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Highest state taxes Publication 523 - Main Content Table of Contents Main HomeVacant land. Highest state taxes Factors used to determine main home. Highest state taxes Figuring Gain or LossSelling Price Amount Realized Adjusted Basis Amount of Gain or Loss Dispositions Other Than Sales Determining BasisCost As Basis Basis Other Than Cost Adjusted Basis Excluding the GainMaximum Exclusion Ownership and Use Tests Reduced Maximum Exclusion Nonqualified Use Business Use or Rental of HomeUnrecaptured section 1250 gain. Highest state taxes Property Used Partly for Business or Rental Reporting the SaleSeller-financed mortgage. Highest state taxes Individual taxpayer identification number (ITIN). Highest state taxes More information. Highest state taxes Comprehensive Examples Special SituationsException for sales to related persons. Highest state taxes Deducting Taxes in the Year of SaleForm 1099-S. Highest state taxes More information. Highest state taxes Recapturing (Paying Back) a Federal Mortgage Subsidy Recapture of First-Time Homebuyer CreditExample. Highest state taxes Worksheets How To Get Tax HelpLow Income Taxpayer Clinics Main Home This section explains the term “main home. Highest state taxes ” Usually, the home you live in most of the time is your main home and can be a: House, Houseboat, Mobile home, Cooperative apartment, or Condominium. Highest state taxes To exclude gain under the rules in this publication, you in most cases must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Highest state taxes Land. Highest state taxes   If you sell the land on which your main home is located, but not the house itself, you cannot exclude any gain you have from the sale of the land. Highest state taxes Example. Highest state taxes You buy a piece of land and move your main home to it. Highest state taxes Then, you sell the land on which your main home was located. Highest state taxes This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land. Highest state taxes Vacant land. Highest state taxes   The sale of vacant land is not a sale of your main home unless: The vacant land is adjacent to land containing your home, You owned and used the vacant land as part of your main home, The separate sale of your home satisfies the requirements for exclusion and occurs within 2 years before or 2 years after the date of the sale of the vacant land, and The other requirements for excluding gain from the sale of a main home have been satisfied with respect to the vacant land. Highest state taxes If these requirements are met, the sale of the home and the sale of the vacant land are treated as one sale and only one maximum exclusion can be applied to any gain. Highest state taxes See Excluding the Gain , later. Highest state taxes The destruction of your home is treated as a sale of your home. Highest state taxes As a result, you may be able to meet these requirements if you sell vacant land used as a part of your main home within 2 years from the date of the destruction of your main home. Highest state taxes For information, see Publication 547. Highest state taxes More than one home. Highest state taxes   If you have more than one home, you can exclude gain only from the sale of your main home. Highest state taxes You must include in income the gain from the sale of any other home. Highest state taxes If you have two homes and live in each of them, your main home is ordinarily the one you live in most of the time during the year. Highest state taxes Example 1. Highest state taxes You own two homes, one in New York and one in Florida. Highest state taxes From 2009 through 2013, you live in the New York home for 7 months and in the Florida residence for 5 months of each year. Highest state taxes In the absence of facts and circumstances indicating otherwise, the New York home is your main home. Highest state taxes You would be eligible to exclude the gain from the sale of the New York home but not of the Florida home in 2013. Highest state taxes Example 2. Highest state taxes You own a house, but you live in another house that you rent. Highest state taxes The rented house is your main home. Highest state taxes Example 3. Highest state taxes You own two homes, one in Virginia and one in New Hampshire. Highest state taxes In 2009 and 2010, you lived in the Virginia home. Highest state taxes In 2011 and 2012, you lived in the New Hampshire home. Highest state taxes In 2013, you lived again in the Virginia home. Highest state taxes Your main home in 2009, 2010, and 2013 is the Virginia home. Highest state taxes Your main home in 2011 and 2012 is the New Hampshire home. Highest state taxes You would be eligible to exclude gain from the sale of either home (but not both) in 2013. Highest state taxes Factors used to determine main home. Highest state taxes   In addition to the amount of time you live in each home, other factors are relevant in determining which home is your main home. Highest state taxes Those factors include the following. Highest state taxes Your place of employment. Highest state taxes The location of your family members' main home. Highest