your economic, family, and personal ties. Free tax filing for low income Example 1. Free tax filing for low income You are employed on an offshore oil rig in the territorial waters of a foreign country and work a 28-day on/28-day off schedule. Free tax filing for low income You return to your family residence in the United States during your off periods. Free tax filing for low income You are considered to have an abode in the United States and do not satisfy the tax home test in the foreign country. Free tax filing for low income You cannot claim either of the exclusions or the housing deduction. Free tax filing for low income Example 2. Free tax filing for low income For several years, you were a marketing executive with a producer of machine tools in Toledo, Ohio. Free tax filing for low income In November of last year, your employer transferred you to London, England, for a minimum of 18 months to set up a sales operation for Europe. Free tax filing for low income Before you left, you distributed business cards showing your business and home addresses in London. Free tax filing for low income You kept ownership of your home in Toledo but rented it to another family. Free tax filing for low income You placed your car in storage. Free tax filing for low income In November of last year, you moved your spouse, children, furniture, and family pets to a home your employer rented for you in London. Free tax filing for low income Shortly after moving, you leased a car and you and your spouse got British driving licenses. Free tax filing for low income Your entire family got library cards for the local public library. Free tax filing for low income You and your spouse opened bank accounts with a London bank and secured consumer credit. Free tax filing for low income You joined a local business league and both you and your spouse became active in the neighborhood civic association and worked with a local charity. Free tax filing for low income Your abode is in London for the time you live there. Free tax filing for low income You satisfy the tax home test in the foreign country. Free tax filing for low income Please click here for the text description of the image. Free tax filing for low income Figure 4–A Can I Claim the Exclusion or Deduction? Temporary or Indefinite Assignment The location of your tax home often depends on whether your assignment is temporary or indefinite. Free tax filing for low income If you are temporarily absent from your tax home in the United States on business, you may be able to deduct your away-from-home expenses (for travel, meals, and lodging), but you would not qualify for the foreign earned income exclusion. Free tax filing for low income If your new work assignment is for an indefinite period, your new place of employment becomes your tax home and you would not be able to deduct any of the related expenses that you have in the general area of this new work assignment. Free tax filing for low income If your new tax home is in a foreign country and you meet the other requirements, your earnings may qualify for the foreign earned income exclusion. Free tax filing for low income If you expect your employment away from home in a single location to last, and it does last, for 1 year or less, it is temporary unless facts and circumstances indicate otherwise. Free tax filing for low income If you expect it to last for more than 1 year, it is indefinite. Free tax filing for low income If you expect it to last for 1 year or less, but at some later date you expect it to last longer than 1 year, it is temporary (in the absence of facts and circumstances indicating otherwise) until your expectation changes. Free tax filing for low income Once your expectation changes, it is indefinite. Free tax filing for low income Foreign Country To meet the bona fide residence test or the physical presence test, you must live in or be present in a foreign country. Free tax filing for low income A foreign country includes any territory under the sovereignty of a government other than that of the United States. Free tax filing for low income The term “foreign country” includes the country's airspace and territorial waters, but not international waters and the airspace above them. Free tax filing for low income It also includes the seabed and subsoil of those submarine areas adjacent to the country's territorial waters over which it has exclusive rights under international law to explore and exploit the natural resources. Free tax filing for low income The term “foreign country” does not include Antarctica or U. Free tax filing for low income S. Free tax filing for low income possessions such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U. Free tax filing for low income S. Free tax filing for low income Virgin Islands, and Johnston Island. Free tax filing for low income For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, the terms “foreign,” “abroad,” and “overseas” refer to areas outside the United States and those areas listed or described in the previous sentence. Free tax filing for low income American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands Residence or presence in a U. Free tax filing for low income S. Free tax filing for low income possession does not qualify you for the foreign earned income exclusion. Free tax filing for low income You may, however, qualify for an exclusion of your possession income on your U. Free tax filing for low income S. Free tax filing for low income return. Free tax filing for low income American Samoa. Free tax filing for low income   There is a possession exclusion available to individuals who are bona fide residents of American Samoa for the entire tax year. Free tax filing for low income Gross income from sources within American Samoa may be eligible for this exclusion. Free tax filing for low income Income that is effectively connected with the conduct of a trade or business within American Samoa also may be eligible for this exclusion. Free tax filing for low income Use Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, to figure the exclusion. Free tax filing for low income Guam and the Commonwealth of the Northern Mariana Islands. Free tax filing for low income   An exclusion will be available to residents of Guam and the Commonwealth of the Northern Mariana Islands if, and when, new implementation agreements take effect between the United States and those possessions. Free tax filing for low income   For more information, see Publication 570. Free tax filing for low income Puerto Rico and U. Free tax filing for low income S. Free tax filing for low income Virgin Islands Residents of Puerto Rico and the U. Free tax filing for low income S. Free tax filing for low income Virgin Islands cannot claim the foreign earned income exclusion or the foreign housing exclusion. Free tax filing for low income Puerto Rico. Free tax filing for low income   Generally, if you are a U. Free tax filing for low income S. Free tax filing for low income citizen who is a bona fide resident of Puerto Rico for the entire tax year, you are not subject to U. Free tax filing for low income S. Free tax filing for low income tax on income from Puerto Rican sources. Free tax filing for low income This does not include amounts paid for services performed as an employee of the United States. Free tax filing for low income However, you are subject to U. Free tax filing for low income S. Free tax filing for low income tax on your income from sources outside Puerto Rico. Free tax filing for low income In figuring your U. Free tax filing for low income S. Free tax filing for low income tax, you cannot deduct expenses allocable to income not subject to tax. Free tax filing for low income Bona Fide Residence Test You meet the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Free tax filing for low income You can use the bona fide residence test to qualify for the exclusions and the deduction only if you are either: A U. Free tax filing for low income S. Free tax filing for low income citizen, or A U. Free tax filing for low income S. Free tax filing for low income resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect. Free tax filing for low income You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year. Free tax filing for low income If you go to a foreign country to work on a particular job for a specified period of time, you ordinarily will not be regarded as a bona fide resident of that country even though you work there for 1 tax year or longer. Free tax filing for low income The length of your stay and the nature of your job are only two of the factors to be considered in determining whether you meet the bona fide residence test. Free tax filing for low income Bona fide residence. Free tax filing for low income   To meet the bona fide residence test, you must have established a bona fide residence in a foreign country. Free tax filing for low income   Your bona fide residence is not necessarily the same as your domicile. Free tax filing for low income Your domicile is your permanent home, the place to which you always return or intend to return. Free tax filing for low income Example. Free tax filing for low income You could have your domicile in Cleveland, Ohio, and a bona fide residence in Edinburgh, Scotland, if you intend to return eventually to Cleveland. Free tax filing for low income The fact that you go to Scotland does not automatically make Scotland your bona fide residence. Free tax filing for low income If you go there as a tourist, or on a short business trip, and return to the United States, you have not established bona fide residence in Scotland. Free tax filing for low income But if you go to Scotland to work for an indefinite or extended period and you set up permanent quarters there for yourself and your family, you probably have established a bona fide residence in a foreign country, even though you intend to return eventually to the United States. Free tax filing for low income You are clearly not a resident of Scotland in the first instance. Free tax filing for low income However, in the second, you are a resident because your stay in Scotland appears to be permanent. Free tax filing for low income If your residency is not as clearly defined as either of these illustrations, it may be more difficult to decide whether you have established a bona fide residence. Free tax filing for low income Determination. Free tax filing for low income   Questions of bona fide residence are determined according to each individual case, taking into account factors such as your intention, the purpose of your trip, and the nature and length of your stay abroad. Free tax filing for low income   To meet the bona fide residence test, you must show the Internal Revenue Service (IRS) that you have been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Free tax filing for low income The IRS decides whether you are a bona fide resident of a foreign country largely on the basis of facts you report on Form 2555. Free tax filing for low income IRS cannot make this determination until you file Form 2555. Free tax filing for low income Statement to foreign authorities. Free tax filing for low income   You are not considered a bona fide resident of a foreign country if you make a statement to the authorities of that country that you are not a resident of that country, and the authorities: Hold that you are not subject to their income tax laws as a resident, or Have not made a final decision on your status. Free tax filing for low income Special agreements and treaties. Free tax filing for low income   An income tax exemption provided in a treaty or other international agreement will not in itself prevent you from being a bona fide resident of a foreign country. Free tax filing for low income Whether a treaty prevents you from becoming a bona fide resident of a foreign country is determined under all provisions of the treaty, including specific provisions relating to residence or privileges and immunities. Free tax filing for low income Example 1. Free tax filing for low income You are a U. Free tax filing for low income S. Free tax filing for low income citizen employed in the United Kingdom by a U. Free tax filing for low income S. Free tax filing for low income employer under contract with the U. Free tax filing for low income S. Free tax filing for low income Armed Forces. Free tax filing for low income You are not subject to the North Atlantic Treaty Status of Forces Agreement. Free tax filing for low income You may be a bona fide resident of the United Kingdom. Free tax filing for low income Example 2. Free tax filing for low income You are a U. Free tax filing for low income S. Free tax filing for low income citizen in the United Kingdom who qualifies as an “employee” of an armed service or as a member of a “civilian component” under the North Atlantic Treaty Status of Forces Agreement. Free tax filing for low income You are not a bona fide resident of the United Kingdom. Free tax filing for low income Example 3. Free tax filing for low income You are a U. Free tax filing for low income S. Free tax filing for low income citizen employed in Japan by a U. Free tax filing for low income S. Free tax filing for low income employer under contract with the U. Free tax filing for low income S. Free tax filing for low income Armed Forces. Free tax filing for low income You are subject to the agreement of the Treaty of Mutual Cooperation and Security between the United States and Japan. Free tax filing for low income Being subject to the agreement does not make you a bona fide resident of Japan. Free tax filing for low income Example 4. Free tax filing for low income You are a U. Free tax filing for low income S. Free tax filing for low income citizen employed as an “official” by the United Nations in Switzerland. Free tax filing for low income You are exempt from Swiss taxation on the salary or wages paid to you by the United Nations. Free tax filing for low income This does not prevent you from being a bona fide resident of Switzerland. Free tax filing for low income Effect of voting by absentee ballot. Free tax filing for low income   If you are a U. Free tax filing for low income S. Free tax filing for low income citizen living abroad, you can vote by absentee ballot in any election held in the United States without risking your status as a bona fide resident of a foreign country. Free tax filing for low income   However, if you give information to the local election officials about the nature and length of your stay abroad that does not match the information you give for the bona fide residence test, the information given in connection with absentee voting will be considered in determining your status, but will not necessarily be conclusive. Free tax filing for low income Uninterrupted period including entire tax year. Free tax filing for low income   To meet the bona fide residence test, you must reside in a foreign country or countries for an uninterrupted period that includes an entire tax year. Free tax filing for low income An entire tax year is from January 1 through December 31 for taxpayers who file their income tax returns on a calendar year basis. Free tax filing for low income   During the period of bona fide residence in a foreign country, you can leave the country for brief or temporary trips back to the United States or elsewhere for vacation or business. Free tax filing for low income To keep your status as a bona fide resident of a foreign country, you must have a clear intention of returning from such trips, without unreasonable delay, to your foreign residence or to a new bona fide residence in another foreign country. Free tax filing for low income Example 1. Free tax filing for low income You arrived with your family in Lisbon, Portugal, on November 1, 2011. Free tax filing for low income Your assignment is indefinite, and you intend to live there with your family until your company sends you to a new post. Free tax filing for low income You immediately established residence there. Free tax filing for low income You spent April of 2012 at a business conference in the United States. Free tax filing for low income Your family stayed in Lisbon. Free tax filing for low income Immediately following the conference, you returned to Lisbon and continued living there. Free tax filing for low income On January 1, 2013, you completed an uninterrupted period of residence for a full tax year (2012), and you meet the bona fide residence test. Free tax filing for low income Example 2. Free tax filing for low income Assume the same facts as in Example 1, except that you transferred back to the United States on December 13, 2012. Free tax filing for low income You would not meet the bona fide residence test because your bona fide residence in the foreign country, although it lasted more than a year, did not include a full tax year. Free tax filing for low income You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test (discussed later). Free tax filing for low income Bona fide resident for part of a year. Free tax filing for low income   Once you have established bona fide residence in a foreign country for an uninterrupted period that includes an entire tax year, you are a bona fide resident of that country for the period starting with the date you actually began the residence and ending with the date you abandon the foreign residence. Free tax filing for low income Your period of bona fide residence can include an entire tax year plus parts of 2 other tax years. Free tax filing for low income Example. Free tax filing for low income You were a bona fide resident of Singapore from March 1, 2011, through September 14, 2013. Free tax filing for low income On September 15, 2013, you returned to the United States. Free tax filing for low income Since you were a bona fide resident of a foreign country for all of 2012, you were also a bona fide resident of a foreign country from March 1, 2011, through the end of 2011 and from January 1, 2013, through September 14, 2013. Free tax filing for low income Reassignment. Free tax filing for low income   If you are assigned from one foreign post to another, you may or may not have a break in foreign residence between your assignments, depending on the circumstances. Free tax filing for low income Example 1. Free tax filing for low income You were a resident of Pakistan from October 1, 2012, through November 30, 2013. Free tax filing for low income On December 1, 2013, you and your family returned to the United States to wait for an assignment to another foreign country. Free tax filing for low income Your household goods also were returned to the United States. Free tax filing for low income Your foreign residence ended on November 30, 2013, and did not begin again until after you were assigned to another foreign country and physically entered that country. Free tax filing for low income Since you were not a bona fide resident of a foreign country for the entire tax year of 2012 or 2013 you do not meet the bona fide residence test in either year. Free tax filing for low income You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test, discussed later. Free tax filing for low income Example 2. Free tax filing for low income Assume the same facts as in Example 1, except that upon completion of your assignment in Pakistan you were given a new assignment to Turkey. Free tax filing for low income On December 1, 2013, you and your family returned to the United States for a month's vacation. Free tax filing for low income On January 2, 