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Freetaxusa com Publication 519 - Additional Material Table of Contents Appendix A—Tax Treaty Exemption Procedure for StudentsBelgium Bulgaria China, People's Republic of Cyprus Czech Republic, Estonia, Latvia, Lithuania, and Slovak Republic Egypt France Germany Iceland Indonesia Israel, Philippines and Thailand Korea, Norway, Poland, and Romania Morocco Netherlands Pakistan Portugal and Spain Slovenia and Venezuela Trinidad and Tobago Tunisia Appendix B—Tax Treaty Exemption Procedure for Teachers and ResearchersBelgium Bulgaria China, People's Republic of Commonwealth of Independent States Czech Republic and Slovak Republic Egypt, Hungary, Korea, Philippines, Poland, and Romania France Germany Greece India Indonesia Israel Italy Jamaica Luxembourg Netherlands Norway Pakistan Portugal Slovenia and Venezuela Thailand Trinidad and Tobago United Kingdom Frequently Asked Questions This section answers tax-related questions commonly asked by aliens. Freetaxusa com . Freetaxusa com What is the difference between a resident alien and a nonresident alien for tax purposes? . Freetaxusa com What is the difference between the taxation of income that is effectively connected with a trade or business in the United States and income that is not effectively connected with a trade or business in the United States? . Freetaxusa com I am a student with an F-1 Visa. Freetaxusa com I was told that I was an exempt individual. Freetaxusa com Does this mean I am exempt from paying U. Freetaxusa com S. Freetaxusa com tax? . Freetaxusa com I am a resident alien. Freetaxusa com Can I claim any treaty benefits? . Freetaxusa com I am a nonresident alien with no dependents. Freetaxusa com I am working temporarily for a U. Freetaxusa com S. Freetaxusa com company. Freetaxusa com What return do I file? . Freetaxusa com I came to the United States on June 30th of last year. Freetaxusa com I have an H-1B Visa. Freetaxusa com What is my tax status, resident alien or nonresident alien? What tax return do I file? . Freetaxusa com When is my Form 1040NR due? . Freetaxusa com My spouse is a nonresident alien. Freetaxusa com Does he need a social security number? . Freetaxusa com I am a nonresident alien. Freetaxusa com Can I file a joint return with my spouse? . Freetaxusa com I have an H-1B Visa and my husband has an F-1 Visa. Freetaxusa com We both lived in the United States all of last year and had income. Freetaxusa com What kind of form should we file? Do we file separate returns or a joint return? . Freetaxusa com Is a dual-resident taxpayer the same as a dual-status taxpayer? . Freetaxusa com I am a nonresident alien and invested money in the U. Freetaxusa com S. Freetaxusa com stock market through a U. Freetaxusa com S. Freetaxusa com brokerage company. Freetaxusa com Are the dividends and the capital gains taxable? If yes, how are they taxed? . Freetaxusa com I am a nonresident alien. Freetaxusa com I receive U. Freetaxusa com S. Freetaxusa com social security benefits. Freetaxusa com Are my benefits taxable? . Freetaxusa com Do I have to pay taxes on my scholarship? . Freetaxusa com I am a nonresident alien. Freetaxusa com Can I claim the standard deduction? . Freetaxusa com I am a dual-status taxpayer. Freetaxusa com Can I claim the standard deduction? . Freetaxusa com I am filing Form 1040NR. Freetaxusa com Can I claim itemized deductions? . Freetaxusa com I am not a U. Freetaxusa com S. Freetaxusa com citizen. Freetaxusa com What exemptions can I claim? . Freetaxusa com What exemptions can I claim as a dual-status taxpayer? . Freetaxusa com I am single with a dependent child. Freetaxusa com I was a dual-status alien in 2013. Freetaxusa com Can I claim the earned income credit on my 2013 tax return? . Freetaxusa com I am a nonresident alien student. Freetaxusa com Can I claim an education credit on my Form 1040NR? . Freetaxusa com I am a nonresident alien, temporarily working in the U. Freetaxusa com S. Freetaxusa com under a J visa. Freetaxusa com Am I subject to social security and Medicare taxes? . Freetaxusa com I am a nonresident alien student. Freetaxusa com Social security taxes were withheld from my pay in error. Freetaxusa com How do I get a refund of these taxes? . Freetaxusa com I am an alien who will be leaving the United States. Freetaxusa com What forms do I have to file before I leave? . Freetaxusa com I filed a Form 1040-C when I left the United States. Freetaxusa com Do I still have to file an annual U. Freetaxusa com S. Freetaxusa com tax return? . Freetaxusa com What is the difference between a resident alien and a nonresident alien for tax purposes? For tax purposes, an alien is an individual who is not a U. Freetaxusa com S. Freetaxusa com citizen. Freetaxusa com Aliens are classified as resident aliens and nonresident aliens. Freetaxusa com Resident aliens are taxed on their worldwide income, the same as U. Freetaxusa com S. Freetaxusa com citizens. Freetaxusa com Nonresident aliens are taxed only on their U. Freetaxusa com S. Freetaxusa com source income and certain foreign source income that is effectively connected with a U. Freetaxusa com S. Freetaxusa com trade or business. Freetaxusa com The difference between these two categories is that effectively connected income, after allowable deductions, is taxed at graduated rates. Freetaxusa com These are the same rates that apply to U. Freetaxusa com S. Freetaxusa com citizens and residents. Freetaxusa com Income that is not effectively connected is taxed at a flat 30% (or lower treaty) rate. Freetaxusa com The term “exempt individual” does not refer to someone exempt from U. Freetaxusa com S. Freetaxusa com tax. Freetaxusa com You were referred to as an exempt individual because as a student temporarily in the United States on an F Visa, you do not have to count the days you were present in the United States as a student during the first 5 years in determining if you are a resident alien under the substantial presence test. Freetaxusa com See chapter 1 . Freetaxusa com Generally, you cannot claim tax treaty benefits as a resident alien. Freetaxusa com However, there are exceptions. Freetaxusa com See Effect of Tax Treaties in chapter 1. Freetaxusa com See also Resident Aliens under Some Typical Tax Treaty Benefits in chapter 9. Freetaxusa com You must file Form 1040NR if you are engaged in a trade or business in the United States, or have any other U. Freetaxusa com S. Freetaxusa com source income on which tax was not fully paid by the amount withheld. Freetaxusa com You can use Form 1040NR-EZ instead of Form 1040NR if you meet all 11 conditions listed under Form 1040NR-EZ in chapter 7. Freetaxusa com You were a dual-status alien last year. Freetaxusa com As a general rule, because you were in the United States for 183 days or more, you have met the substantial presence test and you are taxed as a resident. Freetaxusa com However, for the part of the year that you were not present in the United States, you are a nonresident. Freetaxusa com File Form 1040. Freetaxusa com Print “Dual-Status Return” across the top. Freetaxusa com Attach a statement showing your U. Freetaxusa com S. Freetaxusa com source income for the part of the year you were a nonresident. Freetaxusa com You may use Form 1040NR as the statement. Freetaxusa com Print “Dual-Status Statement” across the top. Freetaxusa com See First Year of Residency in chapter 1 for rules on determining your residency starting date. Freetaxusa com If you are an employee and you receive wages subject to U. Freetaxusa com S. Freetaxusa com income tax withholding, you must generally file by the 15th day of the 4th month after your tax year ends. Freetaxusa com If you file for the 2013 calendar year, your return is due April 15, 2014. Freetaxusa com If you are not an employee who receives wages subject to U. Freetaxusa com S. Freetaxusa com income tax withholding, you must file by the 15th day of the 6th month after your tax year ends. Freetaxusa com For the 2013 calendar year, file your return by June 16, 2014. Freetaxusa com For more information on when and where to file, see chapter 7 . Freetaxusa com A social security number (SSN) must be furnished on returns, statements, and other tax-related documents. Freetaxusa com If your spouse does not have and is not eligible to get an SSN, he must apply for an individual taxpayer identification number (ITIN). Freetaxusa com If you are a U. Freetaxusa com S. Freetaxusa com citizen or resident and you choose to treat your nonresident spouse as a resident and file a joint tax return, your nonresident spouse needs an SSN or an ITIN. Freetaxusa com Alien spouses who are claimed as exemptions or dependents are also required to furnish an SSN or an ITIN. Freetaxusa com See Identification Number in chapter 5 for more information. Freetaxusa com Generally, you cannot file as married filing jointly if either spouse was a nonresident alien at any time during the tax year. Freetaxusa com However, nonresident aliens married to U. Freetaxusa com S. Freetaxusa com citizens or residents can choose to be treated as U. Freetaxusa com S. Freetaxusa com residents and file joint returns. Freetaxusa com For more information on this choice, see Nonresident Spouse Treated as a Resident in chapter 1. Freetaxusa com Assuming both of you had these visas for all of last year, you are a resident alien. Freetaxusa com Your husband is a nonresident alien if he has not been in the United States as a student for more than 5 years. Freetaxusa com You and your husband can file a joint tax return on Form 1040, 1040A, or 1040EZ if he makes the choice to be treated as a resident for the entire year. Freetaxusa com See Nonresident Spouse Treated as a Resident in chapter 1. Freetaxusa com If your husband does not make this choice, you must file a separate return on Form 1040 or Form 1040A. Freetaxusa com Your husband must file Form 1040NR or 1040NR-EZ. Freetaxusa com No. Freetaxusa com A dual-resident taxpayer is one who is a resident of both the United States and another country under each country's tax laws. Freetaxusa com See Effect of Tax Treaties in chapter 1. Freetaxusa com You are a dual-status taxpayer when you are both a resident alien and a nonresident alien in the same year. Freetaxusa com See chapter 6 . Freetaxusa com The following rules apply if the dividends and capital gains are not effectively connected with a U. Freetaxusa com S. Freetaxusa com trade or business. Freetaxusa com Capital gains are generally not taxable if you were in the United States for less than 183 days during the year. Freetaxusa com See Sales or Exchanges of Capital Assets in chapter 4 for more information and exceptions. Freetaxusa com Dividends are generally taxed at a 30% (or lower treaty) rate. Freetaxusa com The brokerage company or payor of the dividends should withhold this tax at source. Freetaxusa com If tax is not withheld at the correct rate, you must file Form 1040NR to receive a refund or pay any additional tax due. Freetaxusa com If the capital gains and dividends are effectively connected with a U. Freetaxusa com S. Freetaxusa com trade or business, they are taxed according to the same rules and at the same rates that apply to U. Freetaxusa com S. Freetaxusa com citizens and residents. Freetaxusa com If you are a nonresident alien, 85% of any U. Freetaxusa com S. Freetaxusa com social security benefits (and the equivalent portion of tier 1 railroad retirement benefits) you receive is subject to the flat 30% tax, unless exempt, or subject to a lower treaty rate. Freetaxusa com See The 30% Tax in chapter 4. Freetaxusa com If you are a nonresident alien and the scholarship is not from U. Freetaxusa com S. Freetaxusa com sources, it is not subject to U. Freetaxusa com S. Freetaxusa com tax. Freetaxusa com See Scholarships, Grants, Prizes, and Awards in chapter 2 to determine whether your scholarship is from U. Freetaxusa com S. Freetaxusa com sources. Freetaxusa com If your scholarship is from U. Freetaxusa com S. Freetaxusa com sources or you are a resident alien, your scholarship is subject to U. Freetaxusa com S. Freetaxusa com tax according to the following rules. Freetaxusa com If you are a candidate for a degree, you may be able to exclude from your income the part of the scholarship you use to pay for tuition, fees, books, supplies, and equipment required by the educational institution. Freetaxusa com However, the part of the scholarship you use to pay for other expenses, such as room and board, is taxable. Freetaxusa com See Scholarships and Fellowship Grants in chapter 3 for more information. Freetaxusa com If you are not a candidate for a degree, your scholarship is taxable. Freetaxusa com Nonresident aliens cannot claim the standard deduction. Freetaxusa com However, see Students and business apprentices from India , under Itemized Deductions in chapter 5 for an exception. Freetaxusa com You cannot claim the standard deduction allowed on Form 1040. Freetaxusa com However, you can itemize any allowable deductions. Freetaxusa com Nonresident aliens can claim some of the same itemized deductions that resident aliens can claim. Freetaxusa com However, nonresident aliens can claim itemized deductions only if they have income effectively connected with their U. Freetaxusa com S. Freetaxusa com trade or business. Freetaxusa com See Itemized Deductions in chapter 5. Freetaxusa com Resident aliens can claim personal exemptions and exemptions for dependents in the same way as U. Freetaxusa com S. Freetaxusa com citizens. Freetaxusa com However, nonresident aliens generally can claim only a personal exemption for themselves on their U. Freetaxusa com S. Freetaxusa com tax return. Freetaxusa com There are special rules for residents of Mexico, Canada, and South Korea; for U. Freetaxusa com S. Freetaxusa com nationals; and for students and business apprentices from India. Freetaxusa com See Exemptions in chapter 5. Freetaxusa com As a dual-status taxpayer, you usually will be able to claim your own personal exemption. Freetaxusa com Subject to the general rules for qualification, you can claim exemptions for your spouse and dependents when you figure taxable income for the part of the year you are a resident alien. Freetaxusa com The amount you can claim for these exemptions is limited to your taxable income (figured before subtracting exemptions) for the part of the year you are a resident alien. Freetaxusa com You cannot use exemptions (other than your own) to reduce taxable income to less than zero for that period. Freetaxusa com If you are a nonresident alien for any part of the year, you cannot claim the earned income credit. Freetaxusa com See chapter 6 for more information on dual-status aliens. Freetaxusa com If you are a nonresident alien for any part of the year, you generally cannot claim the education credits. Freetaxusa com However, if you are married and choose to file a joint return with a U. Freetaxusa com S. Freetaxusa com citizen or resident spouse, you may be eligible for these credits. Freetaxusa com See Nonresident Spouse Treated as a Resident in chapter 1. Freetaxusa com Generally, services you perform as a nonresident alien temporarily in the United States as a nonimmigrant under subparagraph (F), (J), (M), or (Q) of section 101(a)(15) of the Immigration and Nationality Act are not covered under the social security program if you perform the services to carry out the purpose for which you were admitted to the United States. Freetaxusa com See Social Security and Medicare Taxes in chapter 8. Freetaxusa com If social security or Medicare taxes were withheld in error from pay that is not subject to these taxes, contact the employer who withheld the taxes for a refund. Freetaxusa com If you are unable to get a full refund of the amount from your employer, file a claim for refund with the Internal Revenue Service on Form 843, Claim for Refund and Request for Abatement. Freetaxusa com Do not use Form 843 to request a refund of Additional Medicare Tax. Freetaxusa com See Refund of Taxes Withheld in