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Free Tax Filing H&r Block

Free tax filing h&r block 31. Free tax filing h&r block   Tax on Unearned Income of Certain Children Table of Contents What's New Introduction Useful Items - You may want to see: Which Parent's Return To UseParents Who Do Not File a Joint Return Parent's Election To Report Child's Interest and DividendsEffect of Making the Election Figuring Child's Income Figuring Additional Tax Tax for Certain Children Who Have Unearned IncomeProviding Parental Information (Form 8615, lines A–C) Step 1. Free tax filing h&r block Figuring the Child's Net Unearned Income (Form 8615, Part I) Step 2. Free tax filing h&r block Figuring Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) Step 3. Free tax filing h&r block Figuring the Child's Tax (Form 8615, Part III) What's New Net Investment Income Tax. Free tax filing h&r block . Free tax filing h&r block  For tax years beginning after December 31, 2012, a child whose tax is figured on Form 8615 may be subject to the Net Investment Income Tax (NIIT). Free tax filing h&r block NIIT is a 3. Free tax filing h&r block 8% tax on the lesser of the net investment income or the excess of the child's modified adjusted gross income (MAGI) over the threshold amount. Free tax filing h&r block Use Form 8960, Net Investment Income Tax, to figure this tax. Free tax filing h&r block For more information on NIIT, go to www. Free tax filing h&r block irs. Free tax filing h&r block gov and enter “Net Investment Income Tax” in the search box. Free tax filing h&r block Introduction This chapter discusses the following two rules that may affect the tax on unearned income of certain children. Free tax filing h&r block If the child's interest and dividend income (including capital gain distributions) total less than $10,000, the child's parent may be able to choose to include that income on the parent's return rather than file a return for the child. Free tax filing h&r block (See Parent's Election To Report Child's Interest and Dividends , later. Free tax filing h&r block ) If the child's interest, dividends, and other unearned income total more than $2,000, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. Free tax filing h&r block (See Tax for Certain Children Who Have Unearned Income , later. Free tax filing h&r block ) For these rules, the term “child” includes a legally adopted child and a stepchild. Free tax filing h&r block These rules apply whether or not the child is a dependent. Free tax filing h&r block Useful Items - You may want to see: Publication 929 Tax Rules for Children and Dependents Form (and Instructions) 8615 Tax for Certain Children Who Have Unearned Income 8814 Parents' Election To Report Child's Interest and Dividends Which Parent's Return To Use If a child's parents are married to each other and file a joint return, use the joint return to figure the tax on the child's unearned income. Free tax filing h&r block The tax rate and other return information from that return are used to figure the child's tax as explained later under Tax for Certain Children Who Have Unearned Income . Free tax filing h&r block Parents Who Do Not File a Joint Return For parents who do not file a joint return, the following discussions explain which parent's tax return must be used to figure the tax. Free tax filing h&r block Only the parent whose tax return is used can make the election described under Parent's Election To Report Child's Interest and Dividends . Free tax filing h&r block Parents are married. Free tax filing h&r block   If the child's parents file separate returns, use the return of the parent with the greater taxable income. Free tax filing h&r block Parents not living together. Free tax filing h&r block   If the child's parents are married to each other but not living together, and the parent with whom the child lives (the custodial parent) is considered unmarried, use the return of the custodial parent. Free tax filing h&r block If the custodial parent is not considered unmarried, use the return of the parent with the greater taxable income. Free tax filing h&r block   For an explanation of when a married person living apart from his or her spouse is considered unmarried, see Head of Household in chapter 2. Free tax filing h&r block Parents are divorced. Free tax filing h&r block   If the child's parents are divorced or legally separated, and the parent who had custody of the child for the greater part of the year (the custodial parent) has not remarried, use the return of the custodial parent. Free tax filing h&r block Custodial parent remarried. Free tax filing h&r block   If the custodial parent has remarried, the stepparent (rather than the noncustodial parent) is treated as the child's other parent. Free tax filing h&r block Therefore, if the custodial parent and the stepparent file a joint return, use that joint return. Free tax filing h&r block Do not use the return of the noncustodial parent. Free tax filing h&r block   If the custodial parent and the stepparent are married, but file separate returns, use the return of the one with the greater taxable income. Free tax filing h&r block If the custodial parent and the stepparent are married but not living together, the earlier discussion under Parents not living together applies. Free tax filing h&r block Parents never married. Free tax filing h&r block   If a child's parents have never been married to each other, but lived together all year, use the return of the parent with the greater taxable income. Free tax filing h&r block If the parents did not live together all year, the rules explained earlier under Parents are divorced apply. Free tax filing h&r block Widowed parent remarried. Free tax filing h&r block   If a widow or widower remarries, the new spouse is treated as the child's other parent. Free tax filing h&r block The rules explained earlier under Custodial parent remarried apply. Free tax filing h&r block Parent's Election To Report Child's Interest and Dividends You may be able to elect to include your child's interest and dividend income (including capital gain distributions) on your tax return. Free tax filing h&r block If you do, your child will not have to file a return. Free tax filing h&r block You can make this election only if all the following conditions are met. Free tax filing h&r block Your child was under age 19 (or under age 24 if a full-time student) at the end of the year. Free tax filing h&r block Your child had income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends). Free tax filing h&r block The child's gross income was less than $10,000. Free tax filing h&r block The child is required to file a return unless you make this election. Free tax filing h&r block The child does not file a joint return for the year. Free tax filing h&r block No estimated tax payment was made for the year, and no overpayment from the previous year (or from any amended return) was applied to this year under your child's name and social security number. Free tax filing h&r block No federal income tax was taken out of your child's income under the backup withholding rules. Free tax filing h&r block You are the parent whose return must be used when applying the special tax rules for children. Free tax filing h&r block (See Which Parent's Return To Use , earlier. Free tax filing h&r block ) These conditions are also shown in Figure 31-A. Free tax filing h&r block Certain January 1 birthdays. Free tax filing h&r block   A child born on January 1, 1995, is considered to be age 19 at the end of 2013. Free tax filing h&r block You cannot make this election for such a child unless the child was a full-time student. Free tax filing h&r block   A child born on January 1, 1990, is considered to be age 24 at the end of 2013. Free tax filing h&r block You cannot make this election for such a child. Free tax filing h&r block Full-time student. Free tax filing h&r block   A full-time student is a child who during some part of each of any 5 calendar months of the year was enrolled as a full-time student at a school, or took a full-time on-farm training course given by a school or a state, county, or local government agency. Free tax filing h&r block A school includes a technical, trade, or mechanical school. Free tax filing h&r block It does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet. Free tax filing h&r block How to make the election. Free tax filing h&r block   Make the election by attaching Form 8814 to your Form 1040. Free tax filing h&r block (If you make this election, you cannot file Form 1040A or Form 1040EZ. Free tax filing h&r block ) Attach a separate Form 8814 for each child for whom you make the election. Free tax filing h&r block You can make the election for one or more children and not for others. Free tax filing h&r block Effect of Making the Election The federal income tax on your child's income may be more if you make the Form 8814 election. Free tax filing h&r block Rate may be higher. Free tax filing h&r block   If your child received qualified dividends or capital gain distributions, you