2014, you arrived in Turkey for your new assignment. Free tax filing for low income Because you did not interrupt your bona fide residence abroad, you meet the bona fide residence test. Free tax filing for low income Physical Presence Test You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. Free tax filing for low income The 330 days do not have to be consecutive. Free tax filing for low income Any U. Free tax filing for low income S. Free tax filing for low income citizen or resident alien can use the physical presence test to qualify for the exclusions and the deduction. Free tax filing for low income The physical presence test is based only on how long you stay in a foreign country or countries. Free tax filing for low income This test does not depend on the kind of residence you establish, your intentions about returning, or the nature and purpose of your stay abroad. Free tax filing for low income 330 full days. Free tax filing for low income   Generally, to meet the physical presence test, you must be physically present in a foreign country or countries for at least 330 full days during a 12-month period. Free tax filing for low income You can count days you spent abroad for any reason. Free tax filing for low income You do not have to be in a foreign country only for employment purposes. Free tax filing for low income You can be on vacation. Free tax filing for low income   You do not meet the physical presence test if illness, family problems, a vacation, or your employer's orders cause you to be present for less than the required amount of time. Free tax filing for low income Exception. Free tax filing for low income   You can be physically present in a foreign country or countries for less than 330 full days and still meet the physical presence test if you are required to leave a country because of war or civil unrest. Free tax filing for low income See Waiver of Time Requirements, later. Free tax filing for low income Full day. Free tax filing for low income   A full day is a period of 24 consecutive hours, beginning at midnight. Free tax filing for low income Travel. Free tax filing for low income    When you leave the United States to go directly to a foreign country or when you return directly to the United States from a foreign country, the time you spend on or over international waters does not count toward the 330-day total. Free tax filing for low income Example. Free tax filing for low income You leave the United States for France by air on June 10. Free tax filing for low income You arrive in France at 9:00 a. Free tax filing for low income m. Free tax filing for low income on June 11. Free tax filing for low income Your first full day of physical presence in France is June 12. Free tax filing for low income Passing over foreign country. Free tax filing for low income   If, in traveling from the United States to a foreign country, you pass over a foreign country before midnight of the day you leave, the first day you can count toward the 330-day total is the day following the day you leave the United States. Free tax filing for low income Example. Free tax filing for low income You leave the United States by air at 9:30 a. Free tax filing for low income m. Free tax filing for low income on June 10 to travel to Kenya. Free tax filing for low income You pass over western Africa at 11:00 p. Free tax filing for low income m. Free tax filing for low income on June 10 and arrive in Kenya at 12:30 a. Free tax filing for low income m. Free tax filing for low income on June 11. Free tax filing for low income Your first full day in a foreign country is June 11. Free tax filing for low income Change of location. Free tax filing for low income   You can move about from one place to another in a foreign country or to another foreign country without losing full days. Free tax filing for low income If any part of your travel is not within any foreign country and takes less than 24 hours, you are considered to be in a foreign country during that part of travel. Free tax filing for low income Example 1. Free tax filing for low income You leave Ireland by air at 11:00 p. Free tax filing for low income m. Free tax filing for low income on July 6 and arrive in Sweden at 5:00 a. Free tax filing for low income m. Free tax filing for low income on July 7. Free tax filing for low income Your trip takes less than 24 hours and you lose no full days. Free tax filing for low income Example 2. Free tax filing for low income You leave Norway by ship at 10:00 p. Free tax filing for low income m. Free tax filing for low income on July 6 and arrive in Portugal at 6:00 a. Free tax filing for low income m. Free tax filing for low income on July 8. Free tax filing for low income Since your travel is not within a foreign country or countries and the trip takes more than 24 hours, you lose as full days July 6, 7, and 8. Free tax filing for low income If you remain in Portugal, your next full day in a foreign country is July 9. Free tax filing for low income In United States while in transit. Free tax filing for low income   If you are in transit between two points outside the United States and are physically present in the United States for less than 24 hours, you are not treated as present in the United States during the transit. Free tax filing for low income You are treated as traveling over areas not within any foreign country. Free tax filing for low income    Please click here for the text description of the image. Free tax filing for low income Figure 4-B How to figure the 12-month period. Free tax filing for low income   There are four rules you should know when figuring the 12-month period. Free tax filing for low income Your 12-month period can begin with any day of the month. Free tax filing for low income It ends the day before the same calendar day, 12 months later. Free tax filing for low income Your 12-month period must be made up of consecutive months. Free tax filing for low income Any 12-month period can be used if the 330 days in a foreign country fall within that period. Free tax filing for low income You do not have to begin your 12-month period with your first full day in a foreign country or end it with the day you leave. Free tax filing for low income You can choose the 12-month period that gives you the greatest exclusion. Free tax filing for low income In determining whether the 12-month period falls within a longer stay in the foreign country, 12-month periods can overlap one another. Free tax filing for low income Example 1. Free tax filing for low income You are a construction worker who works on and off in a foreign country over a 20-month period. Free tax filing for low income You might pick up the 330 full days in a 12-month period only during the middle months of the time you work in the foreign country because the first few and last few months of the 20-month period are broken up by long visits to the United States. Free tax filing for low income Example 2. Free tax filing for low income You work in New Zealand for a 20-month period from January 1, 2012, through August 31, 2013, except that you spend 28 days in February 2012 and 28 days in February 2013 on vacation in the United States. Free tax filing for low income You are present in New Zealand for at least 330 full days during each of the following two 12-month periods: January 1, 2012 – December 31, 2012 and September 1, 2012 – August 31, 2013. Free tax filing for low income By overlapping the 12-month periods in this way, you meet the physical presence test for the whole 20-month period. Free tax filing for low income See Figure 4-B, on the previous page. Free tax filing for low income Waiver of Time Requirements Both the bona fide residence test and the physical presence test contain minimum time requirements. Free tax filing for low income The minimum time requirements can be waived, however, if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. Free tax filing for low income You must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions. Free tax filing for low income To qualify for the waiver, you must actually have your tax home in the foreign country and be a bona fide resident of, or be physically present in, the foreign country on or before the beginning date of the waiver. Free tax filing for low income Early in 2014, the IRS will publish in the Internal Revenue Bulletin a list of the only countries that qualify for the waiver for 2013 and the effective dates. Free tax filing for low income If you left one of the countries on or after the date listed for each country, you can meet the bona fide residence test or physical presence test for 2013 without meeting the minimum time requirement. Free tax filing for low income However, in figuring your exclusion, the number of your qualifying days of bona fide residence or physical presence includes only days of actual residence or presence within the country. Free tax filing for low income U. Free tax filing for low income S. Free tax filing for low income Travel Restrictions If you are present in a foreign country in violation of U. Free tax filing for low income S. Free tax filing for low income law, you will not be treated as a bona fide resident of a foreign country or as physically present in a foreign country while you are in violation of the law. Free tax filing for low income Income that you earn from sources within such a country for services performed during a period of violation does not qualify as foreign earned income. Free tax filing for low income Your housing expenses within that country (or outside that country for housing your spouse or dependents) while you are in violation of the law cannot be included in figuring your foreign housing amount. Free tax filing for low income For 2013, the only country to which travel restrictions applied was Cuba. Free tax filing for low income The restrictions applied for the entire year. Free tax filing for low income However, individuals working at the U. Free tax filing for low income S. Free tax filing for low income Naval Base at Guantanamo Bay in Cuba are not in violation of U. Free tax filing for low income S. Free tax filing for low income law. Free tax filing for low income Personal service income earned by individuals at the base is eligible for the foreign earned income exclusion provided the other requirements are met. Free tax filing for low income Foreign Earned Income To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income. Free tax filing for low income Foreign earned income generally is income you receive for services you perform during a period in which you meet both of the following requirements. Free tax filing for low income Your tax home is in a foreign country. Free tax filing for low income You meet either the bona fide residence test or the physical presence test. Free tax filing for low income To determine whether your tax home is in a foreign country, see Tax Home in Foreign Country, earlier. Free tax filing for low income To determine whether you meet either the bona fide residence test or the physical presence test, see Bona Fide Residence Test and Physical Presence Test, earlier. Free tax filing for low income Foreign earned income does not include the following amounts. Free tax filing for low income The value of meals and lodging that you exclude from your income because the meals and lodging were furnished for the convenience of your employer. Free tax filing for low income Pension or annuity payments you receive, including social security benefits (see Pensions and annuities, later). Free tax filing for low income Pay you receive as an employee of the U. Free tax filing for low income S. Free tax filing for low income Government. Free tax filing for low income (See U. Free tax filing for low income S. Free tax filing for low income Government Employees, later. Free tax filing for low income ) Amounts you include in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualified annuity contract. Free tax filing for low income Any unallowable moving expense deduction that you choose to recapture as explained under Moving Expense Attributable to Foreign Earnings in 2 Years in chapter 5. Free tax filing for low income Payments you receive after the end of the tax year following the tax year in which you performed the services that earned the income. Free tax filing for low income Earned income. Free tax filing for low income   This is pay for personal services performed, such as wages, salaries, or professional fees. Free tax filing for low income The list that follows classifies many types of income into three categories. Free tax filing for low income The column headed Variable Income lists income that may fall into either the earned income category, the unearned income category, or partly into both. Free tax filing for low income For more information on earned and unearned income, see Earned and Unearned Income, later. Free tax filing for low income Earned Income Unearned Income Variable Income Salaries and wages Dividends Business profits Commissions Interest Royalties Bonuses Capital gains Rents Professional fees Gambling winnings Scholarships and fellowships Tips Alimony     Social security benefits     Pensions     Annuities     In addition to the types of earned income listed, certain noncash income and allowances or reimbursements are considered earned income. Free tax filing for low income Noncash income. Free tax filing for low income   The fair market value of property or facilities provided to you by your employer in the form of lodging, meals, or use of a car is earned income. Free tax filing for low income Allowances or reimbursements. Free tax filing for low income   Earned income includes allowances or reimbursements you receive, such as the following amounts. Free tax filing for low income    Cost-of-living allowances. Free tax filing for low income Overseas differential. Free tax filing for low income Family allowance. Free tax filing for low income Reimbursement for education or education allowance. Free tax filing for low income Home leave allowance. Free tax filing for low income Quarters allowance. Free tax filing for low income Reimbursement for moving or moving allowance (unless excluded from income as discussed later in Reimbursement of employee expenses under Earned and Unearned Income). Free tax filing for low income Source of Earned Income The source of your earned income is the place where you perform the services for which you received the income. Free tax filing for low income Foreign earned income is income you receive for working in a foreign country. Free tax filing for low income Where or how you are paid has no effect on the source of the income. Free tax filing for low income For example, income you receive for work done in Austria is income from a foreign source even if the income is paid directly to your bank account in the United States and your employer is located in New York City. Free tax filing for low income Example. Free tax filing for low income You are a U. Free tax filing for low income S. Free tax filing for low income citizen, a bona fide resident of Canada, and working as a mining engineer. Free tax filing for low income Your salary is $76,800 per year. Free tax filing for low income You also receive a $6,000 cost-of-living allowance, and a $6,000 education allowance. Free tax filing for low income Your employment contract did not indicate that you were entitled to these allowances only while outside the United States. Free tax filing for low income Your total income is $88,800. Free tax filing for low income You work a 5-day week, Monday through Friday. Free tax filing for low income After subtracting your vacation, you have a total of 240 workdays in the year. Free tax filing for low income You worked in the United States during the year for 6 weeks (30 workdays). Free tax filing for low income The following shows how to figure the part of your income that is for work done in Canada during the year. Free tax filing for low income   Number of days worked in Canada during the year (210) × Total income ($88,800) = $77,700     Number of days of work during the year for which payment was made (240)   Your foreign source earned income is $77,700. Free tax filing for low income Earned and Unearned Income Earned income was defined earlier as pay for personal services performed. Free tax filing for low income Some types of income are not easily identified as earned or unearned income. Free tax filing for low income Some of these types of income are further explained here. Free tax filing for low income Income from a sole proprietorship or partnership. Free tax filing for low income   Income from a business in which capital investment is an important part of producing the income may be unearned income. Free tax filing for low income If you are a sole proprietor or partner and your personal services are also an important part of producing the income, the part of the income that represents the value of your personal services will be treated as earned income. Free tax filing for low income Capital a factor. Free tax filing for low income   If capital investment is an important part of producing income, no more than 30% of your share of the net profits of the business is earned income. Free tax filing for low income   If you have no net profits, the part of your gross profit that represents a reasonable allowance for personal services actually performed is considered earned income. Free tax filing for low income Because you do not have a net profit, the 30% limit does not apply. Free tax filing for low income Example 1. Free tax filing for low income You are a U. Free tax filing for low income S. Free tax filing for low income citizen and meet the bona fide residence test. Free tax filing for low income You invest in a partnership based in Cameroon that is engaged solely in selling merchandise outside the United States. Free tax filing for low income You perform no services for the partnership. Free tax filing for low income At the end of the tax year, your share of the net profits is $80,000. Free tax filing for low income The entire $80,000 is unearned income. Free tax filing for low income Example 2. Free tax filing for low income Assume that in Example 1 you spend time operating the business. Free tax filing for low income Your share of the net profits is $80,000; 30% of your share of the profits is $24,000. Free tax filing for low income If the value of your services for the year is $15,000, your earned income is limited to the value of your services, $15,000. Free tax filing for low income Capital not a factor. Free tax filing for low income   If capital is not an income-producing factor and personal services produce the business income, the 30% rule does not apply. Free tax filing for low income The entire amount of business income is earned income. Free tax filing for low income Example. Free tax filing for low income You and Lou Green are management consultants and operate as equal partners in performing services outside the United States. Free tax filing for low income Because capital is not an income- producing factor, all the income from the partnership is considered earned income. Free tax filing for low income Income from a corporation. Free tax filing for low income   The salary you receive from a corporation is earned income only if it represents a reasonable allowance as compensation for work you do for the corporation. Free tax filing for low income Any amount over what is considered a reasonable salary is unearned income. Free tax filing for low