Error in chapter 8. Freetaxusa com Before leaving the United States, aliens generally must obtain a certificate of compliance. Freetaxusa com This document, also popularly known as the sailing permit or departure permit, is part of the income tax form you must file before leaving. Freetaxusa com You will receive a sailing or departure permit after filing a Form 1040-C or Form 2063. Freetaxusa com These forms are discussed in chapter 11. Freetaxusa com Form 1040-C is not an annual U. Freetaxusa com S. Freetaxusa com income tax return. Freetaxusa com If an income tax return is required by law, you must file that return even though you already filed a Form 1040-C. Freetaxusa com Chapters 5 and 7 discuss filing an annual U. Freetaxusa com S. Freetaxusa com income tax return. Freetaxusa com . Freetaxusa com What is the difference between the taxation of income that is effectively connected with a trade or business in the United States and income that is not effectively connected with a trade or business in the United States? The difference between these two categories is that effectively connected income, after allowable deductions, is taxed at graduated rates. Freetaxusa com These are the same rates that apply to U. Freetaxusa com S. Freetaxusa com citizens and residents. Freetaxusa com Income that is not effectively connected is taxed at a flat 30% (or lower treaty) rate. Freetaxusa com The term “exempt individual” does not refer to someone exempt from U. Freetaxusa com S. Freetaxusa com tax. Freetaxusa com You were referred to as an exempt individual because as a student temporarily in the United States on an F Visa, you do not have to count the days you were present in the United States as a student during the first 5 years in determining if you are a resident alien under the substantial presence test. Freetaxusa com See chapter 1 . Freetaxusa com Generally, you cannot claim tax treaty benefits as a resident alien. Freetaxusa com However, there are exceptions. Freetaxusa com See Effect of Tax Treaties in chapter 1. Freetaxusa com See also Resident Aliens under Some Typical Tax Treaty Benefits in chapter 9. Freetaxusa com You must file Form 1040NR if you are engaged in a trade or business in the United States, or have any other U. Freetaxusa com S. Freetaxusa com source income on which tax was not fully paid by the amount withheld. Freetaxusa com You can use Form 1040NR-EZ instead of Form 1040NR if you meet all 11 conditions listed under Form 1040NR-EZ in chapter 7. Freetaxusa com You were a dual-status alien last year. Freetaxusa com As a general rule, because you were in the United States for 183 days or more, you have met the substantial presence test and you are taxed as a resident. Freetaxusa com However, for the part of the year that you were not present in the United States, you are a nonresident. Freetaxusa com File Form 1040. Freetaxusa com Print “Dual-Status Return” across the top. Freetaxusa com Attach a statement showing your U. Freetaxusa com S. Freetaxusa com source income for the part of the year you were a nonresident. Freetaxusa com You may use Form 1040NR as the statement. Freetaxusa com Print “Dual-Status Statement” across the top. Freetaxusa com See First Year of Residency in chapter 1 for rules on determining your residency starting date. Freetaxusa com If you are an employee and you receive wages subject to U. Freetaxusa com S. Freetaxusa com income tax withholding, you must generally file by the 15th day of the 4th month after your tax year ends. Freetaxusa com If you file for the 2013 calendar year, your return is due April 15, 2014. Freetaxusa com If you are not an employee who receives wages subject to U. Freetaxusa com S. Freetaxusa com income tax withholding, you must file by the 15th day of the 6th month after your tax year ends. Freetaxusa com For the 2013 calendar year, file your return by June 16, 2014. Freetaxusa com For more information on when and where to file, see chapter 7 . Freetaxusa com A social security number (SSN) must be furnished on returns, statements, and other tax-related documents. Freetaxusa com If your spouse does not have and is not eligible to get an SSN, he must apply for an individual taxpayer identification number (ITIN). Freetaxusa com If you are a U. Freetaxusa com S. Freetaxusa com citizen or resident and you choose to treat your nonresident spouse as a resident and file a joint tax return, your nonresident spouse needs an SSN or an ITIN. Freetaxusa com Alien spouses who are claimed as exemptions or dependents are also required to furnish an SSN or an ITIN. Freetaxusa com See Identification Number in chapter 5 for more information. Freetaxusa com Generally, you cannot file as married filing jointly if either spouse was a nonresident alien at any time during the tax year. Freetaxusa com However, nonresident aliens married to U. Freetaxusa com S. Freetaxusa com citizens or residents can choose to be treated as U. Freetaxusa com S. Freetaxusa com residents and file joint returns. Freetaxusa com For more information on this choice, see Nonresident Spouse Treated as a Resident in chapter 1. Freetaxusa com Assuming both of you had these visas for all of last year, you are a resident alien. Freetaxusa com Your husband is a nonresident alien if he has not been in the United States as a student for more than 5 years. Freetaxusa com You and your husband can file a joint tax return on Form 1040, 1040A, or 1040EZ if he makes the choice to be treated as a resident for the entire year. Freetaxusa com See Nonresident Spouse Treated as a Resident in chapter 1. Freetaxusa com If your husband does not make this choice, you must file a separate return on Form 1040 or Form 1040A. Freetaxusa com Your husband must file Form 1040NR or 1040NR-EZ. Freetaxusa com No. Freetaxusa com A dual-resident taxpayer is one who is a resident of both the United States and another country under each country's tax laws. Freetaxusa com See Effect of Tax Treaties in chapter 1. Freetaxusa com You are a dual-status taxpayer when you are both a resident alien and a nonresident alien in the same year. Freetaxusa com See chapter 6 . Freetaxusa com The following rules apply if the dividends and capital gains are not effectively connected with a U. Freetaxusa com S. Freetaxusa com trade or business. Freetaxusa com Capital gains are generally not taxable if you were in the United States for less than 183 days during the year. Freetaxusa com See Sales or Exchanges of Capital Assets in chapter 4 for more information and exceptions. Freetaxusa com Dividends are generally taxed at a 30% (or lower treaty) rate. Freetaxusa com The brokerage company or payor of the dividends should withhold this tax at source. Freetaxusa com If tax is not withheld at the correct rate, you must file Form 1040NR to receive a refund or pay any additional tax due. Freetaxusa com If the capital gains and dividends are effectively connected with a U. Freetaxusa com S. Freetaxusa com trade or business, they are taxed according to the same rules and at the same rates that apply to U. Freetaxusa com S. Freetaxusa com citizens and residents. Freetaxusa com If you are a nonresident alien, 85% of any U. Freetaxusa com S. Freetaxusa com social security benefits (and the equivalent portion of tier 1 railroad retirement benefits) you receive is subject to the flat 30% tax, unless exempt, or subject to a lower treaty rate. Freetaxusa com See The 30% Tax in chapter 4. Freetaxusa com If you are a nonresident alien and the scholarship is not from U. Freetaxusa com S. Freetaxusa com sources, it is not subject to U. Freetaxusa com S. Freetaxusa com tax. Freetaxusa com See Scholarships, Grants, Prizes, and Awards in chapter 2 to determine whether your scholarship is from U. Freetaxusa com S. Freetaxusa com sources. Freetaxusa com If your scholarship is from U. Freetaxusa com S. Freetaxusa com sources or you are a resident alien, your scholarship is subject to U. Freetaxusa com S. Freetaxusa com tax according to the following rules. Freetaxusa com If you are a candidate for a degree, you may be able to exclude from your income the part of the scholarship you use to pay for tuition, fees, books, supplies, and equipment required by the educational institution. Freetaxusa com However, the part of the scholarship you use to pay for other expenses, such as room and board, is taxable. Freetaxusa com See Scholarships and Fellowship Grants in chapter 3 for more information. Freetaxusa com If you are not a candidate for a degree, your scholarship is taxable. Freetaxusa com Nonresident aliens cannot claim the standard deduction. Freetaxusa com However, see Students and business apprentices from India , under Itemized Deductions in chapter 5 for an exception. Freetaxusa com You cannot claim the standard deduction allowed on Form 1040. Freetaxusa com However, you can itemize any allowable deductions. Freetaxusa com Nonresident aliens can claim some of the same itemized deductions that resident aliens can claim. Freetaxusa com However, nonresident aliens can claim itemized deductions only if they have income effectively connected with their U. Freetaxusa com S. Freetaxusa com trade or business. Freetaxusa com See Itemized Deductions in chapter 5. Freetaxusa com Resident aliens can claim personal exemptions and exemptions for dependents in the same way as U. Freetaxusa com S. Freetaxusa com citizens. Freetaxusa com However, nonresident aliens generally can claim only a personal exemption for themselves on their U. Freetaxusa com S. Freetaxusa com tax return. Freetaxusa com There are special rules for residents of Mexico, Canada, and South Korea; for U. Freetaxusa com S. Freetaxusa com nationals; and for students and business apprentices from India. Freetaxusa com See Exemptions in chapter 5. Freetaxusa com As a dual-status taxpayer, you usually will be able to claim your own personal exemption. Freetaxusa com Subject to the general rules for qualification, you can claim exemptions for your spouse and dependents when you figure taxable income for the part of the year you are a resident alien. Freetaxusa com The amount you can claim for these exemptions is limited to your taxable income (figured before subtracting exemptions) for the part of the year you are a resident alien. Freetaxusa com You cannot use exemptions (other than your own) to reduce taxable income to less than zero for that period. Freetaxusa com If you are a nonresident alien for any part of the year, you cannot claim the earned income credit. Freetaxusa com See chapter 6 for more information on dual-status aliens. Freetaxusa com If you are a nonresident alien for any part of the year, you generally cannot claim the education credits. Freetaxusa com However, if you are married and choose to file a joint return with a U. Freetaxusa com S. Freetaxusa com citizen or resident spouse, you may be eligible for these credits. Freetaxusa com See Nonresident Spouse Treated as a Resident in chapter 1. Freetaxusa com Generally, services you perform as a nonresident alien temporarily in the United States as a nonimmigrant under subparagraph (F), (J), (M), or (Q) of section 101(a)(15) of the Immigration and Nationality Act are not covered under the social security program if you perform the services to carry out the purpose for which you were admitted to the United States. Freetaxusa com See Social Security and Medicare Taxes in chapter 8. Freetaxusa com If social security or Medicare taxes were withheld in error from pay that is not subject to these taxes, contact the employer who withheld the taxes for a refund. Freetaxusa com If you are unable to get a full refund of the amount from your employer, file a claim for refund with the Internal Revenue Service on Form 843, Claim for Refund and Request for Abatement. Freetaxusa com Do not use Form 843 to request a refund of Additional Medicare Tax. Freetaxusa com See Refund of Taxes Withheld in Error in chapter 8. Freetaxusa com Before leaving the United States, aliens generally must obtain a certificate of compliance. Freetaxusa com This document, also popularly known as the sailing permit or departure permit, is part of the income tax form you must file before leaving. Freetaxusa com You will receive a sailing or departure permit after filing a Form 1040-C or Form 2063. Freetaxusa com These forms are discussed in chapter 11. Freetaxusa com Form 1040-C is not an annual U. Freetaxusa com S. Freetaxusa com income tax return. Freetaxusa com If an income tax return is required by law, you must file that return even though you already filed a Form 1040-C. Freetaxusa com Chapters 5 and 7 discuss filing an annual U. Freetaxusa com S. Freetaxusa com income tax return. Freetaxusa com . Freetaxusa com I am a student with an F-1 Visa. Freetaxusa com I was told that I was an exempt individual. Freetaxusa com Does this mean I am exempt from paying U. Freetaxusa com S. Freetaxusa com tax? The term “exempt individual” does not refer to someone exempt from U. Freetaxusa com S. Freetaxusa com tax. Freetaxusa com You were referred to as an exempt individual because as a student temporarily in the United States on an F Visa, you do not have to count the days you were present in the United States as a student during the first 5 years in determining if you are a resident alien under the substantial presence test. Freetaxusa com See chapter 1 . Freetaxusa com Generally, you cannot claim tax treaty benefits as a resident alien. Freetaxusa com However, there are exceptions. Freetaxusa com See Effect of Tax Treaties in chapter 1. Freetaxusa com See also Resident Aliens under Some Typical Tax Treaty Benefits in chapter 9. Freetaxusa com You must file Form 1040NR if you are engaged in a trade or business in the United States, or have any other U. Freetaxusa com S. Freetaxusa com source income on which tax was not fully paid by the amount withheld. Freetaxusa com You can use Form 1040NR-EZ instead of Form 1040NR if you meet all 11 conditions listed under Form 1040NR-EZ in chapter 7. Freetaxusa com You were a dual-status alien last year. Freetaxusa com As a general rule, because you were in the United States for 183 days or more, you have met the substantial presence test and you are taxed as a resident. Freetaxusa com However, for the part of the year that you were not present in the United States, you are a nonresident. Freetaxusa com File Form 1040. Freetaxusa com Print “Dual-Status Return” across the top. Freetaxusa com Attach a statement showing your U. Freetaxusa com S. Freetaxusa com source income for the part of the year you were a nonresident. Freetaxusa com You may use Form 1040NR as the statement. Freetaxusa com Print “Dual-Status Statement” across the top. Freetaxusa com See First Year of Residency in chapter 1 for rules on determining your residency starting date. Freetaxusa com If you are an employee and you receive wages subject to U. Freetaxusa com S. Freetaxusa com income tax withholding, you must generally file by the 15th day of the 4th month after your tax year ends. Freetaxusa com If you file for the 2013 calendar year, your return is due April 15, 2014. Freetaxusa com If you are not an employee who receives wages subject to U. Freetaxusa com S. Freetaxusa com income tax withholding, you must file by the 15th day of the 6th month after your tax year ends. Freetaxusa com For the 2013 calendar year, file your return by June 16, 2014. Freetaxusa com For more information on when and where to file, see chapter 7 . Freetaxusa com A social security number (SSN) must be furnished on returns, statements, and other tax-related documents. Freetaxusa com If your spouse does not have and is not eligible to get an SSN, he must apply for an individual taxpayer identification number (ITIN). Freetaxusa com If you are a U. Freetaxusa com S. Freetaxusa com citizen or resident and you choose to treat your nonresident spouse as a resident and file a joint tax return, your nonresident spouse needs an SSN or an ITIN. Freetaxusa com Alien spouses who are claimed as exemptions or dependents are also required to furnish an SSN or an ITIN. Freetaxusa