state taxes Your mailing address for bills and correspondence. Highest state taxes The address listed on your: Federal and state tax returns, Driver's license, Car registration, and Voter registration card. Highest state taxes The location of the banks you use. Highest state taxes The location of recreational clubs and religious organizations of which you are a member. Highest state taxes Property used partly as your main home. Highest state taxes   If you use only part of the property as your main home, the rules discussed in this publication apply only to the gain or loss on the sale of that part of the property. Highest state taxes For details, see Business Use or Rental of Home , later. Highest state taxes Figuring Gain or Loss To figure the gain or loss on the sale of your main home, you must know the selling price, the amount realized, and the adjusted basis. Highest state taxes Subtract the adjusted basis from the amount realized to get your gain or loss. Highest state taxes     Selling price     − Selling expenses       Amount realized     − Adjusted basis       Gain or loss   Gain. Highest state taxes   Gain is the excess of the amount realized over the adjusted basis of the property. Highest state taxes Loss. Highest state taxes   Loss is the excess of the adjusted basis over the amount realized for the property. Highest state taxes Selling Price The selling price is the total amount you receive for your home. Highest state taxes It includes money and the fair market value of any other property or any other services you receive and all notes, mortgages or other debts assumed by the buyer as part of the sale. Highest state taxes Personal property. Highest state taxes   The selling price of your home does not include amounts you received for personal property sold with your home. Highest state taxes Personal property is property that is not a permanent part of the home. Highest state taxes Examples are furniture, draperies, rugs, a washer and dryer, and lawn equipment. Highest state taxes Separately stated amounts you received for these items should not be shown on Form 1099-S (discussed later). Highest state taxes Any gains from sales of personal property must be included in your income, but not as part of the sale of your home. Highest state taxes Payment by employer. Highest state taxes   You may have to sell your home because of a job transfer. Highest state taxes If your employer pays you for a loss on the sale or for your selling expenses, do not include the payment as part of the selling price. Highest state taxes Your employer will include it as wages in box 1 of your Form W-2 and you will include it in your income on Form 1040, line 7, or on Form 1040NR, line 8. Highest state taxes Option to buy. Highest state taxes   If you grant an option to buy your home and the option is exercised, add the amount you receive for the option to the selling price of your home. Highest state taxes If the option is not exercised, you must report the amount as ordinary income in the year the option expires. Highest state taxes Report this amount on Form 1040, line 21, or on Form 1040NR, line 21. Highest state taxes Form 1099-S. Highest state taxes   If you received Form 1099-S, box 2 (gross proceeds) should show the total amount you received for your home. Highest state taxes   However, box 2 will not include the fair market value of any services or property other than cash or notes you received or will receive. Highest state taxes Instead, box 4 will be checked to indicate your receipt or expected receipt of these items. Highest state taxes Amount Realized The amount realized is the selling price minus selling expenses. Highest state taxes Selling expenses. Highest state taxes   Selling expenses include: Commissions, Advertising fees, Legal fees, and Loan charges paid by the seller, such as loan placement fees or “points. Highest state taxes ” Adjusted Basis While you owned your home, you may have made adjustments (increases or decreases) to the basis. Highest state taxes This adjusted basis must be determined before you can figure gain or loss on the sale of your home. Highest state taxes For information on how to figure your home's adjusted basis, see Determining Basis , later. Highest state taxes Amount of Gain or Loss To figure the amount of gain or loss, compare the amount realized to the adjusted basis. Highest state taxes Gain on sale. Highest state taxes   If the amount realized is more than the adjusted basis, the difference is a gain and, except for any part you can exclude, generally is taxable. Highest state taxes Loss on sale. Highest state taxes   If the amount realized is less than the adjusted basis, the difference is a loss. Highest state taxes Generally, a loss on the sale of your main home cannot be deducted. Highest state taxes Jointly owned home. Highest state taxes   If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer. Highest state taxes Separate returns. Highest state taxes   If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. Highest state taxes Your ownership interest is generally determined by state law. Highest state taxes Joint owners not