income Example 1. Free tax filing for low income You are a U. Free tax filing for low income S. Free tax filing for low income citizen and an officer and stockholder of a corporation in Honduras. Free tax filing for low income You perform no work or service of any kind for the corporation. Free tax filing for low income During the tax year you receive a $10,000 “salary” from the corporation. Free tax filing for low income The $10,000 clearly is not for personal services and is unearned income. Free tax filing for low income Example 2. Free tax filing for low income You are a U. Free tax filing for low income S. Free tax filing for low income citizen and work full time as secretary-treasurer of your corporation. Free tax filing for low income During the tax year you receive $100,000 as salary from the corporation. Free tax filing for low income If $80,000 is a reasonable allowance as pay for the work you did, then $80,000 is earned income. Free tax filing for low income Stock options. Free tax filing for low income   You may have earned income if you disposed of stock that you got by exercising a stock option granted to you under an employee stock purchase plan. Free tax filing for low income   If your gain on the disposition of stock you got by exercising an option is treated as capital gain, your gain is unearned income. Free tax filing for low income   However, if you disposed of the stock less than 2 years after you were granted the option or less than 1 year after you got the stock, part of the gain on the disposition may be earned income. Free tax filing for low income It is considered received in the year you disposed of the stock and earned in the year you performed the services for which you were granted the option. Free tax filing for low income Any part of the earned income that is due to work you did outside the United States is foreign earned income. Free tax filing for low income   See Publication 525, Taxable and Nontaxable Income, for a discussion of the treatment of stock options. Free tax filing for low income Pensions and annuities. Free tax filing for low income    For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, amounts received as pensions or annuities are unearned income. Free tax filing for low income Royalties. Free tax filing for low income   Royalties from the leasing of oil and mineral lands and patents generally are a form of rent or dividends and are unearned income. Free tax filing for low income   Royalties received by a writer are earned income if they are received: For the transfer of property rights of the writer in the writer's product, or Under a contract to write a book or series of articles. Free tax filing for low income Rental income. Free tax filing for low income   Generally, rental income is unearned income. Free tax filing for low income If you perform personal services in connection with the production of rent, up to 30% of your net rental income can be considered earned income. Free tax filing for low income Example. Free tax filing for low income Larry Smith, a U. Free tax filing for low income S. Free tax filing for low income citizen living in Australia, owns and operates a rooming house in Sydney. Free tax filing for low income If he is operating the rooming house as a business that requires capital and personal services, he can consider up to 30% of net rental income as earned income. Free tax filing for low income On the other hand, if he just owns the rooming house and performs no personal services connected with its operation, except perhaps making minor repairs and collecting rents, none of his net income from the house is considered earned income. Free tax filing for low income It is all unearned income. Free tax filing for low income Professional fees. Free tax filing for low income   If you are engaged in a professional occupation (such as a doctor or lawyer), all fees received in the performance of these services are earned income. Free tax filing for low income Income of an artist. Free tax filing for low income   Income you receive from the sale of paintings you created is earned income. Free tax filing for low income Scholarships and fellowships. Free tax filing for low income   Any portion of a scholarship or fellowship grant that is paid to you for teaching, research or other services is considered earned income if you must include it in your gross income. Free tax filing for low income If the payer of the grant is required to provide you with a Form W-2, Wage and Tax Statement, these amounts will be listed as wages. Free tax filing for low income    Certain scholarship and fellowship income may be exempt under other provisions. Free tax filing for low income See Publication 970, Tax Benefits for Education, chapter 1. Free tax filing for low income Use of employer's property or facilities. Free tax filing for low income   If you receive fringe benefits in the form of the right to use your employer's property or facilities, the fair market value of that right is earned income. Free tax filing for low income Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being required to buy or sell, and both having reasonable knowledge of all the necessary facts. Free tax filing for low income Example. Free tax filing for low income You are privately employed and live in Japan all year. Free tax filing for low income You are paid a salary of $6,000 a month. Free tax filing for low income You live rent-free in a house provided by your employer that has a fair rental value of $3,000 a month. Free tax filing for low income The house is not provided for your employer's convenience. Free tax filing for low income You report on the calendar-year, cash basis. Free tax filing for low income You received $72,000 salary from foreign sources plus $36,000 fair rental value of the house, or a total of $108,000 of earned income. Free tax filing for low income Reimbursement of employee expenses. Free tax filing for low income   If you are reimbursed under an accountable plan (defined below) for expenses you incur on your employer's behalf and you have adequately accounted to your employer for the expenses, do not include the reimbursement for those expenses in your earned income. Free tax filing for low income   The expenses for which you are reimbursed are not considered allocable (related) to your earned income. Free tax filing for low income If expenses and reimbursement are equal, there is nothing to allocate to excluded income. Free tax filing for low income If expenses are more than the reimbursement, the unreimbursed expenses are considered to have been incurred in producing earned income and must be divided between your excluded and included income in determining the amount of unreimbursed expenses you can deduct. Free tax filing for low income (See chapter 5. Free tax filing for low income ) If the reimbursement is more than the expenses, no expenses remain to be divided between excluded and included income and the excess reimbursement must be included in earned income. Free tax filing for low income   These rules do not apply to the following individuals. Free tax filing for low income Straight-commission salespersons. Free tax filing for low income Employees who have arrangements with their employers under which taxes are not withheld on a percentage of the commissions because the employers consider that percentage to be attributable to the employees' expenses. Free tax filing for low income Accountable plan. Free tax filing for low income   An accountable plan is a reimbursement or allowance arrangement that includes all three of the following rules. Free tax filing for low income The expenses covered under the plan must have a business connection. Free tax filing for low income The employee must adequately account to the employer for these expenses within a reasonable period of time. Free tax filing for low income The employee must return any excess reimbursement or allowance within a reasonable period of time. Free tax filing for low income Reimbursement of moving expenses. Free tax filing for low income   Reimbursement of moving expenses may be earned income. Free tax filing for low income You must include as earned income: Any reimbursements of, or payments for, nondeductible moving expenses, Reimbursements that are more than your deductible expenses and that you do not return to your employer, Any reimbursements made (or treated as made) under a nonaccountable plan (any plan that does not meet the rules listed above for an accountable plan), even if they are for deductible expenses, and Any reimbursement of moving expenses you deducted in an earlier year. Free tax filing for low income This section discusses reimbursements that must be included in earned income. Free tax filing for low income Publication 521, Moving Expenses, discusses additional rules that apply to moving expense deductions and reimbursements. Free tax filing for low income   The rules for determining when the reimbursement is considered earned or where the reimbursement is considered earned may differ somewhat from the general rules previously discussed. Free tax filing for low income   Although you receive the reimbursement in one tax year, it may be considered earned for services performed, or to be performed, in another tax year. Free tax filing for low income You must report the reimbursement as income on your return in the year you receive it, even if it is considered earned during a different year. Free tax filing for low income Move from U. Free tax filing for low income S. Free tax filing for low income to foreign country. Free tax filing for low income   If you move from the United States to a foreign country, your moving expense reimbursement is generally considered pay for future services to be performed at the new location. Free tax filing for low income The reimbursement is considered earned solely in the year of the move if you qualify for the exclusion for a period that includes at least 120 days during that tax year. Free tax filing for low income   If you are neither a bona fide resident of nor physically present in a foreign country or countries for a period that includes 120 days during the year of the move, a portion of the reimbursement is considered earned in the year of the move and a portion is considered earned in the year following the year of the move. Free tax filing for low income To figure the amount earned in the year of the move, multiply the reimbursement by a fraction. Free tax filing for low income The numerator (top number) is the number of days in your qualifying period that fall within the year of the move, and the denominator (bottom number) is the total number of days in the year of the move. Free tax filing for low income   The difference between the total reimbursement and the amount considered earned in the year of the move is the amount considered earned in the year following the year of the move. Free tax filing for low income The part earned in each year is figured as shown in the following example. Free tax filing for low income Example. Free tax filing for low income You are a U. Free tax filing for low income S. Free tax filing for low income citizen working in the United States. Free tax filing for low income You were told in October 2012 that you were being transferred to a foreign country. Free tax filing for low income You arrived in the foreign country on December 15, 2012, and you are a bona fide resident for the remainder of 2012 and all of 2013. Free tax filing for low income Your employer reimbursed you $2,000 in January 2013 for the part of the moving expense that you were not allowed to deduct. Free tax filing for low income Because you did not qualify for the exclusion under the bona fide residence test for at least 120 days in 2012 (the year of the move), the reimbursement is considered pay for services performed in the foreign country for both 2012 and 2013. Free tax filing for low income You figure the part of the reimbursement for services performed in the foreign country in 2012 by multiplying the total reimbursement by a fraction. Free tax filing for low income The fraction is the number of days during which you were a bona fide resident in 2012 (the year of the move) divided by 366. Free tax filing for low income The remaining part of the reimbursement is for services performed in the foreign country in 2013. Free tax filing for low income This computation is used only to determine when the reimbursement is considered earned. Free tax filing for low income You would include the amount of the reimbursement in income in 2013, the year you received it. Free tax filing for low income Move between foreign countries. Free tax filing for low income   If you move between foreign countries, any moving expense reimbursement that you must include in income will be considered earned in the year of the move if you qualify for the foreign earned income exclusion for a period that includes at least 120 days in the year of the move. Free tax filing for low income Move to U. Free tax filing for low income S. Free tax filing for low income   If you move to the United States, the moving expense reimbursement that you must include in income is generally considered to be U. Free tax filing for low income S. Free tax filing for low income source income. Free tax filing for low income   However, if under either an agreement between you and your employer or a statement of company policy that is reduced to writing before your move to the foreign country, your employer will reimburse you for your move back to the United States regardless of whether you continue to work for the employer, the includible reimbursement is considered compensation for past services performed in the foreign country. Free tax filing for low income The includible reimbursement is considered earned in the year of the move if you qualify for the foreign earned income exclusion for a period that includes at least 120 days during that year. Free tax filing for low income Otherwise, you treat the includible reimbursement as received for services performed in the foreign country in the year of the move and the year immediately before the year of the move. Free tax filing for low income   See the discussion under Move from U. Free tax filing for low income S. Free tax filing for low income to foreign country , earlier, to figure the amount of the includible reimbursement considered earned in the year of the move. Free tax filing for low income The amount earned in the year before the year of the move is the difference between the total includible reimbursement and the amount earned in the year of the move. Free tax filing for low income Example. Free tax filing for low income You are a U. Free tax filing for low income S. Free tax filing for low income citizen employed in a foreign country. Free tax filing for low income You retired from employment with your employer on March 31, 2013, and returned to the United States after having been a bona fide resident of the foreign country for several years. Free tax filing for low income A written agreement with your employer entered into before you went abroad provided that you would be reimbursed for your move back to the United States. Free tax filing for low income In April 2013, your former employer reimbursed you $4,000 for the part of the cost of your move back to the United States that you were not allowed to deduct. Free tax filing for low income Because you were not a bona fide resident of a foreign country or countries for a period that included at least 120 days in 2013 (the year of the move), the includible reimbursement is considered pay for services performed in the foreign country for both 2013 and 2012. Free tax filing for low income You figure the part of the moving expense reimbursement for services performed in the foreign country for 2013 by multiplying the total includible reimbursement by a fraction. Free tax filing for low income The fraction is the number of days of foreign residence during the year (90) divided by the number of days in the year (365). Free tax filing for low income The remaining part of the includible reimbursement is for services performed in the foreign country in 2012. Free tax filing for low income You report the amount of the includible reimbursement in 2013, the year you received it. Free tax filing for low income    In this example, if you met the physical presence test for a period that included at least 120 days in 2013, the moving expense reimbursement would be considered earned entirely in the year of the move. Free tax filing for low income Storage expense reimbursements. Free tax filing for low income   If you are reimbursed for storage expenses, the reimbursement is for services you perform during the period of time for which the storage expenses are incurred. Free tax filing for low income U. Free tax filing for low income S. Free tax filing for low income Government Employees For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, foreign earned income does not include any amounts paid by the United States or any of its agencies to its employees. Free tax filing for low income This includes amounts paid from both appropriated and nonappropriated funds. Free tax filing for low income The following organizations (and other organizations similarly organized and operated under United States Army, Navy, or Air Force regulations) are integral parts of the Armed Forces, agencies, or instrumentalities of the United States. Free tax filing for low income United States Armed Forces exchanges. Free tax filing for low income Commissioned and noncommissioned officers' messes. Free tax filing for low income Armed Forces motion picture services. Free tax filing for low income Kindergartens on foreign Armed Forces installations. Free tax filing for low income Amounts paid by the United States or its agencies to persons who are not their employees may qualify for exclusion or deduction. Free tax filing for low income If you are a U. Free tax filing for low income S. Free tax filing for low income Government employee paid by a U. Free tax filing for low income S. Free tax filing for low income agency that assigned you to a foreign government to perform specific services for which the agency is reimbursed by the foreign government, your pay is from the U. Free tax filing for low income S. Free tax filing for low income Government and does not qualify for exclusion or deduction. Free tax filing for low income If you have questions about whether you are an employee or an independent contractor, get Publication 15-A, Employer's Supplemental Tax Guide. Free tax filing for low income American Institute in Taiwan. Free tax filing for low income   Amounts paid by the American Institute in Taiwan are not foreign earned income for purposes of the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. Free tax filing for low income If you are an employee of the American Institute in Taiwan, allowances you receive are exempt from U. Free tax filing for low income S. Free tax filing for low income tax up to the amount that equals tax-exempt allowances received by civilian employees of the U. Free tax filing for low income S. Free tax filing for low income Government. Free tax filing for low income Allowances. Free tax filing for low income   Cost-of-living and foreign-area allowances paid under certain acts of Congress to U. Free tax filing for low income S. Free tax filing for low income civilian officers and employees stationed in Alaska and Hawaii or elsewhere outside the 48 contiguous states and the District of