com See Identification Number in chapter 5 for more information. Freetaxusa com Generally, you cannot file as married filing jointly if either spouse was a nonresident alien at any time during the tax year. Freetaxusa com However, nonresident aliens married to U. Freetaxusa com S. Freetaxusa com citizens or residents can choose to be treated as U. Freetaxusa com S. Freetaxusa com residents and file joint returns. Freetaxusa com For more information on this choice, see Nonresident Spouse Treated as a Resident in chapter 1. Freetaxusa com Assuming both of you had these visas for all of last year, you are a resident alien. Freetaxusa com Your husband is a nonresident alien if he has not been in the United States as a student for more than 5 years. Freetaxusa com You and your husband can file a joint tax return on Form 1040, 1040A, or 1040EZ if he makes the choice to be treated as a resident for the entire year. Freetaxusa com See Nonresident Spouse Treated as a Resident in chapter 1. Freetaxusa com If your husband does not make this choice, you must file a separate return on Form 1040 or Form 1040A. Freetaxusa com Your husband must file Form 1040NR or 1040NR-EZ. Freetaxusa com No. Freetaxusa com A dual-resident taxpayer is one who is a resident of both the United States and another country under each country's tax laws. Freetaxusa com See Effect of Tax Treaties in chapter 1. Freetaxusa com You are a dual-status taxpayer when you are both a resident alien and a nonresident alien in the same year. Freetaxusa com See chapter 6 . Freetaxusa com The following rules apply if the dividends and capital gains are not effectively connected with a U. Freetaxusa com S. Freetaxusa com trade or business. Freetaxusa com Capital gains are generally not taxable if you were in the United States for less than 183 days during the year. Freetaxusa com See Sales or Exchanges of Capital Assets in chapter 4 for more information and exceptions. Freetaxusa com Dividends are generally taxed at a 30% (or lower treaty) rate. Freetaxusa com The brokerage company or payor of the dividends should withhold this tax at source. Freetaxusa com If tax is not withheld at the correct rate, you must file Form 1040NR to receive a refund or pay any additional tax due. Freetaxusa com If the capital gains and dividends are effectively connected with a U. Freetaxusa com S. Freetaxusa com trade or business, they are taxed according to the same rules and at the same rates that apply to U. Freetaxusa com S. Freetaxusa com citizens and residents. Freetaxusa com If you are a nonresident alien, 85% of any U. Freetaxusa com S. Freetaxusa com social security benefits (and the equivalent portion of tier 1 railroad retirement benefits) you receive is subject to the flat 30% tax, unless exempt, or subject to a lower treaty rate. Freetaxusa com See The 30% Tax in chapter 4. Freetaxusa com If you are a nonresident alien and the scholarship is not from U. Freetaxusa com S. Freetaxusa com sources, it is not subject to U. Freetaxusa com S. Freetaxusa com tax. Freetaxusa com See Scholarships, Grants, Prizes, and Awards in chapter 2 to determine whether your scholarship is from U. Freetaxusa com S. Freetaxusa com sources. Freetaxusa com If your scholarship is from U. Freetaxusa com S. Freetaxusa com sources or you are a resident alien, your scholarship is subject to U. Freetaxusa com S. Freetaxusa com tax according to the following rules. Freetaxusa com If you are a candidate for a degree, you may be able to exclude from your income the part of the scholarship you use to pay for tuition, fees, books, supplies, and equipment required by the educational institution. Freetaxusa com However, the part of the scholarship you use to pay for other expenses, such as room and board, is taxable. Freetaxusa com See Scholarships and Fellowship Grants in chapter 3 for more information. Freetaxusa com If you are not a candidate for a degree, your scholarship is taxable. Freetaxusa com Nonresident aliens cannot claim the standard deduction. Freetaxusa com However, see Students and business apprentices from India , under Itemized Deductions in chapter 5 for an exception. Freetaxusa com You cannot claim the standard deduction allowed on Form 1040. Freetaxusa com However, you can itemize any allowable deductions. Freetaxusa com Nonresident aliens can claim some of the same itemized deductions that resident aliens can claim. Freetaxusa com However, nonresident aliens can claim itemized deductions only if they have income effectively connected with their U. Freetaxusa com S. Freetaxusa com trade or business. Freetaxusa com See Itemized Deductions in chapter 5. Freetaxusa com Resident aliens can claim personal exemptions and exemptions for dependents in the same way as U. Freetaxusa com S. Freetaxusa com citizens. Freetaxusa com However, nonresident aliens generally can claim only a personal exemption for themselves on their U. Freetaxusa com S. Freetaxusa com tax return. Freetaxusa com There are special rules for residents of Mexico, Canada, and South Korea; for U. Freetaxusa com S. Freetaxusa com nationals; and for students and business apprentices from India. Freetaxusa com See Exemptions in chapter 5. Freetaxusa com As a dual-status taxpayer, you usually will be able to claim your own personal exemption. Freetaxusa com Subject to the general rules for qualification, you can claim exemptions for your spouse and dependents when you figure taxable income for the part of the year you are a resident alien. Freetaxusa com The amount you can claim for these exemptions is limited to your taxable income (figured before subtracting exemptions) for the part of the year you are a resident alien. Freetaxusa com You cannot use exemptions (other than your own) to reduce taxable income to less than zero for that period. Freetaxusa com If you are a nonresident alien for any part of the year, you cannot claim the earned income credit. Freetaxusa com See chapter 6 for more information on dual-status aliens. Freetaxusa com If you are a nonresident alien for any part of the year, you generally cannot claim the education credits. Freetaxusa com However, if you are married and choose to file a joint return with a U. Freetaxusa com S. Freetaxusa com citizen or resident spouse, you may be eligible for these credits. Freetaxusa com See Nonresident Spouse Treated as a Resident in chapter 1. Freetaxusa com Generally, services you perform as a nonresident alien temporarily in the United States as a nonimmigrant under subparagraph (F), (J), (M), or (Q) of section 101(a)(15) of the Immigration and Nationality Act are not covered under the social security program if you perform the services to carry out the purpose for which you were admitted to the United States. Freetaxusa com See Social Security and Medicare Taxes in chapter 8. Freetaxusa com If social security or Medicare taxes were withheld in error from pay that is not subject to these taxes, contact the employer who withheld the taxes for a refund. Freetaxusa com If you are unable to get a full refund of the amount from your employer, file a claim for refund with the Internal Revenue Service on Form 843, Claim for Refund and Request for Abatement. Freetaxusa com Do not use Form 843 to request a refund of Additional Medicare Tax. Freetaxusa com See Refund of Taxes Withheld in Error in chapter 8. Freetaxusa com Before leaving the United States, aliens generally must obtain a certificate of compliance. Freetaxusa com This document, also popularly known as the sailing permit or departure permit, is part of the income tax form you must file before leaving. Freetaxusa com You will receive a sailing or departure permit after filing a Form 1040-C or Form 2063. Freetaxusa com These forms are discussed in chapter 11. Freetaxusa com Form 1040-C is not an annual U. Freetaxusa com S. Freetaxusa com income tax return. Freetaxusa com If an income tax return is required by law, you must file that return even though you already filed a Form 1040-C. Freetaxusa com Chapters 5 and 7 discuss filing an annual U. Freetaxusa com S. Freetaxusa com income tax return. Freetaxusa com . Freetaxusa com I am a resident alien. Freetaxusa com Can I claim any treaty benefits? Generally, you cannot claim tax treaty benefits as a resident alien. Freetaxusa com However, there are exceptions. Freetaxusa com See Effect of Tax Treaties in chapter 1. Freetaxusa com See also Resident Aliens under Some Typical Tax Treaty Benefits in chapter 9. Freetaxusa com You must file Form 1040NR if you are engaged in a trade or business in the United States, or have any other U. Freetaxusa com S. Freetaxusa com source income on which tax was not fully paid by the amount withheld. Freetaxusa com You can use Form 1040NR-EZ instead of Form 1040NR if you meet all 11 conditions listed under Form 1040NR-EZ in chapter 7. Freetaxusa com You were a dual-status alien last year. Freetaxusa com As a general rule, because you were in the United States for 183 days or more, you have met the substantial presence test and you are taxed as a resident. Freetaxusa com However, for the part of the year that you were not present in the United States, you are a nonresident. Freetaxusa com File Form 1040. Freetaxusa com Print “Dual-Status Return” across the top. Freetaxusa com Attach a statement showing your U. Freetaxusa com S. Freetaxusa com source income for the part of the year you were a nonresident. Freetaxusa com You may use Form 1040NR as the statement. Freetaxusa com Print “Dual-Status Statement” across the top. Freetaxusa com See First Year of Residency in chapter 1 for rules on determining your residency starting date. Freetaxusa com If you are an employee and you receive wages subject to U. Freetaxusa com S. Freetaxusa com income tax withholding, you must generally file by the 15th day of the 4th month after your tax year ends. Freetaxusa com If you file for the 2013 calendar year, your return is due April 15, 2014. Freetaxusa com If you are not an employee who receives wages subject to U. Freetaxusa com S. Freetaxusa com income tax withholding, you must file by the 15th day of the 6th month after your tax year ends. Freetaxusa com For the 2013 calendar year, file your return by June 16, 2014. Freetaxusa com For more information on when and where to file, see chapter 7 . Freetaxusa com A social security number (SSN) must be furnished on returns, statements, and other tax-related documents. Freetaxusa com If your spouse does not have and is not eligible to get an SSN, he must apply for an individual taxpayer identification number (ITIN). Freetaxusa com If you are a U. Freetaxusa com S. Freetaxusa com citizen or resident and you choose to treat your nonresident spouse as a resident and file a joint tax return, your nonresident spouse needs an SSN or an ITIN. Freetaxusa com Alien spouses who are claimed as exemptions or dependents are also required to furnish an SSN or an ITIN. Freetaxusa com See Identification Number in chapter 5 for more information. Freetaxusa com Generally, you cannot file as married filing jointly if either spouse was a nonresident alien at any time during the tax year. Freetaxusa com However, nonresident aliens married to U. Freetaxusa com S. Freetaxusa com citizens or residents can choose to be treated as U. Freetaxusa com S. Freetaxusa com residents and file joint returns. Freetaxusa com For more information on this choice, see Nonresident Spouse Treated as a Resident in chapter 1. Freetaxusa com Assuming both of you had these visas for all of last year, you are a resident alien. Freetaxusa com Your husband is a nonresident alien if he has not been in the United States as a student for more than 5 years. Freetaxusa com You and your husband can file a joint tax return on Form 1040, 1040A, or 1040EZ if he makes the choice to be treated as a resident for the entire year. Freetaxusa com See Nonresident Spouse Treated as a Resident in chapter 1. Freetaxusa com If your husband does not make this choice, you must file a separate return on Form 1040 or Form 1040A. Freetaxusa com Your husband must file Form 1040NR or 1040NR-EZ. Freetaxusa com No. Freetaxusa com A dual-resident taxpayer is one who is a resident of both the United States and another country under each country's tax laws. Freetaxusa com See Effect of Tax Treaties in chapter 1. Freetaxusa com You are a dual-status taxpayer when you are both a resident alien and a nonresident alien in the same year. Freetaxusa com See chapter 6 . Freetaxusa com The following rules apply if the dividends and capital gains are not effectively connected with a U. Freetaxusa com S. Freetaxusa com trade or business. Freetaxusa com Capital gains are generally not taxable if you were in the United States for less than 183 days during the year. Freetaxusa com See Sales or Exchanges of Capital Assets in chapter 4 for more information and exceptions. Freetaxusa com Dividends are generally taxed at a 30% (or lower treaty) rate. Freetaxusa com The brokerage company or payor of the dividends should withhold this tax at source. Freetaxusa com If tax is not withheld at the correct rate, you must file Form 1040NR to receive a refund or pay any additional tax due. Freetaxusa com If the capital gains and dividends are effectively connected with a U. Freetaxusa com S. Freetaxusa com trade or business, they are taxed according to the same rules and at the same rates that apply to U. Freetaxusa com S. Freetaxusa com citizens and residents. Freetaxusa com If you are a nonresident alien, 85% of any U. Freetaxusa com S. Freetaxusa com social security benefits (and the equivalent portion of tier 1 railroad retirement benefits) you receive is subject to the flat 30% tax, unless exempt, or subject to a lower treaty rate. Freetaxusa com See The 30% Tax in chapter 4. Freetaxusa com If you are a nonresident alien and the scholarship is not from U. Freetaxusa com S. Freetaxusa com sources, it is not subject to U. Freetaxusa com S. Freetaxusa com tax. Freetaxusa com See Scholarships, Grants, Prizes, and Awards in chapter 2 to determine whether your scholarship is from U. Freetaxusa com S. Freetaxusa com sources. Freetaxusa com If your scholarship is from U. Freetaxusa com S. Freetaxusa com sources or you are a resident alien, your scholarship is subject to U. Freetaxusa com S. Freetaxusa com tax according to the following rules. Freetaxusa com If you are a candidate for a degree, you may be able to exclude from your income the part of the scholarship you use to pay for tuition, fees, books, supplies, and equipment required by the educational institution. Freetaxusa com However, the part of the scholarship you use to pay for other expenses, such as room and board, is taxable. Freetaxusa com See Scholarships and Fellowship Grants in chapter 3 for more information. Freetaxusa com If you are not a candidate for a degree, your scholarship is taxable. Freetaxusa com Nonresident aliens cannot claim the standard deduction. Freetaxusa com However, see Students and business apprentices from India , under Itemized Deductions in chapter 5 for an exception. Freetaxusa com You cannot claim the standard deduction allowed on Form 1040. Freetaxusa com However, you can itemize any allowable deductions. Freetaxusa com Nonresident aliens can claim some of the same itemized deductions that resident aliens can claim. Freetaxusa com However, nonresident aliens can claim itemized deductions only if they have income effectively connected with their U. Freetaxusa com S. Freetaxusa com trade or business. Freetaxusa com See Itemized Deductions in chapter 5. Freetaxusa com Resident aliens can claim personal exemptions and exemptions for dependents in the same way as U. Freetaxusa com S. Freetaxusa com citizens. Freetaxusa com However, nonresident aliens generally can claim only a personal exemption for themselves on their U. Freetaxusa com S. Freetaxusa com tax return. Freetaxusa com There are special rules for residents of Mexico, Canada, and South Korea; for U. Freetaxusa com S. Freetaxusa com nationals; and for students and business apprentices from India. Freetaxusa com See Exemptions