may pay up to $100 more tax if you make this election instead of filing a separate tax return for the child. Free tax filing h&r block This is because the tax rate on the child's income between $1,000 and $2,000 is 10% if you make this election. Free tax filing h&r block However, if you file a separate return for the child, the tax rate may be as low as 0% (zero percent) because of the preferential tax rates for qualified dividends and capital gain distributions. Free tax filing h&r block Deductions you cannot take. Free tax filing h&r block   By making the Form 8814 election, you cannot take any of the following deductions that the child would be entitled to on his or her return. Free tax filing h&r block The additional standard deduction if the child is blind. Free tax filing h&r block The deduction for a penalty on an early withdrawal of your child's savings. Free tax filing h&r block Itemized deductions (such as your child's investment expenses or charitable contributions). Free tax filing h&r block Reduced deductions or credits. Free tax filing h&r block   If you use Form 8814, your increased adjusted gross income may reduce certain deductions or credits on your return including the following. Free tax filing h&r block Deduction for contributions to a traditional individual retirement arrangement (IRA). Free tax filing h&r block Deduction for student loan interest. Free tax filing h&r block Itemized deductions for medical expenses, casualty and theft losses, and certain miscellaneous expenses. Free tax filing h&r block Credit for child and dependent care expenses. Free tax filing h&r block Child tax credit. Free tax filing h&r block Education tax credits. Free tax filing h&r block Earned income credit. Free tax filing h&r block Penalty for underpayment of estimated tax. Free tax filing h&r block   If you make this election for 2013 and did not have enough tax withheld or pay enough estimated tax to cover the tax you owe, you may be subject to a penalty. Free tax filing h&r block If you plan to make this election for 2014, you may need to increase your federal income tax withholding or your estimated tax payments to avoid the penalty. Free tax filing h&r block See chapter 4 for more information. Free tax filing h&r block Figuring Child's Income Use Form 8814, Part I, to figure your child's interest and dividend income to report on your return. Free tax filing h&r block Only the amount over $2,000 is added to your income. Free tax filing h&r block The amount over $2,000 is shown on Form 8814, line 6. Free tax filing h&r block Unless the child's income includes qualified dividends or capital gain distributions (discussed next), the same amount is shown on Form 8814, line 12. Free tax filing h&r block Include the amount from Form 8814, line 12, on Form 1040, line 21. Free tax filing h&r block Enter “Form 8814” on the dotted line next to line 21. Free tax filing h&r block If you file more than one Form 8814, include the total amounts from line 12 of all your Forms 8814 on Form 1040, line 21. Free tax filing h&r block Capital gain distributions and qualified dividends. Free tax filing h&r block   If your child's dividend income included any capital gain distributions, see Capital gain distributions under Figuring Child's Income in Publication 929, Part 2. Free tax filing h&r block If your child's dividend income included any qualified dividends, see Qualified dividends under Figuring Child's Income in Publication 929, Part 2. Free tax filing h&r block Figuring Additional Tax Use Form 8814, Part II, to figure the tax on the $2,000 of your child's interest and dividends that you do not include in your income. Free tax filing h&r block This tax is added to the tax figured on your income. Free tax filing h&r block This additional tax is the smaller of: 10% × (your child's gross income − $1,000), or $100. Free tax filing h&r block Include the amount from line 15 of all your Forms 8814 in the total on Form 1040, line 44. Free tax filing h&r block Check box a on Form 1040, line 44. Free tax filing h&r block Figure 31-A. Free tax filing h&r block Can You Include Your Child's Income On Your Tax Return? Please click here for the text description of the image. Free tax filing h&r block Figure 31–A. Free tax filing h&r block Can You Include Your Child's Income On Your Tax Return? Tax for Certain Children Who Have Unearned Income If a child's interest, dividends, and other unearned income total more than $2,000, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. Free tax filing h&r block If the parent does not or cannot choose to include the child's income on the parent's return, use Form 8615 to figure the child's tax. Free tax filing h&r block Attach the completed form to the child's Form 1040 or Form 1040A. Free tax filing h&r block When Form 8615 must be filed. Free tax filing h&r block   Form 8615 must be filed for a child if all of the following statements are true. Free tax filing h&r block The child's investment income was more than $2,000. Free tax filing h&r block The child is required to file a return for 2013. Free tax filing h&r block The child either: Was under age 18 at the end of the year, Was age 18 at the end of the year and did not have earned income that was more than half of his or her support, or Was over age 18 and under age 24 at the end of the year, was a full-time student, and did not have earned income that was more than half of his or her support. Free tax filing h&r block At least one of the child's parents was alive at the end of 2013. Free tax filing h&r block The child does not file a joint return for 2013. Free tax filing h&r block These conditions are also shown in  Figure 31-B. Free tax filing h&r block Earned income. Free tax filing h&r block   Earned income includes salaries, wages, tips, and other payments received for personal services performed. Free tax filing h&r block It does not include unearned income as defined later in this chapter. Free tax filing h&r block Support. Free tax filing h&r block   Your child's support includes all amounts spent to provide the child with food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. Free tax filing h&r block To figure your child's support, count support provided by you, your child, and others. Free tax filing h&r block However, a scholarship received by your child is not considered support if your child is a full-time student. Free tax filing h&r block See chapter 3 for details about support. Free tax filing h&r block Certain January 1 birthdays. Free tax filing h&r block   Use the following chart to determine whether certain children with January 1 birthdays meet condition 3 under When Form 8615 must be filed. Free tax filing h&r block Figure 31-B. Free tax filing h&r block Do You Have To Use Form 8615 To Figure Your Child's Tax? Please click here for the text description of the image. Free tax filing h&r block Figure 31-B. Free tax filing h&r block Do You Have To Use Form 8615 To Figure Your Child's Tax?    IF a child was born on. Free tax filing h&r block . Free tax filing h&r block . Free tax filing h&r block THEN, at the end of 2013, the child is considered to be. Free tax filing h&r block . Free tax filing h&r block . Free tax filing h&r block January 1, 1996 18* January 1, 1995 19** January 1, 1990 24*** *This child is not under age 18. Free tax filing h&r block The child meets condition 3 only if the child did not have earned income that was more than half of the child's support. Free tax filing h&r block  **This child meets condition 3 only if the child was a full-time student who did not have earned income that was more than half of the child's support. Free tax filing h&r block  ***Do not use Form 8615 for this child. Free tax filing h&r block Providing Parental Information (Form 8615, lines A–C) On Form 8615, lines A and B, enter the parent's name and social security number. Free tax filing h&r block (If the parents filed a joint return, enter the name and social security number listed first on the joint return. Free tax filing h&r block ) On line C, check the box for the parent's filing status. Free tax filing h&r block See Which Parent's Return To Use at the beginning of this chapter for information on which parent's return information must be used on Form 8615. Free tax filing h&r block Parent with different tax year. Free tax filing h&r block   If the parent and the child do not have the same tax year, complete Form 8615 using the information on the parent's return for the tax year that ends in the child's tax year. Free tax filing h&r block Parent's return information not known timely. Free tax filing h&r block   If the information needed from the parent's return is not known by the time the child's return is due (usually April 15), you can file the return using estimates. Free tax filing h&r block   You can use any reasonable estimate. Free tax filing h&r block This includes using information from last year's return. Free tax filing h&r block If you use an estimated amount on Form 8615, enter “Estimated” on the line next to the amount. Free tax filing h&r block    When you get the