married. Highest state taxes   If you and a joint owner other than your spouse sell your jointly owned home, each of you must figure your own gain or loss according to your ownership interest in the home. Highest state taxes Each of you applies the rules discussed in this publication on an individual basis. Highest state taxes Dispositions Other Than Sales Some special rules apply to other dispositions of your main home. Highest state taxes Foreclosure or repossession. Highest state taxes   If your home was foreclosed on or repossessed, you have a disposition. Highest state taxes See Publication 4681 to determine if you have ordinary income, gain, or loss. Highest state taxes More information. Highest state taxes   If part of a home is used for business or rental purposes, see Foreclosures and Repossessions in chapter 1 of Publication 544 for more information. Highest state taxes Publication 544 has examples of how to figure gain or loss on a foreclosure or repossession. Highest state taxes Abandonment. Highest state taxes   If you abandon your home, see Publication 4681 to determine if you have ordinary income, gain, or loss. Highest state taxes Trading (exchanging) homes. Highest state taxes   If you trade your home for another home, treat the trade as a sale and a purchase. Highest state taxes Example. Highest state taxes You owned and lived in a home with an adjusted basis of $41,000. Highest state taxes A real estate dealer accepted your old home as a trade-in and allowed you $50,000 toward a new home priced at $80,000. Highest state taxes This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 − $41,000). Highest state taxes If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, your sales price would still be $50,000 (the $27,000 trade-in allowed plus the $23,000 mortgage assumed). Highest state taxes Transfer to spouse. Highest state taxes   If you transfer your home to your spouse or you transfer it to your former spouse incident to your divorce, you in most cases have no gain or loss (unless the Exception, discussed next, applies). Highest state taxes This is true even if you receive cash or other consideration for the home. Highest state taxes As a result, the rules explained in this publication do not apply. Highest state taxes   If you owned your home jointly with your spouse and transfer your interest in the home to your spouse, or to your former spouse incident to your divorce, the same rule applies. Highest state taxes You have no gain or loss. Highest state taxes Exception. Highest state taxes   These transfer rules do not apply if your spouse or former spouse is a nonresident alien. Highest state taxes In that case, you generally will have a gain or loss. Highest state taxes More information. Highest state taxes    See Property Settlements in Publication 504, Divorced or Separated Individuals, for more information. Highest state taxes Involuntary conversion. Highest state taxes   You have a disposition when your home is destroyed or condemned and you receive other property or money in payment, such as insurance or a condemnation award. Highest state taxes This is treated as a sale and you may be able to exclude all or part of any gain from the destruction or condemnation of your home, as explained later under Special Situations (see Home destroyed or condemned ). Highest state taxes Determining Basis You need to know your basis in your home to figure any gain or loss when you sell it. Highest state taxes Your basis in your home is determined by how you got the home. Highest state taxes Generally, your basis is its cost if you bought it or built it. Highest state taxes If you got it in some other way (inheritance, gift, etc. Highest state taxes ), your basis is generally either its fair market value when you received it or the adjusted basis of the previous owner. Highest state taxes While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. Highest state taxes The result of these adjustments is your home's adjusted basis, which is used to figure gain or loss on the sale of your home. Highest state taxes To figure your adjusted basis, you can use Worksheet 1, near the end of this publication. Highest state taxes Filled-in examples of that worksheet are included in the Comprehensive Examples , later. Highest state taxes Cost As Basis The cost of property is the amount you paid for it in cash, debt obligations, other property, or services. Highest state taxes Purchase. Highest state taxes   If you bought your home, your basis is its cost to you. Highest state taxes This includes the purchase price and certain settlement or closing costs. Highest state taxes In most cases, your purchase price includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller in payment for the home. Highest state taxes If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed later. Highest state taxes Seller-paid points. Highest state taxes   If the person who sold you your home paid points on your loan, you may have to reduce your home's basis by the amount of the points, as shown in the following chart. Highest state taxes    IF you bought your home. Highest state taxes . Highest state