Columbia can be excluded from gross income. Free tax filing for low income Post differentials are wages that must be included in gross income, regardless of the act of Congress under which they are paid. Free tax filing for low income More information. Free tax filing for low income   Publication 516, U. Free tax filing for low income S. Free tax filing for low income Government Civilian Employees Stationed Abroad, has more information for U. Free tax filing for low income S. Free tax filing for low income Government employees abroad. Free tax filing for low income Exclusion of Meals and Lodging You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met. Free tax filing for low income The meals are furnished: On the business premises of your employer, and For the convenience of your employer. Free tax filing for low income The lodging is furnished: On the business premises of your employer, For the convenience of your employer, and As a condition of your employment. Free tax filing for low income If these conditions are met, do not include the value of the meals or lodging in your income, even if a law or your employment contract says that they are provided as compensation. Free tax filing for low income Amounts you do not include in income because of these rules are not foreign earned income. Free tax filing for low income If you receive a Form W-2, excludable amounts should not be included in the total reported in box 1 as wages. Free tax filing for low income Family. Free tax filing for low income   Your family, for this purpose, includes only your spouse and your dependents. Free tax filing for low income Lodging. Free tax filing for low income   The value of lodging includes the cost of heat, electricity, gas, water, sewer service, and similar items needed to make the lodging fit to live in. Free tax filing for low income Business premises of employer. Free tax filing for low income   Generally, the business premises of your employer is wherever you work. Free tax filing for low income For example, if you work as a housekeeper, meals and lodging provided in your employer's home are provided on the business premises of your employer. Free tax filing for low income Similarly, meals provided to cowhands while herding cattle on land leased or owned by their employer are considered provided on the premises of their employer. Free tax filing for low income Convenience of employer. Free tax filing for low income   Whether meals or lodging are provided for your employer's convenience must be determined from all the facts and circumstances. Free tax filing for low income Meals furnished at no charge are considered provided for your employer's convenience if there is a good business reason for providing them, other than to give you more pay. Free tax filing for low income   On the other hand, if your employer provides meals to you or your family as a means of giving you more pay, and there is no other business reason for providing them, their value is extra income to you because they are not furnished for the convenience of your employer. Free tax filing for low income Condition of employment. Free tax filing for low income   Lodging is provided as a condition of employment if you must accept the lodging to properly carry out the duties of your job. Free tax filing for low income You must accept lodging to properly carry out your duties if, for example, you must be available for duty at all times or you could not perform your duties if the lodging was not furnished. Free tax filing for low income Foreign camps. Free tax filing for low income   If the lodging is in a camp located in a foreign country, the camp is considered part of your employer's business premises. Free tax filing for low income The camp must be: Provided for your employer's convenience because the place where you work is in a remote area where satisfactory housing is not available to you on the open market within a reasonable commuting distance, Located as close as reasonably possible in the area where you work, and Provided in a common area or enclave that is not available to the general public for lodging or accommodations and that normally houses at least ten employees. Free tax filing for low income Foreign Earned Income Exclusion If your tax home is in a foreign country and you meet the bona fide residence test or the physical presence test, you can choose to exclude from your income a limited amount of your foreign earned income. Free tax filing for low income Foreign earned income was defined earlier in this chapter. Free tax filing for low income You also can choose to exclude from your income a foreign housing amount. Free tax filing for low income This is explained later under Foreign Housing Exclusion. Free tax filing for low income If you choose to exclude a foreign housing amount, you must figure the foreign housing exclusion before you figure the foreign earned income exclusion. Free tax filing for low income Your foreign earned income exclusion is limited to your foreign earned income minus your foreign housing exclusion. Free tax filing for low income If you choose to exclude foreign earned income, you cannot deduct, exclude, or claim a credit for any item that can be allocated to or charged against the excluded amounts. Free tax filing for low income This includes any expenses, losses, and other normally deductible items allocable to the excluded income. Free tax filing for low income For more information about deductions and credits, see chapter 5 . Free tax filing for low income Limit on Excludable Amount You may be able to exclude up to $97,600 of your foreign earned income in 2013. Free tax filing for low income You cannot exclude more than the smaller of: $97,600, or Your foreign earned income (discussed earlier) for the tax year minus your foreign housing exclusion (discussed later). Free tax filing for low income If both you and your spouse work abroad and each of you meets either the bona fide residence test or the physical presence test, you can each choose the foreign earned income exclusion. Free tax filing for low income You do not both need to meet the same test. Free tax filing for low income Together, you and your spouse can exclude as much as $195,200. Free tax filing for low income Paid in year following work. Free tax filing for low income   Generally, you are considered to have earned income in the year in which you do the work for which you receive the income, even if you work in one year but are not paid until the following year. Free tax filing for low income If you report your income on a cash basis, you report the income on your return for the year you receive it. Free tax filing for low income If you work one year, but are not paid for that work until the next year, the amount you can exclude in the year you are paid is the amount you could have excluded in the year you did the work if you had been paid in that year. Free tax filing for low income For an exception to this general rule, see Year-end payroll period, later. Free tax filing for low income Example. Free tax filing for low income You were a bona fide resident of Brazil for all of 2012 and 2013. Free tax filing for low income You report your income on the cash basis. Free tax filing for low income In 2012, you were paid $84,200 for work you did in Brazil during that year. Free tax filing for low income You excluded all of the $84,200 from your income in 2012. Free tax filing for low income In 2013, you were paid $117,300 for your work in Brazil. Free tax filing for low income $18,800 was for work you did in 2012 and $98,500 was for work you did in 2013. Free tax filing for low income You can exclude $10,900 of the $18,800 from your income in 2013. Free tax filing for low income This is the $95,100 maximum exclusion in 2012 minus the $84,200 actually excluded that year. Free tax filing for low income You must include the remaining $7,900 in income in 2013 because you could not have excluded that income in 2012 if you had received it that year. Free tax filing for low income You can exclude $97,600 of the $98,500 you were paid for work you did in 2013 from your 2013 income. Free tax filing for low income Your total foreign earned income exclusion for 2013 is $108,500 ($10,900 for work you did in 2012 and $97,600 for work you did in 2013). Free tax filing for low income You would include in your 2013 income $8,800 ($7,900 for the work you did in 2012 and $900 for the work you did in 2013). Free tax filing for low income Year-end payroll period. Free tax filing for low income   There is an exception to the general rule that income is considered earned in the year you do the work for which you receive the income. Free tax filing for low income If you are a cash-basis taxpayer, any salary or wage payment you receive after the end of the year in which you do the work for which you receive the pay is considered earned entirely in the year you receive it if all four of the following apply. Free tax filing for low income The period for which the payment is made is a normal payroll period of your employer that regularly applies to you. Free tax filing for low income The payroll period includes the last day of your tax year (December 31 if you figure your taxes on a calendar-year basis). Free tax filing for low income The payroll period is not longer than 16 days. Free tax filing for low income The payday comes at the same time in relation to the payroll period that it would normally come and it comes before the end of the next payroll period. Free tax filing for low income Example. Free tax filing for low income You are paid twice a month. Free tax filing for low income For the normal payroll period that begins on the first of the month and ends on the fifteenth of the month, you are paid on the sixteenth day of the month. Free tax filing for low income For the normal payroll period that begins on the sixteenth of the month and ends on the last day of the month, you are paid on the first day of the following month. Free tax filing for low income Because all of the above conditions are met, the pay you received on January 1, 2013, is considered earned in 2013. Free tax filing for low income Income earned over more than 1 year. Free tax filing for low income   Regardless of when you actually receive income, you must apply it to the year in which you earned it in figuring your excludable amount for that year. Free tax filing for low income For example, a bonus may be based on work you did over several years. Free tax filing for low income You determine the amount of the bonus that is considered earned in a particular year in two steps. Free tax filing for low income Divide the bonus by the number of calendar months in the period when you did the work that resulted in the bonus. Free tax filing for low income Multiply the result of (1) by the number of months you did the work during the year. Free tax filing for low income This is the amount that is subject to the exclusion limit for that tax year. Free tax filing for low income Income received more than 1 year after it was earned. Free tax filing for low income   You cannot exclude income you receive after the end of the year following the year you do the work to earn it. Free tax filing for low income Example. Free tax filing for low income   You were a bona fide resident of Sweden for 2011, 2012, and 2013. Free tax filing for low income You report your income on the cash basis. Free tax filing for low income In 2011, you were paid $69,000 for work you did in Sweden that year and in 2012 you were paid $74,000 for that year's work in Sweden. Free tax filing for low income You excluded all the income on your 2011 and 2012 returns. Free tax filing for low income   In 2013, you were paid $92,000; $82,000 for your work in Sweden during 2013, and $10,000 for work you did in Sweden in 2011. Free tax filing for low income You cannot exclude any of the $10,000 for work done in 2011 because you received it after the end of the year following the year in which you earned it. Free tax filing for low income You must include the $10,000 in income. Free tax filing for low income You can exclude all of the $82,000 received for work you did in 2013. Free tax filing for low income Community income. Free tax filing for low income   The maximum exclusion applies separately to the earnings of spouses. Free tax filing for low income Ignore any community property laws when you figure your limit on the foreign earned income exclusion. Free tax filing for low income Part-year exclusion. Free tax filing for low income   If the period for which you qualify for the foreign earned income exclusion includes only part of the year, you must adjust the maximum limit based on the number of qualifying days in the year. Free tax filing for low income The number of qualifying days is the number of days in the year within the period on which you both: Have your tax home in a foreign country, and Meet either the bona fide residence test or the physical presence test. Free tax filing for low income   For this purpose, you can count as qualifying days all days within a period of 12 consecutive months once you are physically present and have your tax home in a foreign country for 330 full days. Free tax filing for low income To figure your maximum exclusion, multiply the maximum excludable amount for the year by the number of your qualifying days in the year, and then divide the result by the number of days in the year. Free tax filing for low income Example. Free tax filing for low income You report your income on the calendar-year basis and you qualified for the foreign earned income exclusion under the bona fide residence test for 75 days in 2013. Free tax filing for low income You can exclude a maximum of 75/365 of $97,600, or $20,055, of your foreign earned income for 2013. Free tax filing for low income If you qualify under the bona fide residence test for all of 2014, you can exclude your foreign earned income up to the 2014 limit. Free tax filing for low income Physical presence test. Free tax filing for low income   Under the physical presence test, a 12-month period can be any period of 12 consecutive months that includes 330 full days. Free tax filing for low income If you qualify for the foreign earned income exclusion under the physical presence test for part of a year, it is important to carefully choose the 12-month period that will allow the maximum exclusion for that year. Free tax filing for low income Example. Free tax filing for low income You are physically present and have your tax home in a foreign country for a 16-month period from June 1, 2012, through September 30, 2013, except for 16 days in December 2012 when you were on vacation in the United States. Free tax filing for low income You figure the maximum exclusion for 2012 as follows. Free tax filing for low income Beginning with June 1, 2012, count forward 330 full days. Free tax filing for low income Do not count the 16 days you spent in the United States. Free tax filing for low income The 330th day, May 12, 2013, is the last day of a 12-month period. Free tax filing for low income Count backward 12 months from May 11, 2013, to find the first day of this 12-month period, May 12, 2012. Free tax filing for low income This 12-month period runs from May 12, 2012, through May 11, 2013. Free tax filing for low income Count the total days during 2012 that fall within this 12-month period. Free tax filing for low income This is 234 days (May 12, 2012 – December 31, 2012). Free tax filing for low income Multiply $95,100 (the maximum exclusion for 2012) by the fraction 234/366 to find your maximum exclusion for 2012 ($60,802). Free tax filing for low income You figure the maximum exclusion for 2013 in the opposite manner. Free tax filing for low income Beginning with your last full day, September 30, 2013, count backward 330 full days. Free tax filing for low income Do not count the 16 days you spent in the United States. Free tax filing for low income That day, October 20, 2012, is the first day of a 12-month period. Free tax filing for low income Count forward 12 months from October 20, 2012, to find the last day of this 12-month period, October 19, 2013. Free tax filing for low income This 12-month period runs from October 20, 2012, through October 19, 2013. Free tax filing for low income Count the total days during 2013 that fall within this 12-month period. Free tax filing for low income This is 292 days (January 1, 2013 – October 19, 2013). Free tax filing for low income Multiply $97,600, the maximum limit, by the fraction 292/365 to find your maximum exclusion for 2013 ($78,080). Free tax filing for low income Choosing the Exclusion The foreign earned income exclusion is voluntary. Free tax filing for low income You can choose the exclusion by completing the appropriate parts of Form 2555. Free tax filing for low income When You Can Choose the Exclusion Your initial choice of the exclusion on Form 2555 or Form 2555-EZ generally must be made with one of the following returns. Free tax filing for low income A return filed by the due date (including any extensions). Free tax filing for low income A return amending a timely-filed return. Free tax filing for low income Amended returns generally must be filed by the later of 3 years after the filing date of the original return or 2 years after the tax is paid. Free tax filing for low income A return filed within 1 year from the original due date of the return (determined without regard to any extensions). Free tax filing for low income Filing after the above periods. Free tax filing for low income   You can choose the exclusion on a return filed after the periods described above if you owe no federal income tax after taking into account the exclusion. Free tax filing for low income If you owe federal income tax after taking into account the exclusion, you can choose the exclusion on a return filed after the periods described earlier if you file before the IRS discovers that you failed to choose the exclusion. Free tax filing for low income Whether or not you owe federal income tax after taking the exclusion into account, if you file your return after the periods described earlier, you must type or legibly print at the top of the first page of the Form 1040 “Filed pursuant to section 1. Free tax filing for low income 911-7(a)(2)(i)(D). Free tax filing for low income ” If you owe federal income tax after taking into account the foreign earned income exclusion and the IRS discovered that you failed to choose the exclusion, you may still be able to choose the exclusion. Free tax filing for low income You must request a private letter ruling under Income Tax Regulation 301. Free tax filing for low income 9100-3 and Revenue Procedure 2013-1, 2013-1 I. Free tax filing for low income R. Free tax filing for low income B. Free tax filing for low income 1, available at www. Free tax filing for low income irs. Free tax filing for low income gov/irb/2013-01_IRB/ar06. Free tax filing for low income html. Free tax filing for low income Effect of Choosing the Exclusion Once you choose to exclude your foreign earned income, that choice remains in effect for that year and all later years unless you revoke it. Free tax filing for low income Foreign tax credit or deduction. Free tax filing for low income  
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Treasury and IRS Announce That All Legal Same-Sex Marriages Will Be Recognized For Federal Tax Purposes; Ruling Provides Certainty, Benefits and Protections Under Federal Tax Law for Same-Sex Married Couples