correct information, file an amended return on Form 1040X, Amended U. Free tax filing h&r block S. Free tax filing h&r block Individual Income Tax Return. Free tax filing h&r block   Instead of using estimates, you can get an automatic 6-month extension of time to file if, by the date your return is due, you file Form 4868, Application for Automatic Extension of Time To File U. Free tax filing h&r block S. Free tax filing h&r block Individual Income Tax Return. Free tax filing h&r block Extensions are discussed in chapter 1. Free tax filing h&r block Step 1. Free tax filing h&r block Figuring the Child's Net Unearned Income (Form 8615, Part I) The first step in figuring a child's tax using Form 8615 is to figure the child's net unearned income. Free tax filing h&r block To do that, use Form 8615, Part I. Free tax filing h&r block Line 1 (unearned income). Free tax filing h&r block   If the child had no earned income, enter on this line the adjusted gross income shown on the child's return. Free tax filing h&r block Adjusted gross income is shown on Form 1040, line 38, or Form 1040A, line 22. Free tax filing h&r block Form 1040EZ cannot be used if Form 8615 must be filed. Free tax filing h&r block   If the child had earned income, figure the amount to enter on Form 8615, line 1, by using the worksheet in the instructions for the form. Free tax filing h&r block   However, if the child has: excluded any foreign earned income, deducted either a loss from self-employment, or deducted a net operating loss from another year, then use the Alternate Worksheet for Form 8615, Line 1, in Publication 929 to figure the amount to enter on Form 8615, line 1. Free tax filing h&r block Unearned income defined. Free tax filing h&r block   Unearned income is generally all income other than salaries, wages, and other amounts received as pay for work actually done. Free tax filing h&r block It includes taxable interest, dividends (including capital gain distributions), capital gains, unemployment compensation, the taxable part of social security and pension payments, and certain distributions from trusts. Free tax filing h&r block Unearned income includes amounts produced by assets the child obtained with earned income (such as interest on a savings account into which the child deposited wages). Free tax filing h&r block Nontaxable income. Free tax filing h&r block   For this purpose, unearned income includes only amounts the child must include in total income. Free tax filing h&r block Nontaxable unearned income, such as tax-exempt interest and the nontaxable part of social security and pension payments, is not included. Free tax filing h&r block Income from property received as a gift. Free tax filing h&r block   A child's unearned income includes all income produced by property belonging to the child. Free tax filing h&r block This is true even if the property was transferred to the child, regardless of when the property was transferred or purchased or who transferred it. Free tax filing h&r block   A child's unearned income includes income produced by property given as a gift to the child. Free tax filing h&r block This includes gifts to the child from grandparents or any other person and gifts made under the Uniform Gift to Minors Act. Free tax filing h&r block Example. Free tax filing h&r block Amanda Black, age 13, received the following income. Free tax filing h&r block Dividends — $800 Wages — $2,100 Taxable interest — $1,200 Tax-exempt interest — $100 Net capital gains — $100 The dividends were qualified dividends on stock given to her by her grandparents. Free tax filing h&r block Amanda's unearned income is $2,100. Free tax filing h&r block This is the total of the dividends ($800), taxable interest ($1,200), and net capital gains ($100). Free tax filing h&r block Her wages are earned (not unearned) income because they are received for work actually done. Free tax filing h&r block Her tax-exempt interest is not included because it is nontaxable. Free tax filing h&r block Trust income. Free tax filing h&r block   If a child is the beneficiary of a trust, distributions of taxable interest, dividends, capital gains, and other unearned income from the trust are unearned income to the child. Free tax filing h&r block   However, for purposes of completing Form 8615, a taxable distribution from a qualified disability trust is considered earned income, not unearned income. Free tax filing h&r block Line 2 (deductions). Free tax filing h&r block   If the child does not itemize deductions on Schedule A (Form 1040), enter $2,000 on line 2. Free tax filing h&r block   If the child does itemize deductions, enter on line 2 the larger of: $1,000 plus the portion of the child's itemized deductions on Schedule A (Form 1040), line 29, that are directly connected with the production of unearned income entered on line 1, or $2,000. Free tax filing h&r block Directly connected. Free tax filing h&r block   Itemized deductions are directly connected with the production of unearned income if they are for expenses paid to produce or collect taxable income or to manage, conserve, or maintain property held for producing income. Free tax filing h&r block These expenses include custodian fees and service charges, service fees to collect taxable interest and dividends, and certain investment counsel fees. Free tax filing h&r block   These expenses are added to certain other miscellaneous itemized deductions on Schedule A (Form 1040). Free tax filing h&r block Only the amount greater than 2% of the child's adjusted gross income can be deducted. Free tax filing h&r block See chapter 28 for more information. Free tax filing h&r block Example 1. Free tax filing h&r block Roger, age 12, has unearned income of $8,000, no other income, no adjustments to income, and itemized deductions of $300 (net of the 2% limit) that are directly connected with his unearned income. Free tax filing h&r block His adjusted gross income is $8,000, which is entered on Form 1040, line 38, and on Form 8615, line 1. Free tax filing h&r block Roger enters $2,000 on line 2 because that is more than the total of $1,000 plus his directly connected itemized deductions of $300. Free tax filing h&r block Example 2. Free tax filing h&r block Eleanor, age 8, has unearned income of $16,000 and an early withdrawal penalty of $100. Free tax filing h&r block She has no other income. Free tax filing h&r block She has itemized deductions of $1,050 (net of the 2% limit) that are directly connected with the production of her unearned income. Free tax filing h&r block Her adjusted gross income, entered on line 1, is $15,900 ($16,000 − $100). Free tax filing h&r block The amount on line 2 is $2,050. Free tax filing h&r block This is the larger of: $1,000 plus the $1,050 of directly connected itemized deductions, or $2,000. Free tax filing h&r block Line 3. Free tax filing h&r block   Subtract line 2 from line 1 and enter the result on this line. Free tax filing h&r block If zero or less, do not complete the rest of the form. Free tax filing h&r block However, you must still attach Form 8615 to the child's tax return. Free tax filing h&r block Figure the tax on the child's taxable income in the normal manner. Free tax filing h&r block Line 4 (child's taxable income). Free tax filing h&r block   Enter on line 4 the child's taxable income from Form 1040, line 43, or Form 1040A, line 27. Free tax filing h&r block   However, if the child files Form 2555 or 2555-EZ to claim the foreign earned income exclusion, housing exclusion, or housing deduction, see the Form 8615 instructions or Pub. Free tax filing h&r block 929. Free tax filing h&r block Line 5 (net unearned income). Free tax filing h&r block   A child's net unearned income cannot be more than his or her taxable income. Free tax filing h&r block Enter on Form 8615, line 5, the smaller of line 3 or line 4. Free tax filing h&r block This is the child's net unearned income. Free tax filing h&r block   If zero or less, do not complete the rest of the form. Free tax filing h&r block However, you must still attach Form 8615 to the child's tax return. Free tax filing h&r block Figure the tax on the child's taxable income in the normal manner. Free tax filing h&r block Step 2. Free tax filing h&r block Figuring Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) The next step in completing Form 8615 is to figure a tentative tax on the child's net unearned income at the parent's tax rate. Free tax filing h&r block The tentative tax at the parent's tax rate is the difference between the tax on the parent's taxable income figured with the child's net unearned income (plus the net unearned income of any other child whose Form 8615 includes the tax return information of that parent) and the tax figured without it. Free tax filing h&r block When figuring the tentative tax at the parent's tax rate on Form 8615, do not refigure any of the exclusions, deductions, or credits on the parent's return because of the child's net unearned income. Free tax filing h&r block For example, do not refigure the medical expense deduction. Free tax filing