in chapter 5. Freetaxusa com As a dual-status taxpayer, you usually will be able to claim your own personal exemption. Freetaxusa com Subject to the general rules for qualification, you can claim exemptions for your spouse and dependents when you figure taxable income for the part of the year you are a resident alien. Freetaxusa com The amount you can claim for these exemptions is limited to your taxable income (figured before subtracting exemptions) for the part of the year you are a resident alien. Freetaxusa com You cannot use exemptions (other than your own) to reduce taxable income to less than zero for that period. Freetaxusa com If you are a nonresident alien for any part of the year, you cannot claim the earned income credit. Freetaxusa com See chapter 6 for more information on dual-status aliens. Freetaxusa com If you are a nonresident alien for any part of the year, you generally cannot claim the education credits. Freetaxusa com However, if you are married and choose to file a joint return with a U. Freetaxusa com S. Freetaxusa com citizen or resident spouse, you may be eligible for these credits. Freetaxusa com See Nonresident Spouse Treated as a Resident in chapter 1. Freetaxusa com Generally, services you perform as a nonresident alien temporarily in the United States as a nonimmigrant under subparagraph (F), (J), (M), or (Q) of section 101(a)(15) of the Immigration and Nationality Act are not covered under the social security program if you perform the services to carry out the purpose for which you were admitted to the United States. Freetaxusa com See Social Security and Medicare Taxes in chapter 8. Freetaxusa com If social security or Medicare taxes were withheld in error from pay that is not subject to these taxes, contact the employer who withheld the taxes for a refund. Freetaxusa com If you are unable to get a full refund of the amount from your employer, file a claim for refund with the Internal Revenue Service on Form 843, Claim for Refund and Request for Abatement. Freetaxusa com Do not use Form 843 to request a refund of Additional Medicare Tax. Freetaxusa com See Refund of Taxes Withheld in Error in chapter 8. Freetaxusa com Before leaving the United States, aliens generally must obtain a certificate of compliance. Freetaxusa com This document, also popularly known as the sailing permit or departure permit, is part of the income tax form you must file before leaving. Freetaxusa com You will receive a sailing or departure permit after filing a Form 1040-C or Form 2063. Freetaxusa com These forms are discussed in chapter 11. Freetaxusa com Form 1040-C is not an annual U. Freetaxusa com S. Freetaxusa com income tax return. Freetaxusa com If an income tax return is required by law, you must file that return even though you already filed a Form 1040-C. Freetaxusa com Chapters 5 and 7 discuss filing an annual U. Freetaxusa com S. Freetaxusa com income tax return. Freetaxusa com . Freetaxusa com I am a nonresident alien with no dependents. Freetaxusa com I am working temporarily for a U. Freetaxusa com S. Freetaxusa com company. Freetaxusa com What return do I file? You must file Form 1040NR if you are engaged in a trade or business in the United States, or have any other U. Freetaxusa com S. Freetaxusa com source income on which tax was not fully paid by the amount withheld. Freetaxusa com You can use Form 1040NR-EZ instead of Form 1040NR if you meet all 11 conditions listed under Form 1040NR-EZ in chapter 7. Freetaxusa com You were a dual-status alien last year. Freetaxusa com As a general rule, because you were in the United States for 183 days or more, you have met the substantial presence test and you are taxed as a resident. Freetaxusa com However, for the part of the year that you were not present in the United States, you are a nonresident. Freetaxusa com File Form 1040. Freetaxusa com Print “Dual-Status Return” across the top. Freetaxusa com Attach a statement showing your U. Freetaxusa com S. Freetaxusa com source income for the part of the year you were a nonresident. Freetaxusa com You may use Form 1040NR as the statement. Freetaxusa com Print “Dual-Status Statement” across the top. Freetaxusa com See First Year of Residency in chapter 1 for rules on determining your residency starting date. Freetaxusa com If you are an employee and you receive wages subject to U. Freetaxusa com S. Freetaxusa com income tax withholding, you must generally file by the 15th day of the 4th month after your tax year ends. Freetaxusa com If you file for the 2013 calendar year, your return is due April 15, 2014. Freetaxusa com If you are not an employee who receives wages subject to U. Freetaxusa com S. Freetaxusa com income tax withholding, you must file by the 15th day of the 6th month after your tax year ends. Freetaxusa com For the 2013 calendar year, file your return by June 16, 2014. Freetaxusa com For more information on when and where to file, see chapter 7 . Freetaxusa com A social security number (SSN) must be furnished on returns, statements, and other tax-related documents. Freetaxusa com If your spouse does not have and is not eligible to get an SSN, he must apply for an individual taxpayer identification number (ITIN). Freetaxusa com If you are a U. Freetaxusa com S. Freetaxusa com citizen or resident and you choose to treat your nonresident spouse as a resident and file a joint tax return, your nonresident spouse needs an SSN or an ITIN. Freetaxusa com Alien spouses who are claimed as exemptions or dependents are also required to furnish an SSN or an ITIN. Freetaxusa com See Identification Number in chapter 5 for more information. Freetaxusa com Generally, you cannot file as married filing jointly if either spouse was a nonresident alien at any time during the tax year. Freetaxusa com However, nonresident aliens married to U. Freetaxusa com S. Freetaxusa com citizens or residents can choose to be treated as U. Freetaxusa com S. Freetaxusa com residents and file joint returns. Freetaxusa com For more information on this choice, see Nonresident Spouse Treated as a Resident in chapter 1. Freetaxusa com Assuming both of you had these visas for all of last year, you are a resident alien. Freetaxusa com Your husband is a nonresident alien if he has not been in the United States as a student for more than 5 years. Freetaxusa com You and your husband can file a joint tax return on Form 1040, 1040A, or 1040EZ if he makes the choice to be treated as a resident for the entire year. Freetaxusa com See Nonresident Spouse Treated as a Resident in chapter 1. Freetaxusa com If your husband does not make this choice, you must file a separate return on Form 1040 or Form 1040A. Freetaxusa com Your husband must file Form 1040NR or 1040NR-EZ. Freetaxusa com No. Freetaxusa com A dual-resident taxpayer is one who is a resident of both the United States and another country under each country's tax laws. Freetaxusa com See Effect of Tax Treaties in chapter 1. Freetaxusa com You are a dual-status taxpayer when you are both a resident alien and a nonresident alien in the same year. Freetaxusa com See chapter 6 . Freetaxusa com The following rules apply if the dividends and capital gains are not effectively connected with a U. Freetaxusa com S. Freetaxusa com trade or business. Freetaxusa com Capital gains are generally not taxable if you were in the United States for less than 183 days during the year. Freetaxusa com See Sales or Exchanges of Capital Assets in chapter 4 for more information and exceptions. Freetaxusa com Dividends are generally taxed at a 30% (or lower treaty) rate. Freetaxusa com The brokerage company or payor of the dividends should withhold this tax at source. Freetaxusa com If tax is not withheld at the correct rate, you must file Form 1040NR to receive a refund or pay any additional tax due. Freetaxusa com If the capital gains and dividends are effectively connected with a U. Freetaxusa com S. Freetaxusa com trade or business, they are taxed according to the same rules and at the same rates that apply to U. Freetaxusa com S. Freetaxusa com citizens and residents. Freetaxusa com If you are a nonresident alien, 85% of any U. Freetaxusa com S. Freetaxusa com social security benefits (and the equivalent portion of tier 1 railroad retirement benefits) you receive is subject to the flat 30% tax, unless exempt, or subject to a lower treaty rate. Freetaxusa com See The 30% Tax in chapter 4. Freetaxusa com If you are a nonresident alien and the scholarship is not from U. Freetaxusa com S. Freetaxusa com sources, it is not subject to U. Freetaxusa com S. Freetaxusa com tax. Freetaxusa com See Scholarships, Grants, Prizes, and Awards in chapter 2 to determine whether your scholarship is from U. Freetaxusa com S. Freetaxusa com sources. Freetaxusa com If your scholarship is from U. Freetaxusa com S. Freetaxusa com sources or you are a resident alien, your scholarship is subject to U. Freetaxusa com S. Freetaxusa com tax according to the following rules. Freetaxusa com If you are a candidate for a degree, you may be able to exclude from your income the part of the scholarship you use to pay for tuition, fees, books, supplies, and equipment required by the educational institution. Freetaxusa com However, the part of the scholarship you use to pay for other expenses, such as room and board, is taxable. Freetaxusa com See Scholarships and Fellowship Grants in chapter 3 for more information. Freetaxusa com If you are not a candidate for a degree, your scholarship is taxable. Freetaxusa com Nonresident aliens cannot claim the standard deduction. Freetaxusa com However, see Students and business apprentices from India , under Itemized Deductions in chapter 5 for an exception. Freetaxusa com You cannot claim the standard deduction allowed on Form 1040. Freetaxusa com However, you can itemize any allowable deductions. Freetaxusa com Nonresident aliens can claim some of the same itemized deductions that resident aliens can claim. Freetaxusa com However, nonresident aliens can claim itemized deductions only if they have income effectively connected with their U. Freetaxusa com S. Freetaxusa com trade or business. Freetaxusa com See Itemized Deductions in chapter 5. Freetaxusa com Resident aliens can claim personal exemptions and exemptions for dependents in the same way as U. Freetaxusa com S. Freetaxusa com citizens. Freetaxusa com However, nonresident aliens generally can claim only a personal exemption for themselves on their U. Freetaxusa com S. Freetaxusa com tax return. Freetaxusa com There are special rules for residents of Mexico, Canada, and South Korea; for U. Freetaxusa com S. Freetaxusa com nationals; and for students and business apprentices from India. Freetaxusa com See Exemptions in chapter 5. Freetaxusa com As a dual-status taxpayer, you usually will be able to claim your own personal exemption. Freetaxusa com Subject to the general rules for qualification, you can claim exemptions for your spouse and dependents when you figure taxable income for the part of the year you are a resident alien. Freetaxusa com The amount you can claim for these exemptions is limited to your taxable income (figured before subtracting exemptions) for the part of the year you are a resident alien. Freetaxusa com You cannot use exemptions (other than your own) to reduce taxable income to less than zero for that period. Freetaxusa com If you are a nonresident alien for any part of the year, you cannot claim the earned income credit. Freetaxusa com See chapter 6 for more information on dual-status aliens. Freetaxusa com If you are a nonresident alien for any part of the year, you generally cannot claim the education credits. Freetaxusa com However, if you are married and choose to file a joint return with a U. Freetaxusa com S. Freetaxusa com citizen or resident spouse, you may be eligible for these credits. Freetaxusa com See Nonresident Spouse Treated as a Resident in chapter 1. Freetaxusa com Generally, services you perform as a nonresident alien temporarily in the United States as a nonimmigrant under subparagraph (F), (J), (M), or (Q) of section 101(a)(15) of the Immigration and Nationality Act are not covered under the social security program if you perform the services to carry out the purpose for which you were admitted to the United States. Freetaxusa com See Social Security and Medicare Taxes in chapter 8. Freetaxusa com If social security or Medicare taxes were withheld in error from pay that is not subject to these taxes, contact the employer who withheld the taxes for a refund. Freetaxusa com If you are unable to get a full refund of the amount from your employer, file a claim for refund with the Internal Revenue Service on Form 843, Claim for Refund and Request for Abatement. Freetaxusa com Do not use Form 843 to request a refund of Additional Medicare Tax. Freetaxusa com See Refund of Taxes Withheld in Error in chapter 8. Freetaxusa com Before leaving the United States, aliens generally must obtain a certificate of compliance. Freetaxusa com This document, also popularly known as the sailing permit or departure permit, is part of the income tax form you must file before leaving. Freetaxusa com You will receive a sailing or departure permit after filing a Form 1040-C or Form 2063. Freetaxusa com These forms are discussed in chapter 11. Freetaxusa com Form 1040-C is not an annual U. Freetaxusa com S. Freetaxusa com income tax return. Freetaxusa com If an income tax return is required by law, you must file that return even though you already filed a Form 1040-C. Freetaxusa com Chapters 5 and 7 discuss filing an annual U. Freetaxusa com S. Freetaxusa com income tax return. Freetaxusa com . Freetaxusa com I came to the United States on June 30th of last year. Freetaxusa com I have an H-1B Visa. Freetaxusa com What is my tax status, resident alien or nonresident alien? What tax return do I file? You were a dual-status alien last year. Freetaxusa com As a general rule, because you were in the United States for 183 days or more, you have met the substantial presence test and you are taxed as a resident. Freetaxusa com However, for the part of the year that you were not present in the United States, you are a nonresident. Freetaxusa com File Form 1040. Freetaxusa com Print “Dual-Status Return” across the top. Freetaxusa com Attach a statement showing your U. Freetaxusa com S. Freetaxusa com source income for the part of the year you were a nonresident. Freetaxusa com You may use Form 1040NR as the statement. Freetaxusa com Print “Dual-Status Statement” across the top. Freetaxusa com See First Year of Residency in chapter 1 for rules on determining your residency starting date. Freetaxusa com If you are an employee and you receive wages subject to U. Freetaxusa com S. Freetaxusa com income tax withholding, you must generally file by the 15th day of the 4th month after your tax year ends. Freetaxusa com If you file for the 2013 calendar year, your return is due April 15, 2014. Freetaxusa com If you are not an employee who receives wages subject to U. Freetaxusa com S. Freetaxusa com income tax withholding, you must file by the 15th day of the 6th month after your tax year ends. Freetaxusa com For the 2013 calendar year, file your return by June 16, 2014. Freetaxusa com For more information on when and where to file, see chapter 7 . Freetaxusa com A social security number (SSN) must be furnished on returns, statements, and other tax-related documents. Freetaxusa com If your spouse does not have and is not eligible to get an SSN, he must apply for an individual taxpayer identification number (ITIN). Freetaxusa com If you are a U. Freetaxusa com S. Freetaxusa com citizen or resident and you choose to treat your nonresident spouse as a resident and file a joint tax return, your nonresident spouse needs an SSN or an ITIN. Freetaxusa com Alien spouses who are claimed as exemptions or dependents are also required to furnish an SSN or an ITIN. Freetaxusa com See Identification Number in chapter 5 for more information. Freetaxusa com Generally, you cannot file as married