taxes . Highest state taxes THEN reduce your home's basis by the seller-paid points. Highest state taxes . Highest state taxes . Highest state taxes after 1990 but before April 4, 1994 only if you deducted them as home mortgage interest in the year paid. Highest state taxes after April 3, 1994 even if you did not deduct them. Highest state taxes Settlement fees or closing costs. Highest state taxes   When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. Highest state taxes You can include in your basis some of the settlement fees and closing costs you paid for buying the home, but not the fees and costs for getting a mortgage loan. Highest state taxes A fee paid for buying the home is any fee you would have had to pay even if you paid cash for the home (that is, without the need for financing). Highest state taxes   Settlement fees do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Highest state taxes   Some of the settlement fees or closing costs that you can include in your basis are: Abstract fees (abstract of title fees), Charges for installing utility services, Legal fees (including fees for the title search and preparing the sales contract and deed), Recording fees, Survey fees, Transfer or stamp taxes, Owner's title insurance, and Any amounts the seller owes that you agree to pay, such as: Certain real estate taxes (discussed later), Back interest, Recording or mortgage fees, Charges for improvements or repairs, and Sales commissions. Highest state taxes   Some settlement fees and closing costs you cannot include in your basis are: Fire insurance premiums, Rent for occupancy of the house before closing, Charges for utilities or other services related to occupancy of the house before closing, Any fee or cost that you deducted as a moving expense (allowed for certain fees and costs before 1994), Charges connected with getting a mortgage loan, such as: Mortgage insurance premiums (including funding fees connected with loans guaranteed by the Department of Veterans Affairs), Loan assumption fees, Cost of a credit report, Fee for an appraisal required by a lender, and Fees for refinancing a mortgage. Highest state taxes Real estate taxes. Highest state taxes   Real estate taxes for the year you bought your home may affect your basis, as shown in the following chart. Highest state taxes    IF. Highest state taxes . Highest state taxes . Highest state taxes AND. Highest state taxes . Highest state taxes . Highest state taxes THEN the taxes. Highest state taxes . Highest state taxes . Highest state taxes you pay taxes that the seller owed on the home up to the date of sale the seller does not reimburse you are added to the basis of your home. Highest state taxes the seller reimburses you do not affect the basis of your home. Highest state taxes the seller pays taxes for you (taxes owed beginning on the date of sale) you do not reimburse the seller are subtracted from the basis of your home. Highest state taxes you reimburse the seller do not affect the basis of your home. Highest state taxes Construction. Highest state taxes   If you contracted to have your house built on land you own, your basis is: The cost of the land, plus The amount it cost you to complete the house, including: The cost of labor and materials, Any amounts paid to a contractor, Any architect's fees, Building permit charges, Utility meter and connection charges, and Legal fees directly connected with building the house. Highest state taxes   Your cost includes your down payment and any debt such as a first or second mortgage or notes you gave the seller or builder. Highest state taxes It also includes certain settlement or closing costs. Highest state taxes You may have to reduce your basis by points the seller paid for you. Highest state taxes For more information, see Seller-paid points and Settlement fees or closing costs , earlier. Highest state taxes Built by you. Highest state taxes   If you built all or part of your house yourself, its basis is the total amount it cost you to complete it. Highest state taxes Do not include in the cost of the house: The value of your own labor, or The value of any other labor you did not pay for. Highest state taxes Temporary housing. Highest state taxes   If a builder gave you temporary housing while your home was being finished, you must reduce your basis by the part of the contract price that was for the temporary housing. Highest state taxes To figure the amount of the reduction, multiply the contract price by a fraction. Highest state taxes The numerator is the value of the temporary housing, and the denominator is the sum of the value of the temporary housing plus the value of the new home. Highest state taxes Cooperative apartment. Highest state taxes   If you are a tenant-stockholder in a cooperative housing corporation, your basis in the cooperative apartment used as your home is usually the cost of your stock in the corporation. Highest state taxes This may include your share of a mortgage on the apartment building. Highest state taxes Condominium. Highest state taxes   To determine your basis in a condominium apartment used as your home, use the same rules as