h&r block Figure the tentative tax on Form 8615, lines 6 through 13. Free tax filing h&r block Note. Free tax filing h&r block If the child or parent has any capital gains or losses, get Publication 929 for help in completing Form 8615, Part II. Free tax filing h&r block Line 6 (parent's taxable income). Free tax filing h&r block   Enter on line 6 the parent's taxable income from Form 1040, line 43, Form 1040A, line 27, or Form 1040EZ, line 6. Free tax filing h&r block   If the Foreign Earned Income Tax Worksheet (in the Form 1040 instructions) was used to figure the parent's tax, enter the amount from line 3 of that worksheet instead of the parent's taxable income. Free tax filing h&r block Line 7 (net unearned income of other children). Free tax filing h&r block   If the tax return information of the parent is also used on any other child's Form 8615, enter on line 7 the total of the amounts from line 5 of all the other children's Forms 8615. Free tax filing h&r block Do not include the amount from line 5 of the Form 8615 being completed. Free tax filing h&r block Example. Free tax filing h&r block Paul and Jane Persimmon have three children, Sharon, Jerry, and Mike, who must attach Form 8615 to their tax returns. Free tax filing h&r block The children's net unearned income amounts on line 5 of their Forms 8615 are: Sharon — $800 Jerry — $600 Mike — $1,000 Line 7 of Sharon's Form 8615 will show $1,600, the total of the amounts on line 5 of Jerry's and Mike's Forms 8615. Free tax filing h&r block Line 7 of Jerry's Form 8615 will show $1,800 ($800 + $1,000). Free tax filing h&r block Line 7 of Mike's Form 8615 will show $1,400 ($800 + $600). Free tax filing h&r block Other children's information not available. Free tax filing h&r block   If the net unearned income of the other children is not available when the return is due, either file the return using estimates or get an extension of time to file. Free tax filing h&r block See Parent's return information not known timely , earlier. Free tax filing h&r block Line 11 (tentative tax). Free tax filing h&r block   Subtract line 10 from line 9 and enter the result on this line. Free tax filing h&r block This is the tentative tax. Free tax filing h&r block   If line 7 is blank, skip lines 12a and 12b and enter the amount from line 11 on line 13. Free tax filing h&r block Also skip the discussion for lines 12a and 12b that follows. Free tax filing h&r block Lines 12a and 12b (dividing the tentative tax). Free tax filing h&r block   If an amount is entered on line 7, divide the tentative tax shown on line 11 among the children according to each child's share of the total net unearned income. Free tax filing h&r block This is done on lines 12a, 12b, and 13. Free tax filing h&r block Add the amount on line 7 to the amount on line 5 and enter the total on line 12a. Free tax filing h&r block Divide the amount on line 5 by the amount on line 12a and enter the result, as a decimal, on line 12b. Free tax filing h&r block Example. Free tax filing h&r block In the earlier example under Line 7 (net unearned income of other children), Sharon's Form 8615 shows $1,600 on line 7. Free tax filing h&r block The amount entered on line 12a is $2,400, the total of the amounts on lines 5 and 7 ($800 + $1,600). Free tax filing h&r block The decimal on line 12b is  . Free tax filing h&r block 333, figured as follows and rounded to three places. Free tax filing h&r block   $800 = . Free tax filing h&r block 333     $2,400   Step 3. Free tax filing h&r block Figuring the Child's Tax (Form 8615, Part III) The final step in figuring a child's tax using Form 8615 is to determine the larger of: The total of: The child's share of the tentative tax based on the parent's tax rate, plus The tax on the child's taxable income in excess of net unearned income, figured at the child's tax rate, or The tax on the child's taxable income, figured at the child's tax rate. Free tax filing h&r block This is the child's tax. Free tax filing h&r block It is figured on Form 8615, lines 14 through 18. Free tax filing h&r block Alternative minimum tax. Free tax filing h&r block   A child may be subject to alternative minimum tax (AMT) if he or she has certain items given preferential treatment under the tax law. Free tax filing h&r block See Alternative Minimum Tax (AMT) in chapter 30. Free tax filing h&r block    For more information on who is liable for AMT and how to figure it, see Form 6251, Alternative Minimum Tax—Individuals. Free tax filing h&r block For information on special limits that apply to a child who files Form 6251, see Certain Children Under Age 24 in the Instructions for Form 6251. Free tax filing h&r block Prev  Up  Next   Home   More Online Publications
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If you're looking for data on general IRS operations, budget, and compliance, this is the section for you. Within this section, you can learn about taxpayer refunds, IRS collections, law enforcement, taxpayer assistance, system management, and compliance.

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Page Last Reviewed or Updated: 05-Sep-2013

The Free Tax Filing H&r Block

Free tax filing h&r block Accelerated Cost Recovery System (ACRS) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: ACRS Defined What Can and Cannot Be Depreciated Under ACRSRecovery Property Nonrecovery Property How To Figure the DeductionUnadjusted Basis Classes of Recovery Property Recovery Periods Alternate ACRS Method (Modified Straight Line Method) ACRS Deduction in Short Tax Year DispositionsEarly dispositions of ACRS property other than 15-, 18-, or 19-year real property. Free tax filing h&r block Dispositions — mass asset accounts. Free tax filing h&r block Early dispositions — 15-year real property. Free tax filing h&r block Early dispositions — 18- and 19-year real property. Free tax filing h&r block Depreciation Recapture Topics - This chapter discusses: The definition of ACRS What can and cannot be depreciated under ACRS How to figure the deduction Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization The Accelerated Cost Recovery System (ACRS) applies to property first used before 1987. Free tax filing h&r block It is the name given to tax rules for getting back (recovering) through depreciation deductions the cost of property used in a trade or business or to produce income. Free tax filing h&r block These rules are mandatory and generally apply to tangible property placed in service after 1980 and before 1987. Free tax filing h&r block If you placed property in service during this period, you must continue to figure your depreciation under ACRS. Free tax filing h&r block If you used listed property placed in service after June 18, 1984, less than 50% for business in 1995, see Predominant Use Test in chapter 3. Free tax filing h&r block Listed property includes cars, other means of transportation, and certain computers. Free tax filing h&r block Any additions or improvements placed in service after 1986, including any components of a building (such as plumbing, wiring, storm windows, etc. Free tax filing h&r block ), are depreciated using MACRS, discussed in chapter 3 of Publication 946. Free tax filing h&r block It does not matter that the underlying property is depreciated under ACRS or one of the other methods. Free tax filing h&r block ACRS Defined ACRS consists of accelerated depreciation methods and an alternate ACRS method that could have been elected. Free tax filing h&r block The alternate ACRS method used a recovery percentage based on a modified straight line method. Free tax filing h&r block The law prescribes fixed percentages to be uses for each class of property. Free tax filing h&r block Property depreciable under ACRS is called recovery property. Free tax filing h&r block The recovery class of property determines the recovery period. Free tax filing h&r block Generally, the class life of property places it in a 3-year, 5-year, 10-year, 15-year, 18-year, or 19-year recovery class. Free tax filing h&r block Under ACRS, the prescribed percentages are used to recover the unadjusted basis of recovery property. Free tax filing h&r block To figure a depreciation deduction, you multiply the prescribed percentage for the recovery class by the unadjusted basis of the recovery property. Free tax filing h&r block You must continue to figure your depreciation under ACRS for property placed in service after 1980 and before 1987. Free tax filing h&r block For property you placed in service after 1986, you must use MACRS, discussed in chapter 3 of Publication 946. Free tax filing h&r block What Can and Cannot Be Depreciated Under ACRS ACRS applies to most depreciable tangible property placed in service after 1980 and before 1987. Free tax filing h&r block It includes new or used and real or personal property. Free tax filing h&r block The property must be for use in a trade or business or for the production of income. Free tax filing h&r block Property you acquired before 1981 or after 1986 is not ACRS recovery property. Free tax filing h&r block For information