filing jointly if either spouse was a nonresident alien at any time during the tax year. Freetaxusa com However, nonresident aliens married to U. Freetaxusa com S. Freetaxusa com citizens or residents can choose to be treated as U. Freetaxusa com S. Freetaxusa com residents and file joint returns. Freetaxusa com For more information on this choice, see Nonresident Spouse Treated as a Resident in chapter 1. Freetaxusa com Assuming both of you had these visas for all of last year, you are a resident alien. Freetaxusa com Your husband is a nonresident alien if he has not been in the United States as a student for more than 5 years. Freetaxusa com You and your husband can file a joint tax return on Form 1040, 1040A, or 1040EZ if he makes the choice to be treated as a resident for the entire year. Freetaxusa com See Nonresident Spouse Treated as a Resident in chapter 1. Freetaxusa com If your husband does not make this choice, you must file a separate return on Form 1040 or Form 1040A. Freetaxusa com Your husband must file Form 1040NR or 1040NR-EZ. Freetaxusa com No. Freetaxusa com A dual-resident taxpayer is one who is a resident of both the United States and another country under each country's tax laws. Freetaxusa com See Effect of Tax Treaties in chapter 1. Freetaxusa com You are a dual-status taxpayer when you are both a resident alien and a nonresident alien in the same year. Freetaxusa com See chapter 6 . Freetaxusa com The following rules apply if the dividends and capital gains are not effectively connected with a U. Freetaxusa com S. Freetaxusa com trade or business. Freetaxusa com Capital gains are generally not taxable if you were in the United States for less than 183 days during the year. Freetaxusa com See Sales or Exchanges of Capital Assets in chapter 4 for more information and exceptions. Freetaxusa com Dividends are generally taxed at a 30% (or lower treaty) rate. Freetaxusa com The brokerage company or payor of the dividends should withhold this tax at source. Freetaxusa com If tax is not withheld at the correct rate, you must file Form 1040NR to receive a refund or pay any additional tax due. Freetaxusa com If the capital gains and dividends are effectively connected with a U. Freetaxusa com S. Freetaxusa com trade or business, they are taxed according to the same rules and at the same rates that apply to U. Freetaxusa com S. Freetaxusa com citizens and residents. Freetaxusa com If you are a nonresident alien, 85% of any U. Freetaxusa com S. Freetaxusa com social security benefits (and the equivalent portion of tier 1 railroad retirement benefits) you receive is subject to the flat 30% tax, unless exempt, or subject to a lower treaty rate. Freetaxusa com See The 30% Tax in chapter 4. Freetaxusa com If you are a nonresident alien and the scholarship is not from U. Freetaxusa com S. Freetaxusa com sources, it is not subject to U. Freetaxusa com S. Freetaxusa com tax. Freetaxusa com See Scholarships, Grants, Prizes, and Awards in chapter 2 to determine whether your scholarship is from U. Freetaxusa com S. Freetaxusa com sources. Freetaxusa com If your scholarship is from U. Freetaxusa com S. Freetaxusa com sources or you are a resident alien, your scholarship is subject to U. Freetaxusa com S. Freetaxusa com tax according to the following rules. Freetaxusa com If you are a candidate for a degree, you may be able to exclude from your income the part of the scholarship you use to pay for tuition, fees, books, supplies, and equipment required by the educational institution. Freetaxusa com However, the part of the scholarship you use to pay for other expenses, such as room and board, is taxable. Freetaxusa com See Scholarships and Fellowship Grants in chapter 3 for more information. Freetaxusa com If you are not a candidate for a degree, your scholarship is taxable. Freetaxusa com Nonresident aliens cannot claim the standard deduction. Freetaxusa com However, see Students and business apprentices from India , under Itemized Deductions in chapter 5 for an exception. Freetaxusa com You cannot claim the standard deduction allowed on Form 1040. Freetaxusa com However, you can itemize any allowable deductions. Freetaxusa com Nonresident aliens can claim some of the same itemized deductions that resident aliens can claim. Freetaxusa com However, nonresident aliens can claim itemized deductions only if they have income effectively connected with their U. Freetaxusa com S. Freetaxusa com trade or business. Freetaxusa com See Itemized Deductions in chapter 5. Freetaxusa com Resident aliens can claim personal exemptions and exemptions for dependents in the same way as U. Freetaxusa com S. Freetaxusa com citizens. Freetaxusa com However, nonresident aliens generally can claim only a personal exemption for themselves on their U. Freetaxusa com S. Freetaxusa com tax return. Freetaxusa com There are special rules for residents of Mexico, Canada, and South Korea; for U. Freetaxusa com S. Freetaxusa com nationals; and for students and business apprentices from India. Freetaxusa com See Exemptions in chapter 5. Freetaxusa com As a dual-status taxpayer, you usually will be able to claim your own personal exemption. Freetaxusa com Subject to the general rules for qualification, you can claim exemptions for your spouse and dependents when you figure taxable income for the part of the year you are a resident alien. Freetaxusa com The amount you can claim for these exemptions is limited to your taxable income (figured before subtracting exemptions) for the part of the year you are a resident alien. Freetaxusa com You cannot use exemptions (other than your own) to reduce taxable income to less than zero for that period. Freetaxusa com If you are a nonresident alien for any part of the year, you cannot claim the earned income credit. Freetaxusa com See chapter 6 for more information on dual-status aliens. Freetaxusa com If you are a nonresident alien for any part of the year, you generally cannot claim the education credits. Freetaxusa com However, if you are married and choose to file a joint return with a U. Freetaxusa com S. Freetaxusa com citizen or resident spouse, you may be eligible for these credits. Freetaxusa com See Nonresident Spouse Treated as a Resident in chapter 1. Freetaxusa com Generally, services you perform as a nonresident alien temporarily in the United States as a nonimmigrant under subparagraph (F), (J), (M), or (Q) of section 101(a)(15) of the Immigration and Nationality Act are not covered under the social security program if you perform the services to carry out the purpose for which you were admitted to the United States. Freetaxusa com See Social Security and Medicare Taxes in chapter 8. Freetaxusa com If social security or Medicare taxes were withheld in error from pay that is not subject to these taxes, contact the employer who withheld the taxes for a refund. Freetaxusa com If you are unable to get a full refund of the amount from your employer, file a claim for refund with the Internal Revenue Service on Form 843, Claim for Refund and Request for Abatement. Freetaxusa com Do not use Form 843 to request a refund of Additional Medicare Tax. Freetaxusa com See Refund of Taxes Withheld in Error in chapter 8. Freetaxusa com Before leaving the United States, aliens generally must obtain a certificate of compliance. Freetaxusa com This document, also popularly known as the sailing permit or departure permit, is part of the income tax form you must file before leaving. Freetaxusa com You will receive a sailing or departure permit after filing a Form 1040-C or Form 2063. Freetaxusa com These forms are discussed in chapter 11. Freetaxusa com Form 1040-C is not an annual U. Freetaxusa com S. Freetaxusa com income tax return. Freetaxusa com If an income tax return is required by law, you must file that return even though you already filed a Form 1040-C. Freetaxusa com Chapters 5 and 7 discuss filing an annual U. Freetaxusa com S. Freetaxusa com income tax return. Freetaxusa com . Freetaxusa com When is my Form 1040NR due? If you are an employee and you receive wages subject to U. Freetaxusa com S. Freetaxusa com income tax withholding, you must generally file by the 15th day of the 4th month after your tax year ends. Freetaxusa com If you file for the 2013 calendar year, your return is due April 15, 2014. Freetaxusa com If you are not an employee who receives wages subject to U. Freetaxusa com S. Freetaxusa com income tax withholding, you must file by the 15th day of the 6th month after your tax year ends. Freetaxusa com For the 2013 calendar year, file your return by June 16, 2014. Freetaxusa com For more information on when and where to file, see chapter 7 . Freetaxusa com A social security number (SSN) must be furnished on returns, statements, and other tax-related documents. Freetaxusa com If your spouse does not have and is not eligible to get an SSN, he must apply for an individual taxpayer identification number (ITIN). Freetaxusa com If you are a U. Freetaxusa com S. Freetaxusa com citizen or resident and you choose to treat your nonresident spouse as a resident and file a joint tax return, your nonresident spouse needs an SSN or an ITIN. Freetaxusa com Alien spouses who are claimed as exemptions or dependents are also required to furnish an SSN or an ITIN. Freetaxusa com See Identification Number in chapter 5 for more information. Freetaxusa com Generally, you cannot file as married filing jointly if either spouse was a nonresident alien at any time during the tax year. Freetaxusa com However, nonresident aliens married to U. Freetaxusa com S. Freetaxusa com citizens or residents can choose to be treated as U. Freetaxusa com S. Freetaxusa com residents and file joint returns. Freetaxusa com For more information on this choice, see Nonresident Spouse Treated as a Resident in chapter 1. Freetaxusa com Assuming both of you had these visas for all of last year, you are a resident alien. Freetaxusa com Your husband is a nonresident alien if he has not been in the United States as a student for more than 5 years. Freetaxusa com You and your husband can file a joint tax return on Form 1040, 1040A, or 1040EZ if he makes the choice to be treated as a resident for the entire year. Freetaxusa com See Nonresident Spouse Treated as a Resident in chapter 1. Freetaxusa com If your husband does not make this choice, you must file a separate return on Form 1040 or Form 1040A. Freetaxusa com Your husband must file Form 1040NR or 1040NR-EZ. Freetaxusa com No. Freetaxusa com A dual-resident taxpayer is one who is a resident of both the United States and another country under each country's tax laws. Freetaxusa com See Effect of Tax Treaties in chapter 1. Freetaxusa com You are a dual-status taxpayer when you are both a resident alien and a nonresident alien in the same year. Freetaxusa com See chapter 6 . Freetaxusa com The following rules apply if the dividends and capital gains are not effectively connected with a U. Freetaxusa com S. Freetaxusa com trade or business. Freetaxusa com Capital gains are generally not taxable if you were in the United States for less than 183 days during the year. Freetaxusa com See Sales or Exchanges of Capital Assets in chapter 4 for more information and exceptions. Freetaxusa com Dividends are generally taxed at a 30% (or lower treaty) rate. Freetaxusa com The brokerage company or payor of the dividends should withhold this tax at source. Freetaxusa com If tax is not withheld at the correct rate, you must file Form 1040NR to receive a refund or pay any additional tax due. Freetaxusa com If the capital gains and dividends are effectively connected with a U. Freetaxusa com S. Freetaxusa com trade or business, they are taxed according to the same rules and at the same rates that apply to U. Freetaxusa com S. Freetaxusa com citizens and residents. Freetaxusa com If you are a nonresident alien, 85% of any U. Freetaxusa com S. Freetaxusa com social security benefits (and the equivalent portion of tier 1 railroad retirement benefits) you receive is subject to the flat 30% tax, unless exempt, or subject to a lower treaty rate. Freetaxusa com See The 30% Tax in chapter 4. Freetaxusa com If you are a nonresident alien and the scholarship is not from U. Freetaxusa com S. Freetaxusa com sources, it is not subject to U. Freetaxusa com S. Freetaxusa com tax. Freetaxusa com See Scholarships, Grants, Prizes, and Awards in chapter 2 to determine whether your scholarship is from U. Freetaxusa com S. Freetaxusa com sources. Freetaxusa com If your scholarship is from U. Freetaxusa com S. Freetaxusa com sources or you are a resident alien, your scholarship is subject to U. Freetaxusa com S. Freetaxusa com tax according to the following rules. Freetaxusa com If you are a candidate for a degree, you may be able to exclude from your income the part of the scholarship you use to pay for tuition, fees, books, supplies, and equipment required by the educational institution. Freetaxusa com However, the part of the scholarship you use to pay for other expenses, such as room and board, is taxable. Freetaxusa com See Scholarships and Fellowship Grants in chapter 3 for more information. Freetaxusa com If you are not a candidate for a degree, your scholarship is taxable. Freetaxusa com Nonresident aliens cannot claim the standard deduction. Freetaxusa com However, see Students and business apprentices from India , under Itemized Deductions in chapter 5 for an exception. Freetaxusa com You cannot claim the standard deduction allowed on Form 1040. Freetaxusa com However, you can itemize any allowable deductions. Freetaxusa com Nonresident aliens can claim some of the same itemized deductions that resident aliens can claim. Freetaxusa com However, nonresident aliens can claim itemized deductions only if they have income effectively connected with their U. Freetaxusa com S. Freetaxusa com trade or business. Freetaxusa com See Itemized Deductions in chapter 5. Freetaxusa com Resident aliens can claim personal exemptions and exemptions for dependents in the same way as U. Freetaxusa com S. Freetaxusa com citizens. Freetaxusa com However, nonresident aliens generally can claim only a personal exemption for themselves on their U. Freetaxusa com S. Freetaxusa com tax return. Freetaxusa com There are special rules for residents of Mexico, Canada, and South Korea; for U. Freetaxusa com S. Freetaxusa com nationals; and for students and business apprentices from India. Freetaxusa com See Exemptions in chapter 5. Freetaxusa com As a dual-status taxpayer, you usually will be able to claim your own personal exemption. Freetaxusa com Subject to the general rules for qualification, you can claim exemptions for your spouse and dependents when you figure taxable income for the part of the year you are a resident alien. Freetaxusa com The amount you can claim for these exemptions is limited to your taxable income (figured before subtracting exemptions) for the part of the year you are a resident alien. Freetaxusa com You cannot use exemptions (other than your own) to reduce taxable income to less than zero for that period. Freetaxusa com If you are a nonresident alien for any part of the year, you cannot claim the earned income credit. Freetaxusa com See chapter 6 for more information on dual-status aliens. Freetaxusa com If you are a nonresident alien for any part of the year, you generally cannot claim the education credits. Freetaxusa com However, if you are married and choose to file a joint return with a U. Freetaxusa com S. Freetaxusa com citizen or resident spouse, you may be eligible for these credits. Freetaxusa com See Nonresident Spouse Treated as a Resident in chapter 1. Freetaxusa com Generally, services you perform as a nonresident alien temporarily in the United States as a nonimmigrant under subparagraph (F), (J), (M), or (Q) of section 101(a)(15) of the Immigration and Nationality Act are not covered under the social security program if you perform the services to carry out the purpose
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Understanding Your CP232A Notice