Note: On Sept. 23, 2013 IRS issued Notice 2013-61 providing guidance for employers and employees to claim refunds or adjust overpayments of FICA taxes and employment taxes with respect to certain benefits and remunerations provided to same-sex spouses.

IR-2013-72, Aug. 29, 2013

WASHINGTON — The U.S. Department of the Treasury and the Internal Revenue Service (IRS) today ruled that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.

The ruling implements federal tax aspects of the June 26 Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act.

Under the ruling, same-sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit.

Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.

Legally-married same-sex couples generally must file their 2013 federal income tax return using either the married filing jointly or married filing separately filing status.

Individuals who were in same-sex marriages may, but are not required to, file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations.

Generally, the statute of limitations for filing a refund claim is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. As a result, refund claims can still be filed for tax years 2010, 2011 and 2012. Some taxpayers may have special circumstances, such as signing an agreement with the IRS to keep the statute of limitations open, that permit them to file refund claims for tax years 2009 and earlier.

Additionally, employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pre-tax and excludable from income.

How to File a Claim for Refund

Taxpayers who wish to file a refund claim for income taxes should use Form 1040X, Amended U.S. Individual Income Tax Return.

Taxpayers who wish to file a refund claim for gift or estate taxes should file Form 843, Claim for Refund and Request for Abatement. For information on filing an amended return, see Tax Topic 308, Amended Returns, available on IRS.gov, or the Instructions to Forms 1040X and 843. Information on where to file your amended returns is available in the instructions to the form.

Future Guidance

Treasury and the IRS intend to issue streamlined procedures for employers who wish to file refund claims for payroll taxes paid on previously-taxed health insurance and fringe benefits provided to same-sex spouses. Treasury and IRS also intend to issue further guidance on cafeteria plans and on how qualified retirement plans and other tax-favored arrangements should treat same-sex spouses for periods before the effective date of this Revenue Ruling.

Other agencies may provide guidance on other federal programs that they administer that are affected by the Code. 

Revenue Ruling 2013-17, along with updated Frequently Asked Questions for same-sex couples and updated FAQs for registered domestic partners and individuals in civil unions, are available today on IRS.gov. See also Publication 555, Community Property.

Treasury and the IRS will begin applying the terms of Revenue Ruling 2013-17 on Sept. 16, 2013, but taxpayers who wish to rely on the terms of the Revenue Ruling for earlier periods may choose to do so, as long as the statute of limitations for the earlier period has not expired.

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Page Last Reviewed or Updated: 30-Sep-2013