on depreciating property acquired before 1981, see chapter 2. Free tax filing h&r block For information on depreciating property acquired after 1986, see chapter 3 of Publication 946. Free tax filing h&r block Recovery Property Recovery property under ACRS is tangible depreciable property placed in service after 1980 and before 1987. Free tax filing h&r block It generally includes new or used property that you acquired after 1980 and before 1987 for use in your trade or business or for the production of income. Free tax filing h&r block Nonrecovery Property You cannot use ACRS for property you placed in service before 1981 or after 1986. Free tax filing h&r block Nonrecovery property also includes: Intangible property, Property you elected to exclude from ACRS that is properly depreciated under a method of depreciation that is not based on a term of years, Certain public utility property, and Certain property acquired and excluded from ACRS because of the antichurning rules. Free tax filing h&r block Intangible property. Free tax filing h&r block   Intangible property is not depreciated under ACRS. Free tax filing h&r block Property depreciated under methods not expressed in a term of years. Free tax filing h&r block   Certain property depreciated under a method not expressed in a term of years is not depreciated under ACRS. Free tax filing h&r block This included any property: If you made an irrevocable election to exclude such property, and In the first year that you could have claimed depreciation, you properly used the unit-of-production method or any method of depreciation not expressed in a term of years (not including the retirement-replacement-betterment method). Free tax filing h&r block Public utility property. Free tax filing h&r block   Public utility property for which the taxpayer does not use a normalization method of accounting is excluded from ACRS and is subject to depreciation under a special rule. Free tax filing h&r block Additions or improvements to ACRS property after 1986. Free tax filing h&r block   Any additions or improvements placed in service after 1986, including any components of a building (plumbing, wiring, storm windows, etc. Free tax filing h&r block ) are depreciated using MACRS, discussed in chapter 3 of Publication 946. Free tax filing h&r block It does not matter that the underlying property is depreciated under ACRS or one of the other methods. Free tax filing h&r block How To Figure the Deduction After you determine that your property can be depreciated under ACRS, you are ready to figure your deduction. Free tax filing h&r block Because the conventions are built into the percentage table rates, you only need to know the following: The unadjusted basis of your recovery property, The classes of recovery property, The recovery periods, and Whether to use the prescribed percentages based on accelerated methods or percentages based on using the alternate ACRS method. Free tax filing h&r block Unadjusted Basis To figure your ACRS deduction, you multiply the unadjusted basis in your recovery property by its applicable percentage for the year. Free tax filing h&r block Unadjusted basis is the same amount you would use to figure gain on a sale, but it is figured without taking into account any depreciation taken in earlier years. Free tax filing h&r block However, reduce your original basis by the amount of amortization taken on the property and by any section 179 deduction claimed as discussed in chapter 2 of Publication 946. Free tax filing h&r block If you buy property, your unadjusted basis is usually its cost minus any amortized amount and minus any section 179 deduction elected. Free tax filing h&r block If you acquire property in some other way, such as by inheriting it, getting it as a gift, or building it yourself, you figure your unadjusted basis under other rules. Free tax filing h&r block See Publication 551. Free tax filing h&r block Classes of Recovery Property All recovery property under ACRS is in one of the following classes. Free tax filing h&r block The class for your property was determined when you began to depreciate it. Free tax filing h&r block 3-Year Property 3-year property includes automobiles, light-duty trucks (actual unloaded weight less than 13,000 pounds), and tractor units for use over-the-road. Free tax filing h&r block Race horses over 2 years old when placed in service are 3-year property. Free tax filing h&r block Any other horses over 12 years old when you placed them in service are also included in the 3-year property class. Free tax filing h&r block The ACRS percentages for 3-year recovery property are: Recovery Period Percentage 1st year 25% 2nd year 38% 3rd year 37% If you used the percentages above to depreciate your 3-year recovery property, your property, except for certain passenger automobiles, is fully depreciated. Free tax filing h&r block You cannot claim depreciation for this property after 1988. Free tax filing h&r block 5-Year Property 5-year property includes computers, copiers, and equipment, such as office furniture and fixtures. Free tax filing h&r block It also includes single purpose agricultural or horticultural structures and petroleum storage facilities (other than buildings and their structural components). Free tax filing h&r block The ACRS percentages for 5-year recovery property are: Recovery period Percentage 1st year 15% 2nd year 22% 3rd through 5th year 21% If you used the percentages above to depreciate your 5-year recovery property, it is fully depreciated. Free tax filing h&r block You cannot claim depreciation for this property after 1990. Free tax filing h&r block 10-Year Property 10-year property includes certain real property such as theme-park structures and certain public utility property. Free tax filing h&r block Manufactured homes (including mobile homes) and railroad tank cars are also 10-year property. Free tax filing h&r block You do not treat a building, and its structural components, as 10-year property by reason of a change in use after you placed the property in service. Free tax filing h&r block For example, a building (15-year real property) that was placed in service in 1981 and was converted to a theme-park structure in 1986 remains 15-year real property. Free tax filing h&r block The ACRS percentages for 10-year recovery property are: Recovery Period Percentage 1st year 8% 2nd year 14% 3rd year 12% 4th through 6th year 10% 7th through 10th year 9% If you used the percentages above, you cannot claim depreciation for this property after 1995. Free tax filing h&r block Example. Free tax filing h&r block On April 21, 1986, you bought and placed in service a new mobile home for $26,000 to be used as rental property. Free tax filing h&r block You paid $10,000 cash and signed a note for $16,000 giving you an unadjusted basis of $26,000. Free tax filing h&r block On June 8, 1986, you bought and placed in service a used mobile home for use as rental property at a total cost of $11,500. Free tax filing h&r block The total unadjusted basis of your 10-year recovery property placed in service in 1986 was $37,500 ($26,000 + $11,500). Free tax filing h&r block Your ACRS deduction was $3,000 (8% × $37,500). Free tax filing h&r block In 1987, your ACRS deduction was $5,250 (14% × $37,500). Free tax filing h&r block In 1988, your ACRS deduction was $4,500 (12% × $37,500). Free tax filing h&r block In 1989, 1990, and 1991, your ACRS deduction was $3,750 (10% × $37,500). Free tax filing h&r block In 1992, 1993, 1994, and 1995 your deduction for each year is $3,375 (9% × $37,500). Free tax filing h&r block 15-Year Real Property 15-year real property is real property that is recovery property placed in service before March 16, 1984. Free tax filing h&r block It includes all real property, such as buildings, other than that designated as 5-year or 10-year property. Free tax filing h&r block Unlike the 3-, 5-, or 10-year classes of property, the percentages for 15-year real property depend on when you placed the property in service during your tax year. Free tax filing h&r block You could group 15-year real property by month and year placed in service. Free tax filing h&r block In Table 1, at the end of this publication in the Appendix, find the month in your tax year that you placed the property in service in your trade or business or for the production of income. Free tax filing h&r block You use the percentages listed under that month for each year of the recovery period to determine your depreciation deduction each year. Free tax filing h&r block Example. Free tax filing h&r block On March 5, 1984, you placed an apartment building in service in your business. Free tax filing h&r block It is 15-year real property. Free tax filing h&r block After subtracting the value of the land, your unadjusted basis in the building is $250,000. Free tax filing h&r block You use the calendar year as your tax year. Free tax filing h&r block March is the third month of your tax year. Free tax filing h&r block Your ACRS deduction for 1984 was $25,000 (10% × $250,000). Free tax filing h&r block For 