We approved your request for an extension to file your Form 5330.


What you need to do

  • Keep this notice for your records.
  • File your required form by your new due date shown on the notice.

You may want to


Answers to Common Questions

Q. Where can I go for more information about Employee Benefit Plans?

A. For more information on Employee Benefit Plans, see Retirement Plans Community.

Q. Can I get help over the phone?

A. If you have questions and/or need help, please call 1-877-829-5500. Personal assistance is available Monday through Friday, 7:00 a.m. to 7:00 p.m. CT.

 


Tips for next year

Be sure to mail your Form 5558 on or before the due date of your return.

Page Last Reviewed or Updated: 27-Jan-2014

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The Freetaxusa Com

Freetaxusa com 3. Freetaxusa com   Ordinary or Capital Gain or Loss for Business Property Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. Freetaxusa com Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sales Gifts Transfers at Death Like-Kind Exchanges and Involuntary Conversions Multiple Properties Introduction When you dispose of business property, your taxable gain or loss is usually a section 1231 gain or loss. Freetaxusa com Its treatment as ordinary or capital is determined under rules for section 1231 transactions. Freetaxusa com When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Freetaxusa com Any remaining gain is a section 1231 gain. Freetaxusa com Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 537 Installment Sales 547 Casualties, Disasters and Thefts 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) 4797 Sales of Business Property See chapter 5 for information about getting publications and forms. Freetaxusa com Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). Freetaxusa com Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. Freetaxusa com If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). Freetaxusa com Do not take that gain into account as section 1231 gain. Freetaxusa com Section 1231 transactions. Freetaxusa com   The following transactions result in gain or loss subject to section 1231 treatment. Freetaxusa com Sales or exchanges of real property or depreciable personal property. Freetaxusa com This property must be used in a trade or business and held longer than 1 year. Freetaxusa com Generally, property held for the production of rents or royalties is considered to be used in a trade or business. Freetaxusa com Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). Freetaxusa com Sales or exchanges of leaseholds. Freetaxusa com The leasehold must be used in a trade or business and held longer than 1 year. Freetaxusa com Sales or exchanges of cattle and horses. Freetaxusa com The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. Freetaxusa com Sales or exchanges of other livestock. Freetaxusa com This livestock does not include poultry. Freetaxusa com It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. Freetaxusa com Sales or exchanges of unharvested crops. Freetaxusa com The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person and the land must be held longer than 1 year. Freetaxusa com You cannot keep any right or option to directly or indirectly reacquire the land (other than a right customarily incident to a mortgage or other security transaction). Freetaxusa com Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. Freetaxusa com Cutting of timber or disposal of timber, coal, or iron ore. Freetaxusa com The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. Freetaxusa com Condemnations. Freetaxusa com The condemned property must have been held longer than 1 year. Freetaxusa com It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. Freetaxusa com It cannot be property held for personal use. Freetaxusa com Casualties and thefts. Freetaxusa com The casualty or theft must have affected business property, property held for the production of rents and royalties, or investment property (such as notes and bonds). Freetaxusa com You must have held the property longer than 1 year. Freetaxusa com However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. Freetaxusa com For more information on casualties and thefts, see Publication 547. Freetaxusa com Property for sale to customers. Freetaxusa com   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. Freetaxusa com If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. Freetaxusa com Example. Freetaxusa com You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. Freetaxusa com Customers make deposits on the reels, which you refund if the reels are returned within a year. Freetaxusa com If they are not returned, you keep each deposit as the agreed-upon sales price. Freetaxusa com Most reels are returned within the 1-year period. Freetaxusa com You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. Freetaxusa com Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. Freetaxusa com Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. Freetaxusa com Copyrights. Freetaxusa com    The sale of a copyright, a literary, musical, or artistic composition, or similar property is not a section 1231 transaction if your personal efforts created the property, or if you acquired the property in a way that entitled you to the basis of the previous owner whose personal efforts created it (for example, if you receive the property as a gift). Freetaxusa com The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. Freetaxusa com Treatment as ordinary or capital. Freetaxusa com   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. Freetaxusa com If you have a net section 1231 loss, it is ordinary loss. Freetaxusa com If you have a net section 1231 gain, it is ordinary income up to the amount of your nonrecaptured section 1231 losses from previous years. Freetaxusa com The rest, if any, is long-term capital gain. Freetaxusa com Nonrecaptured section 1231 losses. Freetaxusa com   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain. Freetaxusa com Therefore, if in any of your five preceding tax years you had section 1231 losses, a net gain for the current year from the sale of section 1231 assets is ordinary gain to the extent of your prior losses. Freetaxusa com These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. Freetaxusa com Example. Freetaxusa com In 2013, Ben has a $2,000 net section 1231 gain. Freetaxusa com To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. Freetaxusa com From 2008 through 2012 he had the following section 1231 gains and losses. Freetaxusa com Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800 Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. Freetaxusa com 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if otherwise nontaxable) as ordinary income. Freetaxusa com To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. Freetaxusa com This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. Freetaxusa com On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. Freetaxusa com Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. Freetaxusa com Whether the adjusted basis was figured using depreciation or amortization another person claimed. Freetaxusa com Corporate distributions. Freetaxusa com   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. Freetaxusa com General asset accounts. Freetaxusa com   Different rules apply to dispositions of property you depreciated using a general asset account. Freetaxusa com For information on these rules, see Publication 946. Freetaxusa com Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. Freetaxusa com See Gain Treated as Ordinary Income, later. Freetaxusa com Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. Freetaxusa com See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. Freetaxusa com Section 1245 property defined. Freetaxusa com   Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. Freetaxusa com Personal property (either tangible or intangible). Freetaxusa com Other tangible property (except buildings and their structural components) used as any of the following. Freetaxusa com See Buildings and structural components below. Freetaxusa com An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. Freetaxusa com A research facility in any of the activities in (a). Freetaxusa com A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). Freetaxusa com That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. Freetaxusa com Amortization of certified pollution control facilities. Freetaxusa com The section 179 expense deduction. Freetaxusa com Deduction for clean-fuel vehicles and certain refueling property. Freetaxusa com Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. Freetaxusa com Deduction for certain qualified refinery property. Freetaxusa com Deduction for qualified energy efficient commercial building property. Freetaxusa com Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. Freetaxusa com (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). Freetaxusa com ) Certain expenditures for child care facilities if in effect before repeal by Public Law 101-58, Omnibus Budget Reconciliation Act of 1990, section 11801(a)(13) (except with regards to deductions made prior to November 5, 1990). Freetaxusa com Expenditures to remove architectural and transportation barriers to the handicapped and elderly. Freetaxusa com Deduction for qualified tertiary injectant expenses. Freetaxusa com Certain reforestation expenditures. Freetaxusa com Deduction for election to expense qualified advanced mine safety equipment property. Freetaxusa com Single purpose agricultural (livestock) or horticultural structures. Freetaxusa com Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. Freetaxusa com Any railroad grading or tunnel bore. Freetaxusa com Buildings and structural components. Freetaxusa com   Section 1245 property does not include buildings and structural components. Freetaxusa com The term building includes a house, barn, warehouse, or garage. Freetaxusa com The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. Freetaxusa com   Do not treat a structure that is essentially machinery or equipment as a building or structural component. Freetaxusa com Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. Freetaxusa com   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. Freetaxusa com Structures such as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples are not treated as buildings, but as section 1245 property. Freetaxusa com Facility for bulk storage of fungible commodities. Freetaxusa com   This term includes oil or gas storage tanks and grain storage bins. Freetaxusa com Bulk storage means the storage of a commodity in a large mass before it is used. Freetaxusa com For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. Freetaxusa com To be fungible, a commodity must be such that one part may be used in place of another. Freetaxusa com   Stored materials that vary in composition, size, and weight are not fungible. Freetaxusa com Materials are not fungible if one part cannot be used in place of another part and the materials cannot be estimated and replaced by simple reference to weight, measure, and number. Freetaxusa com For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. Freetaxusa com Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. Freetaxusa com The depreciation and amortization allowed or allowable on the property. Freetaxusa com The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). Freetaxusa com A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. Freetaxusa com For any other disposition of section 1245 property, ordinary income is the lesser of (1) earlier or the amount by which its fair market value is more than its adjusted basis. Freetaxusa com See Gifts and Transfers at Death, later. Freetaxusa com Use Part III of Form 4797 to figure the ordinary income part of the gain. Freetaxusa com Depreciation taken on other property or taken by other taxpayers. Freetaxusa com   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. Freetaxusa com Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. Freetaxusa com Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift). Freetaxusa com Depreciation and amortization. Freetaxusa com   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. Freetaxusa com Ordinary depreciation deductions. Freetaxusa com Any special depreciation allowance you claimed. Freetaxusa com Amortization deductions for all the following costs. Freetaxusa com Acquiring a lease. Freetaxusa com Lessee improvements. Freetaxusa com Certified pollution control facilities. Freetaxusa com Certain reforestation expenses. Freetaxusa com Section 197 intangibles. Freetaxusa com Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. Freetaxusa com Franchises, trademarks, and trade names acquired before August 11, 1993. Freetaxusa com The section 179 deduction. Freetaxusa com Deductions for all the following costs. Freetaxusa com Removing barriers to the disabled and the elderly. Freetaxusa com Tertiary injectant expenses. Freetaxusa com Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). Freetaxusa com Environmental cleanup costs. Freetaxusa com Certain reforestation expenses. Freetaxusa com Qualified disaster expenses. Freetaxusa com Any basis reduction for the investment credit (minus any basis increase for credit recapture). Freetaxusa com Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). Freetaxusa com Example. Freetaxusa com You file your returns on a calendar year basis. Freetaxusa com In February 2011, you bought and placed in service for 100% use in your business a light-duty truck (5-year property) that cost $10,000. Freetaxusa com You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. Freetaxusa com You did not take the section 179 deduction. Freetaxusa com You sold the truck in May 2013 for $7,000. Freetaxusa com The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). Freetaxusa com Figure the gain treated as ordinary income as follows. Freetaxusa com 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $2,000 + $3,200 + $960) 6,160   4) Adjusted basis (subtract line 3 from line 2) $3,840 5) Gain realized (subtract line 4 from line 1) $3,160 6) Gain treated as ordinary income (lesser of line 3 or line 5) $3,160 Depreciation on other tangible property. Freetaxusa com   You must take into account depreciation during periods when the property was not used as an integral part of an activity or did not constitute a research or storage facility, as described earlier under Section 1245 property. Freetaxusa com   For example, if depreciation deductions taken on certain storage facilities amounted to $10,000, of which $6,000 is from the periods before their use in a prescribed business activity, you must use the entire $10,000 in determining ordinary income from depreciation. Freetaxusa com Depreciation allowed or allowable. Freetaxusa com   The greater of the depreciation allowed or allowable is generally the amount to use in figuring the part of gain to report as ordinary income. Freetaxusa com However, if in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. Freetaxusa com If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. Freetaxusa com   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. Freetaxusa com Multiple asset accounts. Freetaxusa com   In figuring ordinary income from depreciation, you can treat any number of units of section 1245 property in a single depreciation account as one item if the total ordinary income from depreciation figured by using this method is not less than it would be if depreciation on each unit were figured separately. Freetaxusa com Example. Freetaxusa com In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. Freetaxusa com All of the depreciation was recorded in a single depreciation account. Freetaxusa com After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. Freetaxusa com You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. Freetaxusa com However, if five of the trucks had been sold at a loss, only the 50 machines and 20 of the trucks could be treated as one item in determining the ordinary income from depreciation. Freetaxusa com Normal retirement. Freetaxusa com   The normal retirement of section 1245 property in multiple asset accounts does not require recognition of gain as ordinary income from depreciation if your method of accounting for asset retirements does not require recognition of that gain. Freetaxusa com Section 1250 Property Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. Freetaxusa com To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. Freetaxusa com Section 1250 property defined. Freetaxusa com   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. Freetaxusa com It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. Freetaxusa com A fee simple interest in land is not included because it is not depreciable. Freetaxusa com   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. Freetaxusa com Additional Depreciation If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method. Freetaxusa com For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. Freetaxusa com For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. Freetaxusa com If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. Freetaxusa com You will not have additional depreciation if any of the following conditions apply to the property disposed of. Freetaxusa com You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method; you held the property longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. Freetaxusa com In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction for property placed in service before January 1, 2010. Freetaxusa com The property was residential low-income rental property you held for 162/3 years or longer. Freetaxusa com For low-income rental housing on which the special 60-month depreciation for rehabilitation expenses was allowed, the 162/3 years start when the rehabilitated property is placed in service. Freetaxusa com You chose the alternate ACRS method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. Freetaxusa com The property was residential rental property or nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made); you held it longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. Freetaxusa com These properties are depreciated using the straight line method. Freetaxusa com In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. Freetaxusa com Depreciation taken by other taxpayers or on other property. Freetaxusa com   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). Freetaxusa