for any other home. Highest state taxes Basis Other Than Cost You must use a basis other than cost, such as adjusted basis or fair market value, if you received your home as a gift, inheritance, a trade, or from your spouse. Highest state taxes These situations are discussed in the following pages. Highest state taxes Also, the instructions for Worksheet 1 (near the end of the publication) address each of these issues. Highest state taxes Other special rules may apply in certain situations. Highest state taxes If you converted the property, or some part of it, to business or rental use, see Property Changed to Business or Rental Use, in Publication 551. Highest state taxes Home received as gift. Highest state taxes   Use the following chart to find the basis of a home you received as a gift. Highest state taxes IF the donor's adjusted basis at the time of the gift was. Highest state taxes . Highest state taxes . Highest state taxes THEN your basis is. Highest state taxes . Highest state taxes . Highest state taxes more than the fair market value of the home at that time the same as the donor's adjusted basis at the time of the gift. Highest state taxes   Exception: If using the donor's adjusted basis results in a loss when you sell the home, you must use the fair market value of the home at the time of the gift as your basis. Highest state taxes If using the fair market value results in a gain, you have neither gain nor loss. Highest state taxes equal to or less than the fair market value at that time, and you received the gift before 1977 the smaller of the: • donor's adjusted basis, plus  any federal gift tax paid on  the gift, or • the home's fair market value  at the time of the gift. Highest state taxes equal to or less than the fair market value at that time, and you received the gift after 1976 the same as the donor's adjusted basis, plus the part of any federal gift tax paid that is due to the net increase in value of the home (explained next). Highest state taxes Fair market value. Highest state taxes   The fair market value of property at the time of the gift is the value of the property as appraised for purposes of the federal gift tax. Highest state taxes If the gift was not subject to the federal gift tax, the fair market value is the value as appraised for the purposes of a state gift tax. Highest state taxes Part of federal gift tax due to net increase in value. Highest state taxes   Figure the part of the federal gift tax paid that is due to the net increase in value of the home by multiplying the total federal gift tax paid by a fraction. Highest state taxes The numerator of the fraction is the net increase in the value of the home, and the denominator is the value of the home for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Highest state taxes The net increase in the value of the home is its fair market value minus the donor's adjusted basis immediately before the gift. Highest state taxes Home acquired from a decedent who died before or after 2010. Highest state taxes   If you inherited your home from a decedent who died before or after 2010, your basis is the fair market value of the property on the date of the decedent's death (or the later alternate valuation date chosen by the personal representative of the estate). Highest state taxes If an estate tax return was filed or required to be filed, the value of the property listed on the estate tax return is your basis. Highest state taxes If a federal estate tax return did not have to be filed, your basis in the home is the same as its appraised value at the date of death, for purposes of state inheritance or transmission taxes. Highest state taxes Surviving spouse. Highest state taxes   If you are a surviving spouse and you owned your home jointly, your basis in the home will change. Highest state taxes The new basis for the interest your spouse owned will be its fair market value on the date of death (or alternate valuation date). Highest state taxes The basis in your interest will remain the same. Highest state taxes Your new basis in the home is the total of these two amounts. Highest state taxes   If you and your spouse owned the home either as tenants by the entirety or as joint tenants with right of survivorship, you will each be considered to have owned one-half of the home. Highest state taxes Example. Highest state taxes Your jointly owned home (owned as joint tenants with right of survivorship) had an adjusted basis of $50,000 on the date of your spouse's death, and the fair market value on that date was $100,000. Highest state taxes Your new basis in the home is $75,000 ($25,000 for one-half of the adjusted basis plus $50,000 for one-half of the fair market value). Highest state taxes Community property. Highest state taxes   In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), each spouse is usually considered to own half of the community property. Highest state taxes When either spouse dies, the total fair market value of the community property becomes the basis of the entire property, including the part belonging to the surviving spouse. Highest state taxes For this