1985, the percentage for the third month of the second year of the recovery period is 11%. Free tax filing h&r block Your deduction was $27,500 (11% × $250,000). Free tax filing h&r block For the third, fourth, and fifth years of the recovery period (1986, 1987, and 1988), the percentages are 9%, 8%, and 7%. Free tax filing h&r block For 1989 through 1992, the percentage for the third month is 6%. Free tax filing h&r block Your deduction each year is $15,000 (6% × $250,000). Free tax filing h&r block For 1993, 1994, and 1995, the percentage for the third month is 5%. Free tax filing h&r block Your depreciation deduction is $12,500 (5% × $250,000) for 1993, 1994, and 1995. Free tax filing h&r block Low-Income Housing Low-income housing that was assigned a 15-year recovery period under ACRS includes the following types of property: Federally assisted housing projects where the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. Free tax filing h&r block Low-income rental housing for which a depreciation deduction for rehabilitation expenditures is allowed. Free tax filing h&r block Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under the provisions of state or local laws that authorize similar subsidies for low-income families. Free tax filing h&r block Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. Free tax filing h&r block The ACRS percentages for low-income housing real property, like the regular 15-year real property percentages, depend on when you placed the property in service. Free tax filing h&r block Find the month in your tax year in Table 2 or 3 at the end of this publication in the Appendix that you first placed the property in service as rental housing. Free tax filing h&r block Use the percentages listed under that month for each year of the recovery period. Free tax filing h&r block Table 2 shows percentages for low-income housing placed in service before May 9, 1985. Free tax filing h&r block Table 3 shows percentages for low-income housing placed in service after May 8, 1985, and before 1987. Free tax filing h&r block Example. Free tax filing h&r block In May 1986, you acquired and placed in service a house that qualified as low-income rental housing under item 3) of the above listing. Free tax filing h&r block You use the calendar year as your tax year. Free tax filing h&r block You use Table C–3 because the property was placed in service after May 8, 1985. Free tax filing h&r block Your unadjusted basis for the property, not including the land, was $59,000. Free tax filing h&r block Your deduction for 1986 through 2001 is shown in the following table. Free tax filing h&r block Year Rate Deduction 1986 8. Free tax filing h&r block 9% $5,251 1987 12. Free tax filing h&r block 1% 7,139 1988 10. Free tax filing h&r block 5% 6,195 1989 9. Free tax filing h&r block 1% 5,369 1990 7. Free tax filing h&r block 9% 4,661 1991 6. Free tax filing h&r block 9% 4,071 1992 5. Free tax filing h&r block 9% 3,481 1993 5. Free tax filing h&r block 2% 3,068 1994 4. Free tax filing h&r block 6% 2,714 1995 4. Free tax filing h&r block 6% 2,714 1996 4. Free tax filing h&r block 6% 2,714 1997 4. Free tax filing h&r block 6% 2,714 1998 4. Free tax filing h&r block 6% 2,714 1999 4. Free tax filing h&r block 5% 2,655 2000 4. Free tax filing h&r block 5% 2,655 2001 1. Free tax filing h&r block 5% 885 18-Year Real Property 18-year real property is real property that is recovery property placed in service after March 15, 1984, and before May 9, 1985. Free tax filing h&r block It includes real property, such as buildings, other than that designated as 5-year, 10-year, 15-year real property, or low-income housing. Free tax filing h&r block The ACRS percentages for 18-year real property depend on when you placed the property in service in your trade or business or for the production of income during your tax year. Free tax filing h&r block There are also tables for 18-year real property in the Appendix. Free tax filing h&r block Table 4 shows the percentages for 18-year real property you placed in service after June 22, 1984, and before May 9, 1985. Free tax filing h&r block Table 5 is for 18-year real property placed in service after March 15, 1984, and before June 23, 1984. Free tax filing h&r block Find the month in your tax year that you placed the property in service in a trade or business or for the production of income. Free tax filing h&r block Use the percentages listed under that month for each year of the recovery period. Free tax filing h&r block Example. Free tax filing h&r block On April 28, 1985, you bought and placed in service a rental house. Free tax filing h&r block The house, not including the land, cost $95,000. Free tax filing h&r block This is your unadjusted basis for the house. Free tax filing h&r block You use the calendar year as your tax year. Free tax filing h&r block Because the house was placed in service after June 22, 1984, and before May 9, 1985, it is 18-year real property. Free tax filing h&r block You use Table 4 to figure your deduction for the house. Free tax filing h&r block April is the fourth month of your tax year. Free tax filing h&r block Your deduction for 1985 through 2003 is shown in the following table. Free tax filing h&r block Year Rate Deduction 1985 7. Free tax filing h&r block 0% $6,650 1986 9. Free tax filing h&r block 0% 8,550 1987 8. Free tax filing h&r block 0% 7,600 1988 7. Free tax filing h&r block 0% 6,650 1989 7. Free tax filing h&r block 0% 6,650 1990 6. Free tax filing h&r block 0% 5,700 1991 5. Free tax filing h&r block 0% 4,750 1992 5. Free tax filing h&r block 0% 4,750 1993 5. Free tax filing h&r block 0% 4,750 1994 5. Free tax filing h&r block 0% 4,750 1995 5. Free tax filing h&r block 0% 4,750 1996 5. Free tax filing h&r block 0% 4,750 1997 5. Free tax filing h&r block 0% 4,750 1998 4. Free tax filing h&r block 0% 3,800 1999 4. Free tax filing h&r block 0% 3,800 2000 4. Free tax filing h&r block 0% 3,800 2001 4. Free tax filing h&r block 0% 3,800 2002 4. Free tax filing h&r block 0% 3,800 2003 1. Free tax filing h&r block 0% 950 19-Year Real Property 19-year real property is real property that is recovery property placed in service after May 8, 1985, and before 1987. Free tax filing h&r block It includes all real property, other than that designated as 5-year, 10-year, 15-year, or 18-year real property, or low-income housing. Free tax filing h&r block The ACRS percentages for 19-year real property depend on when you placed the property in service in a trade or business or for the production of income during your tax year. Free tax filing h&r block Table 6 shows the percentages for 19-year real property. Free tax filing h&r block You find the month in your tax year that you placed the property in service. Free tax filing h&r block You use the percentages listed under that month for each year of the recovery period. Free tax filing h&r block Recovery Periods Each item of recovery property is assigned to a class of property. Free tax filing h&r block The classes of recovery property establish the recovery periods over which the unadjusted basis of items in a class is recovered. Free tax filing h&r block The classes of property are: 3-Year property 5-Year property 10-Year property 15-Year real property Low-income housing 18-Year real property 19-Year real property Alternate ACRS Method (Modified Straight Line Method) ACRS provides an alternate ACRS method that could be elected. Free tax filing h&r block This alternate ACRS method uses a recovery percentage based on a modified straight line method. Free tax filing h&r block This alternate ACRS method generally uses percentages other than those from the tables. Free tax filing h&r block If you elected the alternate ACRS method, you determine the recovery period by using the following schedule. Free tax filing h&r block This schedule is for other than 18- and 19-year real property and low-income housing: In the case of: You could have elected a recovery period of: 3-year property 3, 5, or 12 years 5-year property 5, 12, or 25 years 15-year real property 15, 35, or 45 years Percentages. Free tax filing h&r block   The straight-line percentages for the alternate ACRS method are: Recovery Period Percentage 5 years 20. Free tax filing h&r block 00% 10 years 10. Free tax filing h&r block 00% 12 years 8. Free tax filing h&r block 333% 15 years 6. Free tax filing h&r block 667% 25 years 4. Free tax filing h&r block 00% 35 years 2. Free tax filing h&r block 857%   You apply the percentage to the unadjusted basis(defined earlier) of the property to figure your ACRS deduction. Free tax filing h&r block There are tables for 18- and 19-year real property later in this publication in the Appendix. Free tax filing h&r block For 15-year real property, see 15-year real property, later. Free tax filing h&r block 3-, 5-, and 10-year property. Free tax filing h&r block   If you elected to use an alternate recovery percentage, you have to use the same recovery percentage for all property in that class that you placed in service in that tax year. Free tax filing h&r block This applies throughout