com Example. Freetaxusa com Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. Freetaxusa com Immediately after the gift, the son's adjusted basis in the property is the same as his father's and reflects the $500 additional depreciation. Freetaxusa com On January 1 of the next year, after taking depreciation deductions of $1,000 on the property, of which $200 is additional depreciation, the son sells the property. Freetaxusa com At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). Freetaxusa com Depreciation allowed or allowable. Freetaxusa com   The greater of depreciation allowed or allowable (to any person who held the property if the depreciation was used in figuring its adjusted basis in your hands) generally is the amount to use in figuring the part of the gain to be reported as ordinary income. Freetaxusa com If you can show that the deduction allowed for any tax year was less than the amount allowable, the lesser figure will be the depreciation adjustment for figuring additional depreciation. Freetaxusa com Retired or demolished property. Freetaxusa com   The adjustments reflected in adjusted basis generally do not include deductions for depreciation on retired or demolished parts of section 1250 property unless these deductions are reflected in the basis of replacement property that is section 1250 property. Freetaxusa com Example. Freetaxusa com A wing of your building is totally destroyed by fire. Freetaxusa com The depreciation adjustments figured in the adjusted basis of the building after the wing is destroyed do not include any deductions for depreciation on the destroyed wing unless it is replaced and the adjustments for depreciation on it are reflected in the basis of the replacement property. Freetaxusa com Figuring straight line depreciation. Freetaxusa com   The useful life and salvage value you would have used to figure straight line depreciation are the same as those used under the depreciation method you actually used. Freetaxusa com If you did not use a useful life under the depreciation method actually used (such as with the units-of-production method) or if you did not take salvage value into account (such as with the declining balance method), the useful life or salvage value for figuring what would have been the straight line depreciation is the useful life and salvage value you would have used under the straight line method. Freetaxusa com   Salvage value and useful life are not used for the ACRS method of depreciation. Freetaxusa com Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. Freetaxusa com   The straight line method is applied without any basis reduction for the investment credit. Freetaxusa com Property held by lessee. Freetaxusa com   If a lessee makes a leasehold improvement, the lease period for figuring what would have been the straight line depreciation adjustments includes all renewal periods. Freetaxusa com This inclusion of the renewal periods cannot extend the lease period taken into account to a period that is longer than the remaining useful life of the improvement. Freetaxusa com The same rule applies to the cost of acquiring a lease. Freetaxusa com   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. Freetaxusa com However, the inclusion of renewal periods cannot extend the lease by more than two-thirds of the period that was the basis on which the actual depreciation adjustments were allowed. Freetaxusa com Applicable Percentage The applicable percentage used to figure the ordinary income because of additional depreciation depends on whether the real property you disposed of is nonresidential real property, residential rental property, or low-income housing. Freetaxusa com The percentages for these types of real property are as follows. Freetaxusa com Nonresidential real property. Freetaxusa com   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. Freetaxusa com For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. Freetaxusa com Residential rental property. Freetaxusa com   For residential rental property (80% or more of the gross income is from dwelling units) other than low-income housing, the applicable percentage for periods after 1975 is 100%. Freetaxusa com The percentage for periods before 1976 is zero. Freetaxusa com Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. Freetaxusa com Low-income housing. Freetaxusa com    Low-income housing includes all the following types of residential rental property. Freetaxusa com Federally assisted housing projects if 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. Freetaxusa com Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. Freetaxusa com 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 provisions of state or local laws that authorize similar subsidies for low-income families. Freetaxusa com Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. Freetaxusa com   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. Freetaxusa com If you have held low-income housing at least 16 years and 8 months, the percentage is zero and no ordinary income will result from its disposition. Freetaxusa com Foreclosure. Freetaxusa com   If low-income housing is disposed of because of foreclosure or similar proceedings, the monthly applicable percentage reduction is figured as if you disposed of the property on the starting date of the proceedings. Freetaxusa com Example. Freetaxusa com On June 1, 2001, you acquired low-income housing property. Freetaxusa com On April 3, 2012 (130 months after the property was acquired), foreclosure proceedings were started on the property and on December 3, 2013 (150 months after the property was acquired), the property was disposed of as a result of the foreclosure proceedings. Freetaxusa com The property qualifies for a reduced applicable percentage because it was held more than 100 full months. Freetaxusa com The applicable percentage reduction is 30% (130 months minus 100 months) rather than 50% (150 months minus 100 months) because it does not apply after April 3, 2012, the starting date of the foreclosure proceedings. Freetaxusa com Therefore, 70% of the additional depreciation is treated as ordinary income. Freetaxusa com Holding period. Freetaxusa com   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. Freetaxusa com For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. Freetaxusa com If you sold it on January 2, 2013, the holding period is exactly 192 full months. Freetaxusa com The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. Freetaxusa com Holding period for constructed, reconstructed, or erected property. Freetaxusa com   The holding period used to figure the applicable percentage for low-income housing you constructed, reconstructed, or erected starts on the first day of the month it is placed in service in a trade or business, in an activity for the production of income, or in a personal activity. Freetaxusa com Property acquired by gift or received in a tax-free transfer. Freetaxusa com   For low-income housing you acquired by gift or in a tax-free transfer the basis of which is figured by reference to the basis in the hands of the transferor, the holding period for the applicable percentage includes the holding period of the transferor. Freetaxusa com   If the adjusted basis of the property in your hands just after acquiring it is more than its adjusted basis to the transferor just before transferring it, the holding period of the difference is figured as if it were a separate improvement. Freetaxusa com See Low-Income Housing With Two or More Elements, next. Freetaxusa com Low-Income Housing With Two or More Elements If you dispose of low-income housing property that has two or more separate elements, the applicable percentage used to figure ordinary income because of additional depreciation may be different for each element. Freetaxusa com The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. Freetaxusa com The following are the types of separate elements. Freetaxusa com A separate improvement (defined below). Freetaxusa com The basic section 1250 property plus improvements not qualifying as separate improvements. Freetaxusa com The units placed in service at different times before all the section 1250 property is finished. Freetaxusa com For example, this happens when a taxpayer builds an apartment building of 100 units and places 30 units in service (available for renting) on January 4, 2011, 50 on July 18, 2011, and the remaining 20 on January 18, 2012. Freetaxusa com As a result, the apartment house consists of three separate elements. Freetaxusa com The 36-month test for separate improvements. Freetaxusa com   A separate improvement is any improvement (qualifying under The 1-year test, below) added to the capital account of the property, but only if the total of the improvements during the 36-month period ending on the last day of any tax year is more than the greatest of the following amounts. Freetaxusa com Twenty-five percent of the adjusted basis of the property at the start of the first day of the 36-month period, or the first day of the holding period of the property, whichever is later. Freetaxusa com Ten percent of the unadjusted basis (adjusted basis plus depreciation and amortization adjustments) of the property at the start of the period determined in (1). Freetaxusa com $5,000. Freetaxusa com The 1-year test. Freetaxusa com   An addition to the capital account for any tax year (including a short tax year) is treated as an improvement only if the sum of all additions for the year is more than the greater of $2,000 or 1% of the unadjusted basis of the property. Freetaxusa com The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. Freetaxusa com In applying the 36-month test, improvements in any one of the 3 years are omitted entirely if the total improvements in that year do not qualify under the 1-year test. Freetaxusa com Example. Freetaxusa com The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. Freetaxusa com During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. Freetaxusa com The sum of the improvements, $2,300, is less than 1% of the unadjusted basis ($3,000), so the improvements do not satisfy the 1-year test and are not treated as improvements for the 36-month test. Freetaxusa com However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. Freetaxusa com Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. Freetaxusa com Addition to the capital account. Freetaxusa com   Any addition to the capital account made after the initial acquisition or completion of the property by you or any person who held the property during a period included in your holding period is to be considered when figuring the total amount of separate improvements. Freetaxusa com   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. Freetaxusa com For example, if a roof with an adjusted basis of $20,000 is replaced by a new roof costing $50,000, the improvement is the gross addition to the account, $50,000, and not the net addition of $30,000. Freetaxusa com The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. Freetaxusa com The status of an addition to the capital account is not affected by whether it is treated as a separate property for determining depreciation deductions. Freetaxusa com   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. Freetaxusa com If the expense item property and the basic property are sold in two separate transactions, the entire section 1250 property is treated as consisting of two distinct properties. Freetaxusa com Unadjusted basis. Freetaxusa com   In figuring the unadjusted basis as of a certain date, include the actual cost of all previous additions to the capital account plus those that did not qualify as separate improvements. Freetaxusa com However, the cost of components retired before that date is not included in the unadjusted basis. Freetaxusa com Holding period. Freetaxusa com   Use the following guidelines for figuring the applicable percentage for property with two or more elements. Freetaxusa com The holding period of a separate element placed in service before the entire section 1250 property is finished starts on the first day of the month that the separate element is placed in service. Freetaxusa com The holding period for each separate improvement qualifying as a separate element starts on the day after the improvement is acquired or, for improvements constructed, reconstructed, or erected, the first day of the month that the improvement is placed in service. Freetaxusa com The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. Freetaxusa com   If an improvement by itself does not meet the 1-year test (greater of $2,000 or 1% of the unadjusted basis), but it does qualify as a separate improvement that is a separate element (when grouped with other improvements made during the tax year), determine the start of its holding period as follows. Freetaxusa com Use the first day of a calendar month that is closest to the middle of the tax year. Freetaxusa com If there are two first days of a month that are equally close to the middle of the year, use the earlier date. Freetaxusa com Figuring ordinary income attributable to each separate element. Freetaxusa com   Figure ordinary income attributable to each separate element as follows. Freetaxusa com   Step 1. Freetaxusa com Divide the element's additional depreciation after 1975 by the sum of all the elements' additional depreciation after 1975 to determine the percentage used in Step 2. Freetaxusa com   Step 2. Freetaxusa com Multiply the percentage figured in Step 1 by the lesser of the additional depreciation after 1975 for the entire property or the gain from disposition of the entire property (the difference between the fair market value or amount realized and the adjusted basis). Freetaxusa com   Step 3. Freetaxusa com Multiply the result in Step 2 by the applicable percentage for the element. Freetaxusa com Example. Freetaxusa com You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. Freetaxusa com The property consisted of four elements (W, X, Y, and Z). Freetaxusa com Step 1. Freetaxusa com The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. Freetaxusa com The sum of the additional depreciation for all the elements is $24,000. Freetaxusa com Step 2. Freetaxusa com The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. Freetaxusa com Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). Freetaxusa com $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. Freetaxusa com Step 3. Freetaxusa com The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. Freetaxusa com From these facts, the sum of the ordinary income for each element is figured as follows. Freetaxusa com   Step 1 Step 2 Step 3 Ordinary Income W . Freetaxusa com 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . Freetaxusa com 25 5,000 92% 4,600 Z . Freetaxusa com 25 5,000 100% 5,000 Sum of ordinary income of separate elements $16,400 Gain Treated as Ordinary Income To find what part of the gain from the disposition of section 1250 property is treated as ordinary income, follow these steps. Freetaxusa com In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. Freetaxusa com In any other disposition of the property, figure the fair market value that is more than the adjusted basis. Freetaxusa com Figure the additional depreciation for the periods after 1975. Freetaxusa com Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. Freetaxusa com Stop here if this is residential rental property or if (2) is equal to or more than (1). Freetaxusa com This is the gain treated as ordinary income because of additional depreciation. Freetaxusa com Subtract (2) from (1). Freetaxusa com Figure the additional depreciation for periods after 1969 but before 1976. Freetaxusa com Add the lesser of (4) or (5) to the result in (3). Freetaxusa com This is the gain treated as ordinary income because of additional depreciation. Freetaxusa com A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. Freetaxusa com Use Form 4797, Part III, to figure the ordinary income part of the gain. Freetaxusa com Corporations. Freetaxusa com   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. Freetaxusa com The additional amount treated as ordinary income is 20% of the excess of the amount that would have been ordinary income if the property were section 1245 property over the amount treated as ordinary income under section 1250. Freetaxusa com Report this additional ordinary income on Form 4797, Part III, line 26 (f). Freetaxusa com Installment Sales If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. Freetaxusa com This applies even if no payments are received in that year. Freetaxusa com If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. Freetaxusa com For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. Freetaxusa com If you dispose of more than one asset in a single transaction, you must figure the gain on each asset separately so that it may be properly reported. Freetaxusa com To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Freetaxusa com Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. Freetaxusa com For a detailed discussion of installment sales, see Publication 537. Freetaxusa com Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. Freetaxusa com However, if the person who receives it (donee) sells or otherwise disposes of the property in a disposition subject to recapture, the donee must take into account the depreciation you deducted in figuring the gain to be reported as ordinary income. Freetaxusa com For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. Freetaxusa com See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. Freetaxusa com Part gift and part sale or exchange. Freetaxusa com   If you transfer depreciable personal property or real property for less than its fair market value in a transaction considered to be partly a gift and partly a sale or exchange and you have a gain because the amount realized is more than your adjusted basis, you must report ordinary income (up to the amount of gain) to recapture depreciation. Freetaxusa com If the depreciation (additional depreciation, if section 1250 property) is more than the gain, the balance is carried over to the transferee to be taken into account on any later disposition of the property. Freetaxusa com However, see Bargain sale to charity, later. Freetaxusa com Example. Freetaxusa com You transferred depreciable personal property to your son for $20,000. Freetaxusa com When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. Freetaxusa com You took depreciation of $30,000. Freetaxusa