to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. Highest state taxes   For more information about community property, see Publication 555, Community Property. Highest state taxes    If you are selling a home in which you acquired an interest from a decedent who died in 2010, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to determine your basis. Highest state taxes Home received as trade. Highest state taxes   If you acquired your home as a trade for other property, in most cases, the basis of your home is the fair market value (at the time of the trade) of the property you gave up. Highest state taxes If you traded one home for another, you have made a sale and purchase. Highest state taxes In that case, you may have a gain. Highest state taxes See Trading (exchanging) homes under Dispositions Other Than Sales, earlier, for an example of figuring the gain. Highest state taxes Home received from spouse. Highest state taxes   If you received your home from your spouse or from your former spouse incident to your divorce, your basis in the home depends on the date of the transfer. Highest state taxes Transfers after July 18, 1984. Highest state taxes   If you received the home after July 18, 1984, there was no gain or loss on the transfer. Highest state taxes In most cases, your basis in this home is the same as your spouse's (or former spouse's) adjusted basis just before you received it. Highest state taxes This rule applies even if you received the home in exchange for cash, the release of marital rights, the assumption of liabilities, or other considerations. Highest state taxes   If you owned a home jointly with your spouse and your spouse transferred his or her interest in the home to you, in most cases, your basis in the half interest received from your spouse is the same as your spouse's adjusted basis just before the transfer. Highest state taxes This also applies if your former spouse transferred his or her interest in the home to you incident to your divorce. Highest state taxes Your basis in the half interest you already owned does not change. Highest state taxes Your new basis in the home is the total of these two amounts. Highest state taxes Transfers before July 19, 1984. Highest state taxes   If you received your home before July 19, 1984, in exchange for your release of marital rights, in most cases, your basis in the home is generally its fair market value at the time you received it. Highest state taxes More information. Highest state taxes   For more information on property received from a spouse or former spouse, see Property Settlements in Publication 504. Highest state taxes Involuntary conversion. Highest state taxes   If your home is destroyed or condemned, you may receive insurance proceeds or a condemnation award. Highest state taxes If you acquired a replacement home with these proceeds, the basis is its cost decreased by any gain not recognized on the conversion under the rules explained in: Publication 547, in the case of a home that was destroyed, or Chapter 1 of Publication 544, in the case of a home that was condemned. Highest state taxes Example. Highest state taxes A fire destroyed your home that you owned and used for only 6 months. Highest state taxes The home had an adjusted basis of $80,000 and the insurance company paid you $130,000 for the loss. Highest state taxes Your gain is $50,000 ($130,000 − $80,000). Highest state taxes You bought a replacement home for $100,000. Highest state taxes The part of your gain that is taxable is $30,000 ($130,000 − $100,000), the unspent part of the payment from the insurance company. Highest state taxes The rest of the gain ($20,000) is not taxable, so that amount reduces your basis in the new home. Highest state taxes The basis of the new home is figured as follows. Highest state taxes Cost of replacement home $100,000 Minus: Gain not recognized 20,000 Basis of the replacement home $80,000 More information. Highest state taxes   For more information about basis, see Publication 551. Highest state taxes Adjusted Basis Adjusted basis is your cost or other basis increased or decreased by certain amounts. Highest state taxes To figure your adjusted basis, you can use Worksheet 1, found toward the end of this publication. Highest state taxes Filled-in examples of that worksheet are included in Comprehensive Examples , later. Highest state taxes Recordkeeping. Highest state taxes You should keep records to prove your home's adjusted basis. Highest state taxes Ordinarily, you must keep records for 3 years after the due date for filing your return for the tax year in which you sold your home. Highest state taxes But if you sold a home before May 7, 1997, and postponed tax on any gain, the basis of that home affects the basis of the new home you bought. Highest state taxes Keep records proving the basis of both homes as long as they are needed for tax purposes. Highest state taxes The records you should keep include: Proof of the home's purchase price and purchase expenses; Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis; Any worksheets or other computations you used to figure the adjusted basis of the home you sold, the gain or