the recovery period you selected. Free tax filing h&r block Half-year convention. Free tax filing h&r block   If you elected the alternate method, only a half-year of depreciation was deducted for the year you placed the property in service. Free tax filing h&r block This applied regardless of when in the tax year you placed the property in service. Free tax filing h&r block For each of the remaining years in the recovery period, you take a full year's deduction. Free tax filing h&r block If you hold the property for the entire recovery period, a half-year of depreciation is allowable for the year following the end of the recovery period. Free tax filing h&r block Example. Free tax filing h&r block You operate a small upholstery business. Free tax filing h&r block On March 19, 1986, you bought and placed in service a $13,000 light-duty panel truck to be used in your business and a $500 electric saw. Free tax filing h&r block You elected to use the alternate ACRS method. Free tax filing h&r block You did not elect to take a section 179 deduction. Free tax filing h&r block You decided to recover the cost of the truck, which is 3-year recovery property, over 5 years. Free tax filing h&r block The saw is 5-year property, but you decided to recover its cost over 12 years. Free tax filing h&r block For 1986, your ACRS deduction reflected the half-year convention. Free tax filing h&r block In the first year, you deducted half of the amount determined for a full year. Free tax filing h&r block Your ACRS deduction for 1986 is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600 Half-year convention -½ of $2,600= $1,300. Free tax filing h&r block 00     Electric saw   12 years straight line = 8. Free tax filing h&r block 333% 8. Free tax filing h&r block 333% ÷ $500 = $41. Free tax filing h&r block 67 Half-year convention -½ of $41. Free tax filing h&r block 67= 20. Free tax filing h&r block 84 Total ACRS deduction for 1986 $1,320. Free tax filing h&r block 84       You take a full year of depreciation for both the truck and the saw for the years 1987 through 1990. Free tax filing h&r block Your ACRS deduction for each of those years is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600     Electric saw     12 years straight line = 8. Free tax filing h&r block 333% 8. Free tax filing h&r block 333% ÷ $500 = $41. Free tax filing h&r block 67 Total annual ACRS deduction for 1987 through 1990 $2,641. Free tax filing h&r block 67       In 1991, you take a half-year of depreciation for the truck and a full year of depreciation for the saw. Free tax filing h&r block Your ACRS deduction for 1991 is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600 Half-year convention -½ of $2,600= $1,300. Free tax filing h&r block 00     Electric saw   12 years straight line = 8. Free tax filing h&r block 333% 8. Free tax filing h&r block 333% ÷ $500 = $41. Free tax filing h&r block 67 Total ACRS deduction for 1991 $1,341. Free tax filing h&r block 67       The truck is fully depreciated after 1991. Free tax filing h&r block You take a full year of depreciation for the saw for the years 1992 through 1997. Free tax filing h&r block Your ACRS deduction for each of those years is as follows: Electric saw     12 years straight line = 8. Free tax filing h&r block 333% 8. Free tax filing h&r block 333% ÷ $500 = $41. Free tax filing h&r block 67 Total annual ACRS deduction for 1992 through 1997 $41. Free tax filing h&r block 67       You take a half-year of depreciation for the saw for 1998. Free tax filing h&r block Your ACRS deduction for 1998 is as follows: Electric saw   12 years straight line = 8. Free tax filing h&r block 333% 8. Free tax filing h&r block 333% ÷ $500 = $41. Free tax filing h&r block 67 Half-year convention -½ of $41. Free tax filing h&r block 67= 20. Free tax filing h&r block 84 Total ACRS deduction for 1998 $20. Free tax filing h&r block 84       The saw is fully depreciated after 1998. Free tax filing h&r block 15-year real property. Free tax filing h&r block   Under ACRS, you could also elect to use the alternate ACRS method for 15-year real property. Free tax filing h&r block The alternate ACRS method allows you to depreciate your 15-year real property using the straight line ACRS method over the alternate recovery periods of 15, 35, or 45 years. Free tax filing h&r block If you selected a 15-year recovery period, you use the percentage (6. Free tax filing h&r block 667%) from the schedule above. Free tax filing h&r block You prorate this percentage for the number of months the property was in service in the first year. Free tax filing h&r block If you selected a 35- or 45-year recovery period, you use either Table 11 or 15. Free tax filing h&r block Alternate periods for 18-year real property. Free tax filing h&r block   For 18-year real property, the alternate recovery periods are 18, 35, or 45 years. Free tax filing h&r block The percentages for 18-year real property under the alternate method are in Tables 7, 8, 10, 11, 14, and 15 in the Appendix. Free tax filing h&r block There are two tables for each alternate recovery period. Free tax filing h&r block One table shows the percentage for property placed in service after June 22, 1984. Free tax filing h&r block The other table has the percentages for property placed in service after March 15, 1984, and before June 23, 1984. Free tax filing h&r block Alternate periods for 19-year real property. Free tax filing h&r block   For 19-year real property, the alternate recovery periods are 19, 35, or 45 years. Free tax filing h&r block If you selected a 19-year recovery period, use Table 9 to determine your deduction. Free tax filing h&r block If you select a 35- or 45-year recovery period, use either Table 13 or 14. Free tax filing h&r block Example. Free tax filing h&r block You placed in service an apartment building on August 3, 1986. Free tax filing h&r block The building is 19-year real property. Free tax filing h&r block The sales contract allocated $300,000 to the building and $100,000 to the land. Free tax filing h&r block You use the calendar year as your tax year. Free tax filing h&r block You chose the alternate ACRS method over a recovery period of 35 years. Free tax filing h&r block For 1986, you figure your ACRS deduction usingTable 13. Free tax filing h&r block August is the eighth month of your tax year. Free tax filing h&r block The percentage from Table 13 for the eighth month is 1. Free tax filing h&r block 1%. Free tax filing h&r block Your deduction was $3,300 ($300,000 ÷ 1. Free tax filing h&r block 1%). Free tax filing h&r block The deduction rate from ACRS Table 13 for years 2 through 20 is 2. Free tax filing h&r block 9% so that your deduction in 1987 through 2005 is $8,700 ($300,000 ÷ 2. Free tax filing h&r block 9%). Free tax filing h&r block Alternate periods for low-income housing. Free tax filing h&r block   For low-income housing, the alternate recovery periods are 15, 35, or 45 years. Free tax filing h&r block If you selected a 15-year period for this property, use 6. Free tax filing h&r block 667% as the percentage. Free tax filing h&r block If you selected a 35- or 45-year period, use either Table 11, 12, or 15. Free tax filing h&r block Election. Free tax filing h&r block   You had to make the election to use the alternate ACRS method by the return due date (including extensions) for the tax year you placed the property in service. Free tax filing h&r block Revocation of election. Free tax filing h&r block   Your election to use an alternate ACRS method, once made, can be changed only with the consent of the Commissioner. Free tax filing h&r block The Commissioner grants consent only in extraordinary circumstances. Free tax filing h&r block Any request for a revocation will be considered a request for a ruling. Free tax filing h&r block ACRS Deduction in Short Tax Year For a tax year that is less than 12 months, the ACRS deduction is prorated on a 12-month basis. Free tax filing h&r block Figure the amount of the ACRS deduction for a short tax year as follows: First, you figure the ACRS deduction for a full year. Free tax filing h&r block You figure this by multiplying the unadjusted basis by the recovery percentage. Free tax filing h&r block You then multiply the ACRS deduction determined for a full tax year by a fraction. Free tax filing h&r block The numerator (top number) of the fraction is the number of months in the short tax year and the denominator (bottom number) is 12. Free tax filing h&r block For example, a corporation placed in service in June 1986 an item of 3-year property with an unadjusted basis of $10,000. Free tax filing h&r block The corporation files a tax return, because of a change in its accounting period, for the 6-month short tax year ending June 30, 1986. Free tax filing h&r block The full year's ACRS deduction for this item is $2,500 ($10,000 ÷ 25%), the first year percentage from the 3-year table. Free tax filing h&r block The ACRS deduction for the short tax year is $1,250 ($2,500 ÷ 6/12). Free tax filing h&r block You use the full ACRS percentages during the remaining years