The Free Tax Filing For Low Income

Free tax filing for low income 7. Free tax filing for low income   Depreciation, Depletion, and Amortization Table of Contents What's New for 2013 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Overview of DepreciationWhat Property Can Be Depreciated? What Property Cannot Be Depreciated? When Does Depreciation Begin and End? Can You Use MACRS To Depreciate Your Property? What Is the Basis of Your Depreciable Property? How Do You Treat Repairs and Improvements? Do You Have To File Form 4562? How Do You Correct Depreciation Deductions? Section 179 Expense DeductionWhat Property Qualifies? What Property Does Not Qualify? How Much Can You Deduct? How Do You Elect the Deduction? When Must You Recapture the Deduction? Claiming the Special Depreciation AllowanceWhat is Qualified Property? How Can You Elect Not To Claim the Allowance? When Must You Recapture an Allowance Figuring Depreciation Under MACRSWhich Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS? What Is the Placed-in-Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies? Which Convention Applies? Which Depreciation Method Applies? How Is the Depreciation Deduction Figured? How Do You Use General Asset Accounts? When Do You Recapture MACRS Depreciation? Additional Rules for Listed PropertyWhat Is Listed Property? What Is the Business-Use Requirement? Do the Passenger Automobile Limits Apply? Depletion Who Can Claim Depletion? Figuring Depletion AmortizationBusiness Start-Up Costs Reforestation Costs Section 197 Intangibles What's New for 2013 Increased section 179 expense deduction dollar limits. Free tax filing for low income  The maximum amount you can elect to deduct for most section 179 property you placed in service in 2013 is $500,000. Free tax filing for low income This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. Free tax filing for low income See Dollar Limits under Section 179 Expense Deduction , later. Free tax filing for low income Extension of special depreciation allowance for certain qualified property acquired after December 31, 2007. Free tax filing for low income . Free tax filing for low income  You may be able to take a 50% special depreciation allowance for certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Free tax filing for low income See Claiming the Special Depreciation Allowance , later. Free tax filing for low income Expiration of the 3- year recovery period for certain race horses. Free tax filing for low income  The 3-year recovery period for race horses two years old or younger will expire for such horses placed in service after December 31, 2013. Free tax filing for low income Introduction If you buy or make improvements to farm property such as machinery, equipment, livestock, or a structure with a useful life of more than a year, you generally cannot deduct its entire cost in one year. Free tax filing for low income Instead, you must spread the cost over the time you use the property and deduct part of it each year. Free tax filing for low income For most types of property, this is called depreciation. Free tax filing for low income This chapter gives information on depreciation methods that generally apply to property placed in service after 1986. Free tax filing for low income For information on depreciating pre-1987 property, see Publication 534, Depreciating Property Placed in Service Before 1987. Free tax filing for low income Topics - This chapter discusses: Overview of depreciation Section 179 expense deduction Special depreciation allowance Modified Accelerated Cost Recovery System (MACRS) Listed property Basic information on cost depletion (including timber depletion) and percentage depletion Amortization of the costs of going into business, reforestation costs, the costs of pollution control facilities, and the costs of section 197 intangibles Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) T (Timber), Forest Activities Schedule 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. Free tax filing for low income It is important to keep good records for property you depreciate. Free tax filing for low income Do not file these records with your return. Free tax filing for low income Instead, you should keep them as part of the permanent records of the depreciated property. Free tax filing for low income They will help you verify the accuracy of the depreciation of assets placed in service in the current and previous tax years. Free tax filing for low income For general information on recordkeeping, see Publication 583, Starting a Business and Keeping Records. Free tax filing for low income For specific information on keeping records for section 179 property and listed property, see Publication 946, How To Depreciate Property. Free tax filing for low income Overview of Depreciation This overview discusses basic information on the following. Free tax filing for low income What property can be depreciated. Free tax filing for low income What property cannot be depreciated. Free tax filing for low income When depreciation begins and ends. Free tax filing for low income Whether MACRS can be used to figure depreciation. Free tax filing for low income What is the basis of your depreciable property. Free tax filing for low income How to treat repairs and improvements. Free tax filing for low income When you must file Form 4562. Free tax filing for low income How you can correct depreciation claimed incorrectly. Free tax filing for low income What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, equipment, vehicles, certain livestock, and furniture. Free tax filing for low income You can also depreciate certain intangible property, such as copyrights, patents, and computer software. Free tax filing for low income To be depreciable, the property must meet all the following requirements. Free tax filing for low income It must be property you own. Free tax filing for low income It must be used in your business or income-producing activity. Free tax filing for low income It must have a determinable useful life. Free tax filing for low income It must have a useful life that extends substantially beyond the year you place it in service. Free tax filing for low income Property You Own To claim depreciation, you usually must be the owner of the property. Free tax filing for low income You are considered as owning property even if it is subject to a debt. Free tax filing for low income Leased property. Free tax filing for low income   You can depreciate leased property only if you retain the incidents of ownership in the property. Free tax filing for low income This means you bear the burden of exhaustion of the capital investment in the property. Free tax filing for low income Therefore, if you lease property from someone to use in your trade or business or for the production of income, you generally cannot depreciate its cost because you do not retain the incidents of ownership. Free tax filing for low income You can, however, depreciate any capital improvements you make to the leased property. Free tax filing for low income See Additions and Improvements under Which Recovery Period Applies in chapter 4 of Publication 946. Free tax filing for low income   If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. Free tax filing for low income However, you cannot depreciate the cost of the property if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased. Free tax filing for low income Life tenant. Free tax filing for low income   Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. Free tax filing for low income See Certain term interests in property , later, for an exception. Free tax filing for low income Property Used in Your Business or Income-Producing Activity To claim depreciation on property, you must use it in your business or income-producing activity. Free tax filing for low income If you use property to produce income (investment use), the income must be taxable. Free tax filing for low income You cannot depreciate property that you use solely for personal activities. Free tax filing for low income However, if you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the percentage of business or investment use. Free tax filing for low income Example 1. Free tax filing for low income   If you use your car for farm business, you can deduct depreciation based on its percentage of use in farming. Free tax filing for low income If you also use it for investment purposes, you can depreciate it based on its percentage of investment use. Free tax filing for low income Example 2. Free tax filing for low income   If you use part of your home for business, you may be able to deduct depreciation on that part based on its business use. Free tax filing for low income For more information, see Business Use of Your Home in chapter 4. Free tax filing for low income Inventory. Free tax filing for low income   You can never depreciate inventory because it is not held for use in your business. Free tax filing for low income Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. Free tax filing for low income Livestock. Free tax filing for low income   Livestock purchased for draft, breeding, or dairy purposes can be depreciated only if they are not kept in an inventory account. Free tax filing for low income Livestock you raise usually has no depreciable basis because the costs of raising them are deducted and not added to their basis. Free tax filing for low income However, see Immature livestock under When Does Depreciation Begin and End , later, for a special rule. Free tax filing for low income Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. Free tax filing for low income This means it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Free tax filing for low income Irrigation systems and water wells. Free tax filing for low income   Irrigation systems and wells used in a trade or business can be depreciated if their useful life can be determined. Free tax filing for low income You can depreciate irrigation systems and wells composed of masonry, concrete, tile, metal, or wood. Free tax filing for low income In addition, you can depreciate costs for moving dirt to construct irrigation systems and water wells composed of these materials. Free tax filing for low income However, land preparation costs for center pivot irrigation systems are not depreciable. Free tax filing for low income Dams, ponds, and terraces. Free tax filing for low income   In general, you cannot depreciate earthen dams, ponds, and terraces unless the structures have a determinable useful life. Free tax filing for low income What Property Cannot Be Depreciated? Certain property cannot be depreciated, even if the requirements explained earlier are met. Free tax filing for low income This includes the following. Free tax filing for low income Land. Free tax filing for low income You can never depreciate the cost of land because land does not wear out, become obsolete, or get used up. Free tax filing for low income The cost of land generally includes the cost of clearing, grading, planting, and landscaping. Free tax filing for low income Although you cannot depreciate land, you can depreciate certain costs incurred in preparing land for business use. Free tax filing for low income See chapter 1 of Publication 946. Free tax filing for low income Property placed in service and disposed of in the same year. Free tax filing for low income Determining when property is placed in service is explained later. Free tax filing for low income Equipment used to build capital improvements. Free tax filing for low income You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Free tax filing for low income Intangible property such as section 197 intangibles. Free tax filing for low income This property does not have a determinable useful life and generally cannot be depreciated. Free tax filing for low income However, see Amortization , later. Free tax filing for low income Special rules apply to computer software (discussed below). Free tax filing for low income Certain term interests (discussed below). Free tax filing for low income Computer software. Free tax filing for low income   Computer software is generally not a section 197 intangible even if acquired in connection with the acquisition of a business, if it meets all of the following tests. Free tax filing for low income It is readily available for purchase by the general public. Free tax filing for low income It is subject to a nonexclusive license. Free tax filing for low income It has not been substantially modified. Free tax filing for low income   If the software meets the tests above, it can be depreciated and may qualify for the section 179 expense deduction and the special depreciation allowance (if applicable), discussed later. Free tax filing for low income Certain term interests in property. Free tax filing for low income   You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is held, directly or indirectly, by a person related to you. Free tax filing for low income This rule does not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. Free tax filing for low income For more information, see chapter 1 of Publication 946. Free tax filing for low income When Does Depreciation Begin and End? You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. Free tax filing for low income You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first. Free tax filing for low income Placed in Service Property is placed in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. Free tax filing for low income Even if you are not using the property, it is in service when it is ready and available for its specific use. Free tax filing for low income Example. Free tax filing for low income You bought a planter for use in your farm business. Free tax filing for low income The planter was delivered in December 2012 after harvest was over. Free tax filing for low income You begin to depreciate the planter for 2012 because it was ready and available for its specific use in 2012, even though it will not be used until the spring of 2013. Free tax filing for low income If your planter comes unassembled in December 2012 and is put together in February 2013, it is not placed in service until 2013. Free tax filing for low income You begin to depreciate it in 2013. Free tax filing for low income If your planter was delivered and assembled in February 2013 but not used until April 2013, it is placed in service in February 2013, because this is when the planter was ready for its specified use. Free tax filing for low income You begin to depreciate it in 2013. Free tax filing for low income Fruit or nut trees and vines. Free tax filing for low income   If you acquire an orchard, grove, or vineyard before the trees or vines have reached the income-producing stage, and they have a preproductive period of more than 2 years, you must capitalize the preproductive-period costs under the uniform capitalization rules (unless you elect not to use these rules). Free tax filing for low income See chapter 6 for information about the uniform capitalization rules. Free tax filing for low income Your depreciation begins when the trees and vines reach the income-producing stage (that is, when they bear fruit, nuts, or grapes in quantities sufficient to commercially warrant harvesting). Free tax filing for low income Immature livestock. Free tax filing for low income   Depreciation for livestock begins when the livestock reaches the age of maturity. Free tax filing for low income If you bought immature livestock for drafting purposes, depreciation begins when they can be worked. Free tax filing for low income If you bought immature livestock for dairy purposes, depreciation begins when they can be milked. Free tax filing for low income If you bought immature livestock for breeding purposes, depreciation begins when they can be bred. Free tax filing for low income Your basis for depreciation is your initial cost for the immature livestock. Free tax filing for low income Idle Property Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle. Free tax filing for low income For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine. Free tax filing for low income Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. Free tax filing for low income This happens when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. Free tax filing for low income Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. Free tax filing for low income You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. Free tax filing for low income You sell or exchange the property. Free tax filing for low income You convert the property to personal use. Free tax filing for low income You abandon the property. Free tax filing for low income You transfer the property to a supplies or scrap account. Free tax filing for low income The property is destroyed. Free tax filing for low income For information on abandonment of property, see chapter 8. Free tax filing for low income For information on destroyed property, see chapter 11 and Publication 547, Casualties, Disasters, and Thefts. Free tax filing for low income Can You Use MACRS To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most business and investment property placed in service after 1986. Free tax filing for low income MACRS is explained later under Figuring Depreciation Under MACRS . Free tax filing for low income You cannot use MACRS to depreciate the following property. Free tax filing for low income Property you placed in service before 1987. Free tax filing for low income Use the methods discussed in Publication 534. Free tax filing for low income Certain property owned or used in 1986. Free tax filing for low income See chapter 1 of Publication 946. Free tax filing for low income Intangible property. Free tax filing for low income Films, video tapes, and recordings. Free tax filing for low income Certain corporate or partnership property acquired in a nontaxable transfer. Free tax filing for low income Property you elected to exclude from MACRS. Free tax filing for low income For more information, see chapter 1 of Publication 946. Free tax filing for low income What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. Free tax filing for low income To determine basis, you need to know the cost or other basis of your property. Free tax filing for low income Cost or other basis. Free tax filing for low income   The basis of property you buy is usually its cost plus amounts you paid for items such as sales tax, freight charges, and installation and testing fees. Free tax filing for low income The cost includes the amount you pay in cash, debt obligations, other property, or services. Free tax filing for low income   There are times when you cannot use cost as basis. Free tax filing for low income In these situations, the fair market value (FMV) or the adjusted basis of the property may be used. Free tax filing for low income Adjusted basis. Free tax filing for low income   To find your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service. Free tax filing for low income Basis adjustment for depreciation allowed or allowable. Free tax filing for low income   After you place your property in service, you must reduce the basis of the property by the depreciation allowed or allowable, whichever is greater. Free tax filing for low income Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Free tax filing for low income Depreciation allowable is depreciation you are entitled to deduct. Free tax filing for low income   If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable. Free tax filing for low income   If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed). Free tax filing for low income   For more information, see chapter 6. Free tax filing for low income How Do You Treat Repairs and Improvements? You generally deduct the cost of repairing business property in the same way as any other business expense. Free tax filing for low income However, if a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it. Free tax filing for low income Treat improvements as separate depreciable property. Free tax filing for low income See chapter 1 of Publication 946 for more information. Free tax filing for low income Example. Free tax filing for low income You repair a small section on a corner of the roof of a barn that you rent to others. Free tax filing for low income You deduct the cost of the repair as a business expense. Free tax filing for low income However, if you replace the entire roof, the new roof is considered to be an improvement because it increases the value and lengthens the life for the property. Free tax filing for low income You depreciate the cost of the new roof. Free tax filing for low income Improvements to rented property. Free tax filing for low income   You can depreciate permanent improvements you make to business property you rent from someone else. Free tax filing for low income Do You Have To File Form 4562? Use Form 4562 to claim your deduction for depreciation and amortization. Free tax filing for low income You must complete and attach Form 4562 to your tax return if you are claiming any of the following. Free tax filing for low income A section 179 expense deduction for the current year or a section 179 carryover from a prior year. Free tax filing for low income Depreciation for property placed in service during the current year. Free tax filing for low income Depreciation on any vehicle or other listed property, regardless of when it was placed in service. Free tax filing for low income Amortization of costs that began in the current year. Free tax filing for low income For more information, see the Instructions for Form 4562. Free tax filing for low income How Do You Correct Depreciation Deductions? If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. Free tax filing for low income You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Free tax filing for low income You claimed the incorrect amount because of a mathematical error made in any year. Free tax filing for low income You claimed the incorrect amount because of a posting error made in any year, for example, omitting an asset from the depreciation schedule. Free tax filing for low income You have not adopted a method of accounting for the property placed in service by you in tax years ending after December 29, 2003. Free tax filing for low income You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Free tax filing for low income Note. Free tax filing for low income You have adopted a method of accounting if you used the same incorrect method of depreciation for two or more consecutively filed returns. Free tax filing for low income If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. Free tax filing for low income See the Instructions for Form 3115. Free tax filing for low income Section 179 Expense Deduction You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. Free tax filing for low income This is the section 179 expense deduction. Free tax filing for low income You can elect the section 179 expense deduction instead of recovering the cost by taking depreciation deductions. Free tax filing for low income This part of the chapter explains the rules for the section 179 expense deduction. Free tax filing for low income It explains what property qualifies for the deduction, what property does not qualify for the deduction, the limits that may apply, how to elect the deduction, and when you may have to recapture the deduction. Free tax filing for low income For more information, see chapter 2 of Publication 946. Free tax filing for low income What Property Qualifies? To qualify for the section 179 expense deduction, your property must meet all the following requirements. Free tax filing for low income It must be eligible property. Free tax filing for low income It must be acquired for business use. Free tax filing for low income It must have been acquired by purchase. Free tax filing for low income Eligible Property To qualify for the section 179 expense deduction, your property must be one of the following types of depreciable property. Free tax filing for low income Tangible personal property. Free tax filing for low income Qualified real property. Free tax filing for low income (Special rules apply to qualified real property that you elect to treat as qualified section 179 real property. Free tax filing for low income For more information, see chapter 2 of Publication 946 and section 179(f) of the Internal Revenue Code. Free tax filing for low income ) Other tangible property (except buildings and their structural components) used as: An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services; A research facility used in connection with any of the activities in (a) above; or A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities. Free tax filing for low income Single purpose agricultural (livestock) or horticultural structures. Free tax filing for low income Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. Free tax filing for low income Off-the-shelf computer software that is readily available for purchase by the general public, is subject to a nonexclusive lease, and has not been substantially modified. Free tax filing for low income Tangible personal property. Free tax filing for low income   Tangible personal property is any tangible property that is not real property. Free tax filing for low income It includes the following property. Free tax filing for low income Machinery and equipment. Free tax filing for low income Property contained in or attached to a building (other than structural components), such as milk tanks, automatic feeders, barn cleaners, and office equipment. Free tax filing for low income Gasoline storage tanks and pumps at retail service stations. Free tax filing for low income Livestock, including horses, cattle, hogs, sheep, goats, and mink and other fur-bearing animals. Free tax filing for low income Facility used for the bulk storage of fungible commodities. Free tax filing for low income   A facility used for the bulk