com You are considered to have made a gift of $20,000, the difference between the $40,000 fair market value and the $20,000 sale price to your son. Freetaxusa com You have a taxable gain on the transfer of $10,000 ($20,000 sale price minus $10,000 adjusted basis) that must be reported as ordinary income from depreciation. Freetaxusa com You report $10,000 of your $30,000 depreciation as ordinary income on the transfer of the property, so the remaining $20,000 depreciation is carried over to your son for him to take into account on any later disposition of the property. Freetaxusa com Gift to charitable organization. Freetaxusa com   If you give property to a charitable organization, you figure your deduction for your charitable contribution by reducing the fair market value of the property by the ordinary income and short-term capital gain that would have resulted had you sold the property at its fair market value at the time of the contribution. Freetaxusa com Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. Freetaxusa com   You also may have to reduce the fair market value of the contributed property by the long-term capital gain (including any section 1231 gain) that would have resulted had the property been sold. Freetaxusa com For more information, see Giving Property That Has Increased in Value in Publication 526. Freetaxusa com Bargain sale to charity. Freetaxusa com   If you transfer section 1245 or section 1250 property to a charitable organization for less than its fair market value and a deduction for the contribution part of the transfer is allowable, your ordinary income from depreciation is figured under different rules. Freetaxusa com First, figure the ordinary income as if you had sold the property at its fair market value. Freetaxusa com Then, allocate that amount between the sale and the contribution parts of the transfer in the same proportion that you allocated your adjusted basis in the property to figure your gain. Freetaxusa com See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. Freetaxusa com Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. Freetaxusa com Example. Freetaxusa com You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. Freetaxusa com Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. Freetaxusa com If you had sold the property at its fair market value, your ordinary income would have been $5,000. Freetaxusa com Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). Freetaxusa com Transfers at Death When a taxpayer dies, no gain is reported on depreciable personal property or real property transferred to his or her estate or beneficiary. Freetaxusa com For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. Freetaxusa com However, if the decedent disposed of the property while alive and, because of his or her method of accounting or for any other reason, the gain from the disposition is reportable by the estate or beneficiary, it must be reported in the same way the decedent would have had to report it if he or she were still alive. Freetaxusa com Ordinary income due to depreciation must be reported on a transfer from an executor, administrator, or trustee to an heir, beneficiary, or other individual if the transfer is a sale or exchange on which gain is realized. Freetaxusa com Example 1. Freetaxusa com Janet Smith owned depreciable property that, upon her death, was inherited by her son. Freetaxusa com No ordinary income from depreciation is reportable on the transfer, even though the value used for estate tax purposes is more than the adjusted basis of the property to Janet when she died. Freetaxusa com However, if she sold the property before her death and realized a gain and if, because of her method of accounting, the proceeds from the sale are income in respect of a decedent reportable by her son, he must report ordinary income from depreciation. Freetaxusa com Example 2. Freetaxusa com The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. Freetaxusa com If the property had a value of $9,000 at the date used for estate tax valuation purposes, the $1,000 increase in value to the date of distribution is a gain realized by the trust. Freetaxusa com Ordinary income from depreciation must be reported by the trust on the transfer. Freetaxusa com Like-Kind Exchanges and Involuntary Conversions A like-kind exchange of your depreciable property or an involuntary conversion of the property into similar or related property will not result in your having to report ordinary income from depreciation unless money or property other than like-kind, similar, or related property is also received in the transaction. Freetaxusa com For information on like-kind exchanges and involuntary conversions, see chapter 1. Freetaxusa com Depreciable personal property. Freetaxusa com   If you have a gain from either a like-kind exchange or an involuntary conversion of your depreciable personal property, the amount to be reported as ordinary income from depreciation is the amount figured under the rules explained earlier (see Section 1245 Property), limited to the sum of the following amounts. Freetaxusa com The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. Freetaxusa com The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. Freetaxusa com Example 1. Freetaxusa com You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. Freetaxusa com The old machine cost you $5,000 two years ago. Freetaxusa com You took depreciation deductions of $3,950. Freetaxusa com Even though you deducted depreciation of $3,950, the $310 gain ($1,360 trade-in allowance minus $1,050 adjusted basis) is not reported because it is postponed under the rules for like-kind exchanges and you received only depreciable personal property in the exchange. Freetaxusa com Example 2. Freetaxusa com You bought office machinery for $1,500 two years ago and deducted $780 depreciation. Freetaxusa com This year a fire destroyed the machinery and you received $1,200 from your fire insurance, realizing a gain of $480 ($1,200 − $720 adjusted basis). Freetaxusa com You choose to postpone reporting gain, but replacement machinery cost you only $1,000. Freetaxusa com Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. Freetaxusa com All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. Freetaxusa com Example 3. Freetaxusa com A fire destroyed office machinery you bought for $116,000. Freetaxusa com The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. Freetaxusa com You received a $117,000 insurance payment, realizing a gain of $92,640. Freetaxusa com You immediately spent $105,000 of the insurance payment for replacement machinery and $9,000 for stock that qualifies as replacement property and you choose to postpone reporting the gain. Freetaxusa com $114,000 of the $117,000 insurance payment was used to buy replacement property, so the gain that must be included in income under the rules for involuntary conversions is the part not spent, or $3,000. Freetaxusa com The part of the insurance payment ($9,000) used to buy the nondepreciable property (the stock) also must be included in figuring the gain from depreciation. Freetaxusa com The amount you must report as ordinary income on the transaction is $12,000, figured as follows. Freetaxusa com 1) Gain realized on the transaction ($92,640) limited to depreciation ($91,640) $91,640 2) Gain includible in income (amount not spent) 3,000     Plus: fair market value of property other than depreciable personal property (the stock) 9,000 12,000 Amount reportable as ordinary income (lesser of (1) or (2)) $12,000   If, instead of buying $9,000 in stock, you bought $9,000 worth of depreciable personal property similar or related in use to the destroyed property, you would only report $3,000 as ordinary income. Freetaxusa com Depreciable real property. Freetaxusa com   If you have a gain from either a like-kind exchange or involuntary conversion of your depreciable real property, ordinary income from additional depreciation is figured under the rules explained earlier (see Section 1250 Property), limited to the greater of the following amounts. Freetaxusa com The gain that must be reported under the rules for like-kind exchanges or involuntary conversions plus the fair market value of stock bought as replacement property in acquiring control of a corporation. Freetaxusa com The gain you would have had to report as ordinary income from additional depreciation had the transaction been a cash sale minus the cost (or fair market value in an exchange) of the depreciable real property acquired. Freetaxusa com   The ordinary income not reported for the year of the disposition is carried over to the depreciable real property acquired in the like-kind exchange or involuntary conversion as additional depreciation from the property disposed of. Freetaxusa com Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. Freetaxusa com Example. Freetaxusa com The state paid you $116,000 when it condemned your depreciable real property for public use. Freetaxusa com You bought other real property similar in use to the property condemned for $110,000 ($15,000 for depreciable real property and $95,000 for land). Freetaxusa com You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. Freetaxusa com You choose to postpone reporting the gain. Freetaxusa com If the transaction had been a sale for cash only, under the rules described earlier, $20,000 would have been reportable as ordinary income because of additional depreciation. Freetaxusa com The ordinary income to be reported is $6,000, which is the greater of the following amounts. Freetaxusa com The gain that must be reported under the rules for involuntary conversions, $1,000 ($116,000 − $115,000) plus the fair market value of stock bought as qualified replacement property, $5,000, for a total of $6,000. Freetaxusa com The gain you would have had to report as ordinary income from additional depreciation ($20,000) had this transaction been a cash sale minus the cost of the depreciable real property bought ($15,000), or $5,000. Freetaxusa com   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. Freetaxusa com Basis of property acquired. Freetaxusa com   If the ordinary income you have to report because of additional depreciation is limited, the total basis of the property you acquired is its fair market value (its cost, if bought to replace property involuntarily converted into money) minus the gain postponed. Freetaxusa com   If you acquired more than one item of property, allocate the total basis among the properties in proportion to their fair market value (their cost, in an involuntary conversion into money). Freetaxusa com However, if you acquired both depreciable real property and other property, allocate the total basis as follows. Freetaxusa com Subtract the ordinary income because of additional depreciation that you do not have to report from the fair market value (or cost) of the depreciable real property acquired. Freetaxusa com Add the fair market value (or cost) of the other property acquired to the result in (1). Freetaxusa com Divide the result in (1) by the result in (2). Freetaxusa com Multiply the total basis by the result in (3). Freetaxusa com This is the basis of the depreciable real property acquired. Freetaxusa com If you acquired more than one item of depreciable real property, allocate this basis amount among the properties in proportion to their fair market value (or cost). Freetaxusa com Subtract the result in (4) from the total basis. Freetaxusa com This is the basis of the other property acquired. Freetaxusa com If you acquired more than one item of other property, allocate this basis amount among the properties in proportion to their fair market value (or cost). Freetaxusa com Example 1. Freetaxusa com In 1988, low-income housing property that you acquired and placed in service in 1983 was destroyed by fire and you received a $90,000 insurance payment. Freetaxusa com The property's adjusted basis was $38,400, with additional depreciation of $14,932. Freetaxusa com On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. Freetaxusa com Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). Freetaxusa com You chose to postpone reporting the gain under the involuntary conversion rules. Freetaxusa com Under the rules for depreciation recapture on real property, the ordinary gain was $14,932, but you did not have to report any of it because of the limit for involuntary conversions. Freetaxusa com The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. Freetaxusa com The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. Freetaxusa com If you sold the property in 2013, your holding period for figuring the applicable percentage of additional depreciation to report as ordinary income will have begun December 2, 1988, the day after you acquired the property. Freetaxusa com Example 2. Freetaxusa com John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. Freetaxusa com He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. Freetaxusa com He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. Freetaxusa com Of this gain, $10,000 is ordinary income from additional depreciation but is not reported because of the limit for involuntary conversions of depreciable real property. Freetaxusa com The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. Freetaxusa com The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. Freetaxusa com The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. Freetaxusa com The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. Freetaxusa com 4. Freetaxusa com The basis of the depreciable real property is $12,000. Freetaxusa com This is the $30,000 total basis multiplied by the 0. Freetaxusa com 4 figured in (3). Freetaxusa com The basis of the other property (land) is $18,000. Freetaxusa com This is the $30,000 total basis minus the $12,000 figured in (4). Freetaxusa com The ordinary income that is not reported ($10,000) is carried over as additional depreciation to the depreciable real property that was bought and may be taxed as ordinary income on a later disposition. Freetaxusa com Multiple Properties If you dispose of depreciable property and other property in one transaction and realize a gain, you must allocate the amount realized between the two types of property in proportion to their respective fair market values to figure the part of your gain to be reported as ordinary income from depreciation. Freetaxusa com Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. Freetaxusa com See chapter 2. Freetaxusa com In general, if a buyer and seller have adverse interests as to the allocation of the amount realized between the depreciable property and other property, any arm's length agreement between them will establish the allocation. Freetaxusa com In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. Freetaxusa com These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. Freetaxusa com The comparison should take into account all the following facts and circumstances. Freetaxusa com The original cost and reproduction cost of construction, erection, or production. Freetaxusa com The remaining economic useful life. Freetaxusa com The state of obsolescence. Freetaxusa com The anticipated expenditures required to maintain, renovate, or modernize the properties. Freetaxusa com Like-kind exchanges and involuntary conversions. Freetaxusa com   If you dispose of and acquire depreciable personal property and other property (other than depreciable real property) in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. Freetaxusa com The amount allocated to the depreciable personal property disposed of is treated as consisting of, first, the fair market value of the depreciable personal property acquired and, second (to the extent of any remaining balance), the fair market value of the other property acquired. Freetaxusa com The amount allocated to the other property disposed of is treated as consisting of the fair market value of all property acquired that has not already been taken into account. Freetaxusa com   If you dispose of and acquire depreciable real property and other property in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. Freetaxusa com The amount allocated to each of the three types of property (depreciable real property, depreciable personal property, or other property) disposed of is treated as consisting of, first, the fair market value of that type of property acquired and, second (to the extent of any remaining balance), any excess fair market value of the other types of property acquired. Freetaxusa com If the excess fair market value is more than the remaining balance of the amount realized and is from both of the other two types of property, you can apply the unallocated amount in any manner you choose. Freetaxusa com Example. Freetaxusa com A fire destroyed your property with a total fair market value of $50,000. Freetaxusa com It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. Freetaxusa com You received an insurance payment of $40,000 and immediately used it with $10,000 of your own funds (for a total of $50,000) to buy machinery with a fair market value of $15,000 and nondepreciable property with a fair market value of $35,000. Freetaxusa com The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. Freetaxusa com You choose to postpone reporting your gain from the involuntary conversion. Freetaxusa com You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. Freetaxusa com The $40,000 insurance payment must be allocated between the machinery and the other property destroyed in proportion to the fair market value of each. Freetaxusa com The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. Freetaxusa com The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. Freetaxusa com Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. Freetaxusa com The $24,000 allocated to the machinery disposed of is treated as consisting of the $15,000 fair market value of the replacement machinery bought and $9,000 of the fair market value of other property bought in the transaction. Freetaxusa com All $16,000 allocated to the other property disposed of is treated as consisting of the fair market value of the other property that was bought. Freetaxusa com Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. Freetaxusa com However, the amount you must report as ordinary income is limited to the $9,000 included in the amount realized for the machinery that represents the fair market value of property other than the depreciable property you bought. Freetaxusa com Prev  Up  Next   Home   More Online Publications