of the recovery period. Free tax filing h&r block For the first tax year after the recovery period, the unrecovered basis will be deductible. Free tax filing h&r block Exception. Free tax filing h&r block   For the tax year in which you placed 15-, 18-, or 19-year real property in service or in the tax year you dispose of it, you compute the ACRS deduction for the number of months that the property is in service during that tax year. Free tax filing h&r block You compute the number of months using either a full month or mid-month convention. Free tax filing h&r block This is true regardless of the number of months in the tax year and the recovery period and method used. Free tax filing h&r block Dispositions A disposition is the permanent withdrawal of property from use in your trade or business or in the production of income. Free tax filing h&r block You can make a withdrawal by sale, exchange, retirement, abandonment, or destruction. Free tax filing h&r block You generally recognize gain or loss on the disposition of an asset by sale. Free tax filing h&r block However, nonrecognition rules can allow you to postpone some gain. Free tax filing h&r block See Publication 544. Free tax filing h&r block If you physically abandon property, you can deduct as a loss the adjusted basis of the asset at the time of its abandonment. Free tax filing h&r block Your intent must be to discard the asset so that you will not use it again or retrieve it for sale, exchange, or other disposition. Free tax filing h&r block Early dispositions. Free tax filing h&r block   The disposal of an asset before the end of its specified recovery period, is referred to as an early disposition. Free tax filing h&r block When an early disposition occurs, the depreciation deduction in the year of disposition depends on the class of property involved. Free tax filing h&r block Early dispositions of ACRS property other than 15-, 18-, or 19-year real property. Free tax filing h&r block   Generally, you get no ACRS deduction for the tax year in which you dispose of or retire recovery property, except for 15-, 18-, and 19-year real property. Free tax filing h&r block This means there is no depreciation deduction under ACRS in the year you dispose of or retire any of your 3-, 5-, or 10-year recovery property. Free tax filing h&r block Dispositions — mass asset accounts. Free tax filing h&r block   The law provides a special rule to avoid the calculation of gain on the disposition of assets from mass asset accounts. Free tax filing h&r block A mass asset account includes items usually minor in value in relation to the group, numerous in quantity, impractical to separately identify, and not usually accounted for on a separate basis, but on a total dollar value. Free tax filing h&r block Examples of mass assets include minor items of office, plant, and store furniture and fixtures. Free tax filing h&r block   Under the special rule, if you elected to use a mass asset account, you recognize gain to the extent of the proceeds from the disposition of the asset. Free tax filing h&r block You leave the unadjusted basis of the property in the account until recovered in future years. Free tax filing h&r block If you did this, include the total proceeds realized from the disposition in income on the tax return for the year of disposition. Free tax filing h&r block Early dispositions — 15-year real property. Free tax filing h&r block   If you dispose of 15-year real property, you base your ACRS deduction for the year of disposition on the number of months in use. Free tax filing h&r block You use a full-month convention. Free tax filing h&r block For a disposition at any time during a particular month before the end of the recovery period, no deduction is allowed for the month of disposition. Free tax filing h&r block This applies whether you use the regular ACRS method or elected the alternate ACRS method. Free tax filing h&r block Example. Free tax filing h&r block You purchased and placed in service a rental house on March 2, 1984, for $98,000 (not including the cost of land). Free tax filing h&r block You file your return based on a calendar year. Free tax filing h&r block Your rate from Table 1 for the third month is 10%. Free tax filing h&r block Your ACRS deduction for 1984 was $9,800 ($98. Free tax filing h&r block 000 ÷ 10%). Free tax filing h&r block For 1985 through 1988, you figured your ACRS deductions using 11%, 9%, 8%, and 7% ÷ $98,000. Free tax filing h&r block For 1989 through 1992, you figured your ACRS deductions using 6% for each year. Free tax filing h&r block The deduction each year was $98,000 ÷ 6%. Free tax filing h&r block For 1993 and 1994, the ACRS deduction is ($98,000 ÷ 5%) $4,900 for each year. Free tax filing h&r block You sell the house on June 1, 1995. Free tax filing h&r block You figure your ACRS deduction for 1995 for the full year and then prorate that amount for the months of use. Free tax filing h&r block The full ACRS deduction for 1995 is $4,900 ($98,000 ÷ 5%). Free tax filing h&r block You then prorate this amount to the 5 months in 1995 during which it was rented. Free tax filing h&r block Your ACRS deduction for 1995 is $2,042 ($4,900 ÷ 5/12). Free tax filing h&r block Early dispositions — 18- and 19-year real property. Free tax filing h&r block   If you dispose of 18- or 19-year real property, you base your ACRS deduction for the year of disposition on the number of months in use. Free tax filing h&r block For 18-year property placed in service before June 23, 1984, use a full-month convention on a disposition. Free tax filing h&r block For 18-year property placed in service after June 22, 1984, and for 19-year property, determine the number of months in use by using the mid-month convention. Free tax filing h&r block Under the mid-month convention,treat real property disposed of any time during a month as disposed of in the middle of that month. Free tax filing h&r block Count the month of disposition as half a month of use. Free tax filing h&r block Example. Free tax filing h&r block You purchased and placed in service a rental house on July 2, 1984, for $100,000 (not including the cost of land). Free tax filing h&r block You file your return based on a calendar year. Free tax filing h&r block Your rate from Table 4 for the seventh month is 4%. Free tax filing h&r block You figured your ACRS deduction for 1984 was $4,000 ($100,000 ÷ 4%). Free tax filing h&r block In 1985 through 1994, your ACRS deductions were 9%, 8%, 8%, 7%, 6%, 6%, 5%, 5%, and 5% ÷ $100,000. Free tax filing h&r block You sell the house on September 24, 1995. Free tax filing h&r block Figure your ACRS deduction for 1995 for the months of use. Free tax filing h&r block The full ACRS deduction for 1995 is $5,000 ($100,000 ÷ 5%). Free tax filing h&r block Prorate this amount for the 8. Free tax filing h&r block 5 months in 1995 that you held the property. Free tax filing h&r block Under the mid-month convention, you count September as half a month. Free tax filing h&r block Your ACRS deduction for 1995 is $3,542 ($5,000 ÷ 8. Free tax filing h&r block 5/12). Free tax filing h&r block Depreciation Recapture If you dispose of property depreciated under ACRS that is section 1245 recovery property, you will generally recognize gain or loss. Free tax filing h&r block Gain recognized on a disposition is ordinary income to the extent of prior depreciation deductions taken. Free tax filing h&r block This recapture rule applies to all personal property in the 3-year, 5-year, and 10-year classes. Free tax filing h&r block You recapture gain on manufactured homes and theme park structures in the 10-year class as section 1245 property. Free tax filing h&r block Section 1245 property generally includes all personal property. Free tax filing h&r block See Section 1245 property in chapter 4 of Publication 544 for more information. Free tax filing h&r block You treat dispositions of section 1250 real property on which you have a gain as section 1245 recovery property. Free tax filing h&r block You recognize gain on this property as ordinary income to the extent of prior depreciation deductions taken. Free tax filing h&r block Section 1250 property includes most real property. Free tax filing h&r block See Section 1250 property in chapter 4 of Publication 544 for more information. Free tax filing h&r block This rule applies to all section 1250 real property except the following property: Any 15-, 18-, or 19-year real property that is residential rental property. Free tax filing h&r block Any 15-, 18-, or 19-year real property that you elected to depreciate using the alternate ACRS method. Free tax filing h&r block Any 15-, 18-, or 19-year real property that is subsidized low-income housing. Free tax filing h&r block For these recapture rules, you treat the section 179 deduction and 50% of the investment credit that reduced your basis as depreciation. Free tax filing h&r block See Publication 544 for further discussion of dispositions of section 1245 and 1250 property. Free tax filing h&r block Prev  Up  Next   Home   More Online Publications