storage of fungible commodities is qualifying property for purposes of the section 179 expense deduction if it is used in connection with any of the activities listed earlier in item (3)(a). Free tax filing for low income Bulk storage means the storage of a commodity in a large mass before it is used. Free tax filing for low income Grain bins. Free tax filing for low income   A grain bin is an example of a storage facility that is qualifying section 179 property. Free tax filing for low income It is a facility used in connection with the production of grain or livestock for the bulk storage of fungible commodities. Free tax filing for low income Single purpose agricultural or horticultural structures. Free tax filing for low income   A single purpose agricultural (livestock) or horticultural structure is qualifying property for purposes of the section 179 expense deduction. Free tax filing for low income Agricultural structure. Free tax filing for low income   A single purpose agricultural (livestock) structure is any building or enclosure specifically designed, constructed, and used for both the following reasons. Free tax filing for low income To house, raise, and feed a particular type of livestock and its produce. Free tax filing for low income To house the equipment, including any replacements, needed to house, raise, or feed the livestock. Free tax filing for low income For this purpose, livestock includes poultry. Free tax filing for low income   Single purpose structures are qualifying property if used, for example, to breed chickens or hogs, produce milk from dairy cattle, or produce feeder cattle or pigs, broiler chickens, or eggs. Free tax filing for low income The facility must include, as an integral part of the structure or enclosure, equipment necessary to house, raise, and feed the livestock. Free tax filing for low income Horticultural structure. Free tax filing for low income   A single purpose horticultural structure is either of the following. Free tax filing for low income A greenhouse specifically designed, constructed, and used for the commercial production of plants. Free tax filing for low income A structure specifically designed, constructed, and used for the commercial production of mushrooms. Free tax filing for low income Use of structure. Free tax filing for low income   A structure must be used only for the purpose that qualified it. Free tax filing for low income For example, a hog barn will not be qualifying property if you use it to house poultry. Free tax filing for low income Similarly, using part of your greenhouse to sell plants will make the greenhouse nonqualifying property. Free tax filing for low income   If a structure includes work space, the work space can be used only for the following activities. Free tax filing for low income Stocking, caring for, or collecting livestock or plants or their produce. Free tax filing for low income Maintaining the enclosure or structure. Free tax filing for low income Maintaining or replacing the equipment or stock enclosed or housed in the structure. Free tax filing for low income Property Acquired by Purchase To qualify for the section 179 expense deduction, your property must have been acquired by purchase. Free tax filing for low income For example, property acquired by gift or inheritance does not qualify. Free tax filing for low income Property acquired from a related person (that is, your spouse, ancestors, or lineal descendants) is not considered acquired by purchase. Free tax filing for low income Example. Free tax filing for low income Ken is a farmer. Free tax filing for low income He purchased two tractors, one from his brother and one from his father. Free tax filing for low income He placed both tractors in service in the same year he bought them. Free tax filing for low income The tractor purchased from his father does not qualify for the section 179 expense deduction because he is a related person (as defined above). Free tax filing for low income The tractor purchased from his brother does qualify for the deduction because Ken is not a related person (as defined above). Free tax filing for low income What Property Does Not Qualify? Land and improvements. Free tax filing for low income   Land and land improvements, do not qualify as section 179 property. Free tax filing for low income Land improvements include nonagricultural fences, swimming pools, paved parking areas, wharves, docks, bridges, and fences. Free tax filing for low income However, agricultural fences do qualify as section 179 property. Free tax filing for low income Similarly, field drainage tile also qualifies as section 179 property. Free tax filing for low income Excepted property. Free tax filing for low income   Even if the requirements explained in the preceding discussions are met, farmers cannot elect the section 179 expense deduction for the following property. Free tax filing for low income Certain property you lease to others (if you are a noncorporate lessor). Free tax filing for low income Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. Free tax filing for low income Property used by a tax-exempt organization (other than a tax-exempt farmers' cooperative) unless the property is used mainly in a taxable unrelated trade or business. Free tax filing for low income Property used by governmental units or foreign persons or entities (except property used under a lease with a term of less than 6 months). Free tax filing for low income How Much Can You Deduct? Your section 179 expense deduction is generally the cost of the qualifying property. Free tax filing for low income However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. Free tax filing for low income These limits apply to each taxpayer, not to each business. Free tax filing for low income However, see Married individuals under Dollar Limits , later. Free tax filing for low income See also the special rules for applying the limits for partnerships and S corporations under Partnerships and S Corporations , later. Free tax filing for low income If you deduct only part of the cost of qualifying property as a section 179 expense deduction, you can generally depreciate the cost you do not deduct. Free tax filing for low income Use Part I of Form 4562 to figure your section 179 expense deduction. Free tax filing for low income Partial business use. Free tax filing for low income   When you use property for business and nonbusiness purposes, you can elect the section 179 expense deduction only if you use it more than 50% for business in the year you place it in service. Free tax filing for low income If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. Free tax filing for low income Use the resulting business cost to figure your section 179 expense deduction. Free tax filing for low income Trade-in of other property. Free tax filing for low income   If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 expense deduction includes only the cash you paid. Free tax filing for low income For example, if you buy (for cash and a trade-in) a new tractor for use in your business, your cost for the section 179 expense deduction is the cash you paid. Free tax filing for low income It does not include the adjusted basis of the old tractor you trade for the new tractor. Free tax filing for low income Example. Free tax filing for low income J-Bar Farms traded two cultivators having a total adjusted basis of $6,800 for a new cultivator costing $13,200. Free tax filing for low income They received an $8,000 trade-in allowance for the old cultivators and paid $5,200 cash for the new cultivator. Free tax filing for low income J-Bar also traded a used pickup truck with an adjusted basis of $8,000 for a new pickup truck costing $35,000. Free tax filing for low income They received a $5,000 trade-in allowance and paid $30,000 cash for the new pickup truck. Free tax filing for low income Only the cash paid by J-Bar qualifies for the section 179 expense deduction. Free tax filing for low income J-Bar's business costs that qualify for a section 179 expense deduction are $35,200 ($5,200 + $30,000). Free tax filing for low income Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 is $500,000. Free tax filing for low income If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 expense deduction among the items in any way, as long as the total deduction is not more than $500,000. Free tax filing for low income Qualified real property that you elect to treat as section 179 property is limited to $250,000 of the maximum section 179 deduction of $500,000 for 2013. Free tax filing for low income You do not have to claim the full $500,000. Free tax filing for low income For specific information on the section 179 dollar limits, see chapter 2 of Publication 946. Free tax filing for low income Reduced dollar limit for cost exceeding $2 million. Free tax filing for low income   If the cost of your qualifying section 179 property placed in service in 2013 is over $2 million, you must reduce the dollar limit (but not below zero) by the amount of cost over $2 million. Free tax filing for low income If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 expense deduction and you cannot carry over the cost that is more than $2,500,000. Free tax filing for low income Example. Free tax filing for low income This year, James Smith placed in service machinery costing $2,050,000. Free tax filing for low income Because this cost is $50,000 more than $2 million, he must reduce his dollar limit to $450,000 ($500,000 − $50,000). Free tax filing for low income Limits for sport utility vehicles. Free tax filing for low income   The total amount you can elect to deduct for certain sport utility vehicles and certain other vehicles placed in service in 2013 is $25,000. Free tax filing for low income This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, and highways that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. Free tax filing for low income   For more information, see chapter 2 of Publication 946. Free tax filing for low income Limits for passenger automobiles. Free tax filing for low income   For a passenger automobile that is placed in service in 2013, the total section 179 and depreciation deduction is limited. Free tax filing for low income See Do the Passenger Automobile Limits Apply , later. Free tax filing for low income Married individuals. Free tax filing for low income   If you are married, how you figure your section 179 expense deduction depends on whether you file jointly or separately. Free tax filing for low income If you file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. Free tax filing for low income If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over $2 million. Free tax filing for low income You must allocate the dollar limit (after any reduction) equally between you, unless you both elect a different allocation. Free tax filing for low income If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. Free tax filing for low income Joint return after separate returns. Free tax filing for low income   If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return, the dollar limit on the joint return is the lesser of the following amounts. Free tax filing for low income The dollar limit (after reduction for any cost of section 179 property over $2 million). Free tax filing for low income The total cost of section 179 property you and your spouse elected to expense on your separate returns. Free tax filing for low income Business Income Limit The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. Free tax filing for low income Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business. Free tax filing for low income Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. Free tax filing for low income See Carryover of disallowed deduction , later. Free tax filing for low income Taxable income. Free tax filing for low income   In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. Free tax filing for low income In addition to net income or loss from a sole proprietorship, partnership, or S corporation, net income or loss derived from a trade or business also includes the following items. Free tax filing for low income Section 1231 gains (or losses) as discussed in chapter 9. Free tax filing for low income Interest from working capital of your trade or business. Free tax filing for low income Wages, salaries, tips, or other pay earned by you (or your spouse if you file a joint return) as an employee of any employer. Free tax filing for low income   In addition, figure taxable income without regard to any of the following. Free tax filing for low income The section 179 expense deduction. Free tax filing for low income The self-employment tax deduction. Free tax filing for low income Any net operating loss carryback or carryforward. Free tax filing for low income Any unreimbursed employee business expenses. Free tax filing for low income Two different taxable income limits. Free tax filing for low income   In addition to the business income limit for your section 179 expense deduction, you may have a taxable income limit for some other deduction (for example, charitable contributions). Free tax filing for low income You may have to figure the limit for this other deduction taking into account the section 179 expense deduction. Free tax filing for low income If so, complete the following steps. Free tax filing for low income Step Action 1 Figure taxable income without the section 179 expense deduction or the other deduction. Free tax filing for low income 2 Figure a hypothetical section 179 expense deduction using the taxable income figured in Step 1. Free tax filing for low income 3 Subtract the hypothetical section 179 expense deduction figured in Step 2 from the taxable income figured in Step 1. Free tax filing for low income 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. Free tax filing for low income 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in  Step 1. Free tax filing for low income 6 Figure your actual section 179 expense deduction using the taxable income figured in Step 5. Free tax filing for low income 7 Subtract your actual section 179 expense deduction figured in Step 6 from the taxable income figured in Step 1. Free tax filing for low income 8 Figure your actual other deduction using the taxable income figured in Step 7. Free tax filing for low income Example. Free tax filing for low income On February 1, 2013, the XYZ farm corporation purchased and placed in service qualifying section 179 property that cost $500,000. Free tax filing for low income It elects to expense the entire $500,000 cost under section 179. Free tax filing for low income In June, the corporation gave a charitable contribution of $10,000. Free tax filing for low income A corporation's limit on charitable contributions is figured after subtracting any section 179 expense deduction. Free tax filing for low income The business income limit for the section 179 expense deduction is figured after subtracting any allowable charitable contributions. Free tax filing for low income XYZ's taxable income figured without the section 179 expense deduction or the deduction for charitable contributions is $520,000. Free tax filing for low income XYZ figures its section 179 expense deduction and its deduction for charitable contributions as follows. Free tax filing for low income Step 1. Free tax filing for low income Taxable income figured without either deduction is $520,000. Free tax filing for low income Step 2. Free tax filing for low income Using $520,000 as taxable income, XYZ's hypothetical section 179 expense deduction is $500,000. Free tax filing for low income Step 3. Free tax filing for low income $20,000 ($520,000 − $500,000). Free tax filing for low income Step 4. Free tax filing for low income Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. Free tax filing for low income Step 5. Free tax filing for low income $518,000 ($520,000 − $2,000). Free tax filing for low income Step 6. Free tax filing for low income Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 expense deduction. Free tax filing for low income Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 expense deduction. Free tax filing for low income Step 7. Free tax filing for low income $20,000 ($520,000 − $500,000). Free tax filing for low income Step 8. Free tax filing for low income Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. Free tax filing for low income Carryover of disallowed deduction. Free tax filing for low income   You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense but were unable to because of the business income limit. Free tax filing for low income   The amount you carry over is used in determining your section 179 expense deduction in the next year. Free tax filing for low income However, it is subject to the limits in that year. Free tax filing for low income If you place more than one property in service in a year, you can select the properties for which all or a part of the cost will be carried forward. Free tax filing for low income Your selections must be shown in your books and records. Free tax filing for low income Example. Free tax filing for low income Last year, Joyce Jones placed in service a machine that cost $8,000 and elected to deduct all $8,000 under section 179. Free tax filing for low income The taxable income from her business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) was $6,000. Free tax filing for low income Her section 179 expense deduction was limited to $6,000. Free tax filing for low income The $2,000 cost that was not allowed as a section 179 expense deduction (because of the business income limit) is carried to this year. Free tax filing for low income This year, Joyce placed another machine in service that cost $9,000. Free tax filing for low income Her taxable income from business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) is $10,000. Free tax filing for low income Joyce can deduct the full cost of the machine ($9,000) but only $1,000 of the carryover from last year because of the business income limit. Free tax filing for low income She can carry over the balance of $1,000 to next year. Free tax filing for low income Partnerships and S Corporations The section 179 expense deduction limits apply both to the partnership or S corporation and to each partner or shareholder. Free tax filing for low income The partnership or S corporation determines its section 179 expense deduction subject to the limits. Free tax filing for low income It then allocates the deduction among its partners or shareholders. Free tax filing for low income If you are a partner in a partnership or shareholder of an S corporation, you add the amount allocated from the partnership or S corporation to any section 179 costs not related to the partnership or S corporation and then apply the dollar limit to this total. Free tax filing for low income To determine any reduction in the dollar limit for costs over $560,000, you do not include any of the cost of section 179 property placed in service by the partnership or S corporation. Free tax filing for low income After you apply the dollar limit, you apply the business income limit to any remaining section 179 costs. Free tax filing for low income For more information, see chapter 2 of Publication 946. Free tax filing for low income Example. Free tax filing for low income In 2013, Partnership P placed in service section 179 property with a total cost of $2,160,000. Free tax filing for low income P must reduce its dollar limit by $160,000 ($2,160,000 − $2,000,000). Free tax filing for low income Its maximum section 179 expense deduction is $340,000 ($500,000 − $160,000), and it elects to expense that amount. Free tax filing for low income Because P's taxable income from the active conduct of all its trades or businesses for the year was $400,000, it can deduct the full $340,000. Free tax filing for low income P allocates $100,000 of its section 179 expense deduction and $110,000 of its taxable income to John, one of its partners. Free tax filing for low income John also conducts a business as a sole proprietor and in 2013, placed in service in that business, section 179 property costing $28,000. Free tax filing for low income John's taxable income from that business was $10,000. Free tax filing for low income In addition to the $100,000 allocated from P, he elects to expense the $28,000 of his sole proprietorship's section 179 costs. Free tax filing for low income However, John's deduction is limited to his business taxable income of $120,000 ($110,000 from P plus $10,000 from his sole proprietorship). Free tax filing for low income He carries over $8,000 ($128,000 − $120,000) of the elected section 179 costs to 2014. Free tax filing for low income How Do You Elect the Deduction? You elect to take the section 179 expense deduction by completing Part I of Form 4562. Free tax filing for low income If you elect the deduction for listed property, complete Part V of  Form 4562 before completing Part I. Free tax filing for low income   File Form 4562 with either of the following: Your original tax return (whether or not you filed it timely), or An amended return filed within the time prescribed by law. Free tax filing for low income An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. Free tax filing for low income The amended return must also include any resulting adjustments to taxable income. Free tax filing for low income Revoking an election. Free tax filing for low income   An election (or any specification made in the election) to take a section 179 expense deduction for 2013 can be revoked without IRS approval by filing an amended return. Free tax filing for low income The amended return must be filed within the time prescribed by law. Free tax filing for low income The amended return must also include any resulting adjustments to taxable income (for example, allowable depreciation in that tax year for the item of section 179 property for which the election pertains. Free tax filing for low income ) Once made, the revocation is irrevocable. Free tax filing for low income When Must You Recapture the Deduction? You may have to recapture the section 179 expense deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. Free tax filing for low income In the year the business use drops to 50% or less, you include the recapture amount as ordinary income. Free tax filing for low income You also increase the basis of the property by the recapture amount. Free tax filing for low income Recovery periods for property are discussed later. Free tax filing for low income If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. Free tax filing for low income Instead, use the rules for recapturing depreciation explained in  chapter 9 under Section 1245 Property. Free tax filing for low income   If the property is listed property, do not figure the recapture amount under the rules explained in this discussion when the percentage of business use drops to 50% or less. Free tax filing for low income Instead, use the rules for recapturing depreciation explained in chapter 5 of Publication 946 under Recapture of Excess Depreciation. Free tax filing for low income Figuring the recapture amount. Free tax filing for low income   To figure the amount to recapture, take the following steps. Free tax filing for low income Figure the allowable depreciation for the section 179 expense deduction you claimed. Free tax filing for low income Begin with the year you placed the property in service and include the year of recapture. Free tax filing for low income Subtract the depreciation figured in (1) from the section 179 expense deduction you actually claimed. Free tax filing for low income The result is the amount you must recapture. Free tax filing for low income Example. Free tax filing for low income In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. Free tax filing for low income The property is not listed property. Free tax filing for low income He elected a $5,000 section 179 expense deduction for the property and also elected not to claim a special depreciation allowance. Free tax filing for low income He used the property only for business in 2011 and 2012. Free tax filing for low income During 2013, he used the property 40% for business and 60% for personal use. Free tax filing for low income He figures his recapture amount as follows. Free tax filing for low income Section 179 expense deduction claimed (2011) $5,000 Minus: Allowable depreciation (instead of section 179 expense deduction):   2011 $1,250   2012 1,875   2013 ($1,250 × 40% (business)) 500 3,625 2013 — Recapture amount $1,375     Paul must include $1,375 in income for 2013. Free tax filing for low income Where to report recapture. Free tax filing for low income   Report any recapture of the section 179 expense deduction as ordinary income in Part IV of Form 4797 and include it in income on Schedule F (Form 1040). Free tax filing for low income Recapture for qualified section 179 GO Zone property. Free tax filing for low income   If any qualified section 179 GO Zone property ceases to be used in the GO Zone in a later year, you must recapture the benefit of the increased section 179 expense deduction as “other income. Free tax filing for low income ” Claiming the Special Depreciation Allowance For qualified property (defined below) placed in service in 2013, you can take an additional 50% special depreciation allowance. Free tax filing for low income The allowance is an additional deduction you can take after any section 179 expense deduction and before you figure regular depreciation under MACRS. Free tax filing for low income Figure the special depreciation allowance by multiplying the depreciable basis of the qualified property by 50%. Free tax filing for low income What is Qualified Property? For farmers, qualified property generally is certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Free tax filing for low income Certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Free tax filing for low income   Certain qualified property (defined below) acquired after December 31, 2007, and before January 1, 2014, is eligible for a 50% special depreciation allowance. Free tax filing for low income   Qualified property includes the following: Tangible property depreciated under the Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less. Free tax filing for low income Water utility property. Free tax filing for low income Off-the-shelf computer software. Free tax filing for low income Qualified leasehold improvement property. Free tax filing for low income   Qualified property must also meet all of the following tests: You must have acquired qualified property by purchase after December 31, 2007. Free tax filing for low income If a binding contract to acquire the property existed before January 1, 2008, the property does not qualify. Free tax filing for low income Qualified property must be placed in service after December 31, 2007 and placed in service before January 1, 2014 (before January 1, 2015 for certain property with a long production period and for certain aircraft). Free tax filing for low income The original use of the property must begin with you after December 31, 2007. Free tax filing for low income For more information, see chapter 3 of Publication 946. Free tax filing for low income How Can You Elect Not To Claim the Allowance? You can elect, for any class of property, not to deduct the special depreciation allowance for all property in such class placed in service during the tax year. Free tax filing for low income To make the election, attach a statement to your return indicating the class of property for which you are making the election. Free tax filing for low income Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. Free tax filing for low income However, if you timely filed your return for the year without making the election, you still can make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). Free tax filing for low income Attach the election statement to the amended return. Free tax filing for low income On the amended return, write “Filed pursuant to section 301. Free tax filing for low income 9100-2. Free tax filing for low income ” Once made, the election may not be revoked without IRS consent. Free tax filing for low income If you elect not to have the special depreciation allowance apply, the property may be subject to an alternative minimum tax adjustment for depreciation. Free tax filing for low income When Must You Recapture an Allowance When you dispose of property for which you claimed a special depreciation allowance, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the special depreciation allowance previously allowed or allowable. Free tax filing for low income For more information, see chapter 3 of Publication 946. Free tax filing for low income Figuring Depreciation Under MACRS The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. Free tax filing for low income MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Free tax filing for low income Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. Free tax filing for low income To be sure you can use MACRS to figure depreciation for your property, see Can You Use MACRS To Depreciate Your Property, earlier. Free tax filing for low income This part explains how to determine which MACRS depreciation system applies to your property. Free tax filing for low income It also discusses the following information that you need to know before you can figure depreciation under MACRS. Free tax filing for low income Property's recovery class. Free tax filing for low income Placed-in-service date. Free tax filing for low income Basis for depreciation. Free tax filing for low income Recovery period. Free tax filing for low income Convention. Free tax filing for low income Depreciation method. Free tax filing for low income Finally, this part explains how to use this information to figure your depreciation deduction. Free tax filing for low income Which Depreciation System (GDS or ADS) Applies? Your use of either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to depreciate property under MACRS determines what depreciation method and recovery period you use. Free tax filing for low income You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Free tax filing for low income Required use of ADS. Free tax filing for low income   You must use ADS for the following property. Free tax filing for low income All property used predominantly in a farming business and placed in service in any tax year during which an election not to apply the uniform capitalization rules to certain farming costs is in effect. Free tax filing for low income Listed property used 50% or less in a qualified business use. Free tax filing for low income See Additional Rules for Listed Property , later. Free tax filing for low income Any tax-exempt use property. Free tax filing for low income Any tax-exempt bond-financed property. Free tax filing for low income Any property imported from a foreign country for which an Executive Order is in effect because the country maintains trade restrictions or engages in other discriminatory acts. Free tax filing for low income Any tangible property used predominantly outside the United States during the year. Free tax filing for low income If you are required to use ADS to depreciate your property, you cannot claim the special depreciation allowance. Free tax filing for low income Electing ADS. Free tax filing for low income   Although your property may qualify for GDS, you can elect to use ADS. Free tax filing for low income The election generally must cover all property in the same property class you placed in service during the year. Free tax filing for low income However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Free tax filing for low income Once you make this election, you can never revoke it. Free tax filing for low income   You make the election by completing line 20 in Part III of Form 4562. Free tax filing for low income Which Property Class Applies Under GDS? The following is a list of the nine property classes under GDS. Free tax filing for low income 3-year property. Free tax filing for low income 5-year property. Free tax filing for low income 7-year property. Free tax filing for low income 10-year property. Free tax filing for low income 15-year property. Free tax filing for low income 20-year property. Free tax filing for low income 25-year property. Free tax filing for low income Residential rental property. Free tax filing for low income Nonresidential real property. Free tax filing for low income See Which Property Class Applies Under GDS in chapter 4 of Publication 946 for examples of the types of property included in each class. Free tax filing for low income What Is the Placed-in-Service Date? You begin to claim depreciation when your property is placed in service for use either in a trade or business or for the production of income. Free tax filing for low income The placed-in-service date for your property is the date the property is ready and available for a specific use. Free tax filing for low income It is therefore not necessarily the date it is first used. Free tax filing for low income If you converted property held for personal use to use in a trade or business or for the production of income, treat the property as being placed in service on the conversion date. Free tax filing for low income See Placed in Service under When Does Depreciation Begin and End , earlier, for examples illustrating when property is placed in service. Free tax filing for low income What Is the Basis for Depreciation? The basis for depreciation of MACRS property is the property's cost or other basis multiplied by the percentage of business/investment use. Free tax filing for low income Reduce that amount by any credits and deductions allocable to the property. Free tax filing for low income The following are examples of some of the credits and deductions that reduce basis. Free tax filing for low income Any deduction for section 179 property. Free tax filing for low income Any deduction for removal of barriers to the disabled and the elderly. Free tax filing for low income Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. Free tax filing for low income Any special depreciation allowance. Free tax filing for low income Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. Free tax filing for low income For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property , earlier. Free tax filing for low income Also, see chapter 6. Free tax filing for low income For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. Free tax filing for low income Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. Free tax filing for low income It is determined based on the depreciation system (GDS or ADS) used. Free tax filing for low income See Table 7-1 for recovery periods under both GDS and ADS for some commonly used assets. Free tax filing for low income For a complete list of recovery periods, see the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. Free tax filing for low income House trailers for farm laborers. Free tax filing for low income   To depreciate a house trailer you supply as housing for those who work on your farm, use one of the following recovery periods if the house trailer is mobile (it has wheels and a history of movement). Free tax filing for low income A 7-year recovery period under GDS. Free tax filing for low income A 10-year recovery period under ADS. Free tax filing for low income   However, if the house trailer is not mobile (its wheels have been removed and permanent utilities and pipes attached to it), use one of the following recovery periods. Free tax filing for low income A 20-year recovery period under GDS. Free tax filing for low income A 25-year recovery period under ADS. Free tax filing for low income Water wells. Free tax filing for low income   Water wells used to provide water for raising poultry and livestock are land improvements. Free tax filing for low income If they are depreciable, use one of the following recovery periods. Free tax filing for low income A 15-year recovery period under GDS. Free tax filing for low income A 20-year recovery period under ADS. Free tax filing for low income   The types of water wells that can be depreciated were discussed earlier in Irrigation systems and water wells under Property Having a Determinable Useful Life . Free tax filing for low income Table 7-1. Free tax filing for low income Farm Property Recovery Periods   Recovery Period in Years Assets GDS ADS Agricultural structures (single purpose) 10 15 Automobiles 5 5 Calculators and copiers 5 6 Cattle (dairy or breeding) 5 7 Communication equipment1 7 10 Computer and peripheral equipment 5 5 Drainage facilities 15 20 Farm buildings2 20 25 Farm machinery and equipment 7 10 Fences (agricultural) 7 10 Goats and sheep (breeding) 5 5 Grain bin 7 10 Hogs (breeding) 3 3 Horses (age when placed in service)     Breeding and working (12 years or less) 7 10 Breeding and working (more than 12 years) 3 10 Racing horses 3 12 Horticultural structures (single purpose) 10 15 Logging machinery and equipment3 5 6 Nonresidential real property 394 40 Office furniture, fixtures, and equipment (not calculators, copiers, or typewriters) 7 10 Paved lots 15 20 Residential rental property 27. Free tax filing for low income 5 40 Tractor units (over-the-road) 3 4 Trees or vines bearing fruit or nuts 10 20 Truck (heavy duty, unloaded weight 13,000 lbs. Free tax filing for low income or more) 5 6 Truck (actual weight less than 13,000 lbs) 5 5 Water wells 15 20 1 Not including communication equipment listed in other classes. Free tax filing for low income 2 Not including single purpose agricultural or horticultural structures. Free tax filing for low income 3 Used by logging and sawmill operators for cutting of timber. Free tax filing for low income 4 For property placed in service after May 12, 1993; for property placed in service before May 13, 1993,  the recovery period is 31. Free tax filing for low income 5 years. Free tax filing for low income Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. Free tax filing for low income The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property. Free tax filing for low income Use one of the following conventions. Free tax filing for low income The half-year convention. Free tax filing for low income The mid-month convention. Free tax filing for low income The mid-quarter convention. Free tax filing for low income For a detailed explanation of each convention, see Which Convention Applies in chapter 4 of Publication 946. Free tax filing for low income Also, see the Instructions for Form 4562. Free tax filing for low income Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. Free tax filing for low income The 200% declining balance method over a GDS recovery period. Free tax filing for low income The 150% declining balance method over a GDS recovery period. Free tax filing for low income The straight line method over a GDS recovery period. Free tax filing for low income The straight line method over an ADS recovery period. Free tax filing for low income Depreciation Table. Free tax filing for low income   The following table lists the types of property you can depreciate under each method. Free tax filing for low income The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. Free tax filing for low income Depreciation Table System/Method   Type of Property GDS using  150% DB • All property used in a farming business (except real property)   • All 15- and 20-year property   • Nonfarm 3-, 5-, 7-, and 10-year property1 GDS using SL • Nonresidential real property   • Residential rental property   • Trees or vines bearing fruit or nuts   • All 3-, 5-, 7-, 10-, 15-, and 20-year property1 ADS using SL • Property used predomi- nantly outside the United States   • Farm property used when an election not to apply the uniform capitalization rules is in effect   • Tax-exempt property   • Tax-exempt bond-financed property   • Imported property2   • Any property for which you elect to use this method1 GDS using  200% DB • Nonfarm 3-, 5-, 7-, and 10-year property 1Elective method 2See section 168(g)(6) of the Internal Revenue  Code Property used in farming business. Free tax filing for low income   For personal property placed in service after 1988 in a farming business, you must use the 150% declining balance method over a GDS recovery period or you can elect one of the following methods. Free tax filing for low income The straight line method over a GDS recovery period. Free tax filing for low income The straight line method over an ADS recovery period. Free tax filing for low income For property placed in service before 1999, you could have elected to use the 150% declining balance method using the ADS recovery periods for certain property classes. Free tax filing for low income If you made this election, continue to use the same method and recovery period for that property. Free tax filing for low income Real property. Free tax filing for low income   You can depreciate real property using the straight line method under either GDS or ADS. Free tax filing for low income Switching to straight line. Free tax filing for low income   If you use a declining balance method, you switch to the straight line method in the year it provides an equal or greater deduction. Free tax filing for low income If you use the MACRS percentage tables, discussed later under How Is the Depreciation Deduction Figured , you do not need to determine in which year your deduction is greater using the straight line method. Free tax filing for low income The tables have the switch to the straight line method built into their rates. Free tax filing for low income Fruit or nut trees and vines. Free tax filing for low income   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a 10-year recovery period. Free tax filing for low income ADS required for some farmers. Free tax filing for low income   If you elect not to apply the uniform capitalization rules to any plant shown in Table 6-1 of chapter 6 and produced in your farming business, you must use ADS for all property you place in service in any year the election is in effect. Free tax filing for low income See chapter 6 for a discussion of the application of the uniform capitalization rules to farm property. Free tax filing for low income Electing a different method. Free tax filing for low income   As shown in the Depreciation Table , you can elect a different method for depreciation for certain types of property. Free tax filing for low income You must make the election by the due date of the return (including extensions) for the year you placed the property in service. Free tax filing for low income However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). Free tax filing for low income Attach the election to the amended return and write “Filed pursuant to section 301. Free tax filing for low income 9100-2” on the election statement. Free tax filing for low income File the amended return at the same address you filed the original return. Free tax filing for low income Once you make the election, you cannot change it. Free tax filing for low income    If you elect to use a different method for one item in a property class, you must apply the same method to all property in that class placed in service during the year of the election. Free tax filing for low income However, you can make the election on a property-by-property basis for residential rental and nonresidential real property. Free tax filing for low income Straight line election. Free tax filing for low income   Instead of using the declining balance method, you can elect to use the straight line method over the GDS recovery period. Free tax filing for low income Make the election by entering “S/L” under column (f) in Part III of Form 4562. Free tax filing for low income ADS election. Free tax filing for low income   As explained earlier under Which Depreciation System (GDS or ADS) Applies , you can elect to use ADS even though your property may come under GDS. Free tax filing for low income ADS uses the straight line method of depreciation over the ADS recovery periods, which are generally longer than the GDS recovery periods. Free tax filing for low income The ADS recovery periods for many assets used in the business of farming are listed in Table 7–1. Free tax filing for low income Additional ADS recovery periods for other classes of property may be found in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. Free tax filing for low income How Is the Depreciation Deduction Figured? To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed-in-service date, basis amount, recovery period, convention, and depreciation method that applies to your property. Free tax filing for low income Then you are ready to figure your depreciation deduction. Free tax filing for low income You can figure it in one of two ways. Free tax filing for low income You can use the percentage tables provided by the IRS. Free tax filing for low income You can figure your own deduction without using the tables. Free tax filing for low income Figuring your own MACRS deduction will generally result in a slightly different amount than using the tables. Free tax filing for low income Using the MACRS Percentage Tables To help you figure your deduction under MACRS, the IRS has established percentage tables that incorporate the applicable convention and depreciation method. Free tax filing for low income These percentage tables are in Appendix A of Publication 946. Free tax filing for low income Rules for using the tables. Free tax filing for low income   The following rules cover the use of the percentage tables. Free tax filing for low income You must apply the rates in the percentage tables to your property's unadjusted basis. Free tax filing for low income Unadjusted basis is the same basis amount you would use to figure gain on a sale but figured without reducing your original basis by any MACRS depreciation taken in earlier years. Free tax filing for low income You cannot use the percentage tables for a short tax year. Free tax filing for low income See chapter 4 of Publication 946 for information on how to figure the deduction for a short tax year. Free tax filing for low income You generally must continue to use them for the entire recovery period of the property. Free tax filing for low income You must stop using the tables if you adjust the basis of the property for any reason other than— Depreciation allowed or allowable, or An addition or improvement to the property, which is depreciated as a separate property. Free tax filing for low income Basis adjustment due to casualty loss. Free tax filing for low income   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. Free tax filing for low income For the year of the adjustment and the remaining recovery period, you must figure the depreciation yourself using the property's adjusted basis at the end of the year. Free tax filing for low income See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946. Free tax filing for low income Figuring depreciation using the 150% DB method and half-year convention. Free tax filing for low income    Table 7-2 has the percentages for 3-, 5-, 7-, and 20-year property. Free tax filing for low income The percentages are based on the 150% declining balance method with a change to the straight line method. Free tax filing for low income This table covers only the half-year convention and the first 8 years for 20-year property. Free tax filing for low income See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. Free tax filing for low income   The following examples show how to figure depreciation under MACRS using the percentages in Table 7-2 . Free tax filing for low income Example 1. Free tax filing for low income During the year, you bought an item of 7-year property for $10,000 and placed it in service. Free tax filing for low income You do not elect a section 179 expense deduction for this property. Free tax filing for low income In addition, the property is not qualified property for purposes of the special depreciation allowance. Free tax filing for low income The unadjusted basis of the property is $10,000. Free tax filing for low income You use the percentages in Table 7-2 to figure your deduction. Free tax filing for low income Since this is 7-year property, you multiply $10,000 by 10. Free tax filing for low income 71% to get this year's depreciation of $1,071. Free tax filing for low income For next year, your depreciation will be $1,913 ($10,000 × 19. Free tax filing for low income 13%). Free tax filing for low income Example 2. Free tax filing for low income You had a barn constructed on your farm at a cost of $20,000. Free tax filing for low income You placed the barn in service this year. Free tax filing for low income You elect not to claim the special depreciation allowance. Free tax filing for low income The barn is 20-year property and you use the table percentages to figure your deduction. Free tax filing for low income You figure this year's depreciation by multiplying $20,000 (unadjusted basis) by 3. Free tax filing for low income 75% to get $750. Free tax filing for low income For next year, your depreciation will be $1,443. Free tax filing for low income 80 ($20,000 × 7. Free tax filing for low income 219%). Free tax filing for low income Table 7-2. Free tax filing for low income 150% Declining Balance Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 25. Free tax filing for low income 0 % 15. Free tax filing for low income 00 % 10. Free tax filing for low income 71 % 3. Free tax filing for low income 750 % 2 37. Free tax filing for low income 5   25. Free tax filing for low income 50   19. Free tax filing for low income 13   7. Free tax filing for low income 219   3 25. Free tax filing for low income 0   17. Free tax filing for low income 85   15. Free tax filing for low income 03   6. Free tax filing for low income 677   4 12. Free tax filing for low income 5   16. Free tax filing for low income 66   12. Free tax filing for low income 25   6. Free tax filing for low income 177   5     16. Free tax filing for low income 66   12. Free tax filing for low income 25   5. Free tax filing for low income 713   6     8. Free tax filing for low income 33   12. Free tax filing for low income 25   5. Free tax filing for low income 285   7         12. Free tax filing for low income 25   4. Free tax filing for low income 888   8         6. Free tax filing for low income 13   4. Free tax filing for low income 522   Figuring depreciation using the straight line method and half-year convention. Free tax filing for low income   The following table has the straight line percentages for 3-, 5-, 7-, and 20-year property using the half-year convention. Free tax filing for low income The table covers only the first 8 years for 20-year property. Free tax filing for low income See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. Free tax filing for low income Table 7-3. Free tax filing for low income Straight Line Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 16. Free tax filing for low income 67 % 10 % 7. Free tax filing for low income 14 % 2. Free tax filing for low income 5 % 2 33. Free tax filing for low income 33   20   14. Free tax filing for low income 29   5. Free tax filing for low income 0   3 33. Free tax filing for low income 33   20   14. Free tax filing for low income 29   5. Free tax filing for low income 0   4 16. Free tax filing for low income 67   20   14. Free tax filing for low income 28   5. Free tax filing for low income 0   5     20   14. Free tax filing for low income 29   5. Free tax filing for low income 0   6     10   14. Free tax filing for low income 28   5. Free tax filing for low income 0   7         14. Free tax filing for low income 29   5. Free tax filing for low income 0   8         7. Free tax filing for low income 14   5. Free tax filing for low income 0