loss on the sale, the exclusion, and the taxable gain; Any Form 982 you filed to exclude any discharge of qualified principal residence indebtedness; Any Form 2119, Sale of Your Home, you filed to postpone gain from the sale of a previous home before May 7, 1997; and Any worksheets you used to prepare Form 2119, such as the Adjusted Basis of Home Sold Worksheet or the Capital Improvements Worksheet from the Form 2119 instructions, or other source of computations. Highest state taxes Increases to Basis These include the following. Highest state taxes Additions and other improvements that have a useful life of more than 1 year. Highest state taxes Special assessments for local improvements. Highest state taxes Amounts you spent after a casualty to restore damaged property. Highest state taxes Improvements. Highest state taxes   These add to the value of your home, prolong its useful life, or adapt it to new uses. Highest state taxes You add the cost of additions and other improvements to the basis of your property. Highest state taxes   The following chart lists some other examples of improvements. Highest state taxes Examples of Improvements That Increase Basis Additions Bedroom Bathroom Deck Garage Porch Patio Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Lawn & Grounds Landscaping Driveway Walkway Fence  Retaining wall Sprinkler system Swimming pool  Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system  Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances  Kitchen modernization  Flooring Wall-to-wall carpeting  Insulation Attic Walls Floors Pipes and duct work Improvements no longer part of home. Highest state taxes   Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home. Highest state taxes Example. Highest state taxes You put wall-to-wall carpeting in your home 15 years ago. Highest state taxes Later, you replaced that carpeting with new wall-to-wall carpeting. Highest state taxes The cost of the old carpeting you replaced is no longer part of your home's adjusted basis. Highest state taxes Repairs. Highest state taxes   These maintain your home in good condition but do not add to its value or prolong its life. Highest state taxes You do not add their cost to the basis of your property. Highest state taxes Examples. Highest state taxes Repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes are examples of repairs. Highest state taxes Exception. Highest state taxes   The entire job is considered an improvement if items that would otherwise be considered repairs are done as part of an extensive remodeling or restoration of your home. Highest state taxes For example, if you have a casualty and your home is damaged, increase your basis by the amount you spend on repairs that restore the property to its pre-casualty condition. Highest state taxes Decreases to Basis These include the following. Highest state taxes Discharge of qualified principal residence indebtedness that was excluded from income (but not below zero). Highest state taxes For details, see Publication 4681. Highest state taxes Some or all of the cancellation of debt income that was excluded due to your bankruptcy or insolvency. Highest state taxes For details, see Publication 4681. Highest state taxes Gain you postponed from the sale of a previous home before May 7, 1997. Highest state taxes Deductible casualty losses. Highest state taxes Insurance payments you received or expect to receive for casualty losses. Highest state taxes Payments you received for granting an easement or right-of-way. Highest state taxes Depreciation allowed or allowable if you used your home for business or rental purposes. Highest state taxes Energy-related credits allowed for expenditures made on the residence. Highest state taxes (Reduce the increase in basis otherwise allowable for expenditures on the residence by the amount of credit allowed for those expenditures. Highest state taxes ) Adoption credit you claimed for improvements added to the basis of your home. Highest state taxes Nontaxable payments from an adoption assistance program of your employer you used for improvements you added to the basis of your home. Highest state taxes Energy conservation subsidy excluded from your gross income because you received it (directly or indirectly) from a public utility after 1992 to buy or install any energy conservation measure. Highest state taxes An energy conservation measure is an installation or modification primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home. Highest state taxes District of Columbia first-time homebuyer credit allowed on the purchase of a principal residence in the District of Columbia. Highest state taxes General sales taxes claimed as an itemized deduction on Schedule A (Form 1040) that were imposed on the purchase of personal property, such as a houseboat used as your home or a mobile home. Highest state taxes Discharges of qualified principal residence indebtedness. Highest state taxes   You may be able to exclude from gross income a discharge of qualified principal residence indebtedness. Highest state taxes This exclusion applies to discharges made after 2006 and before 2014. Highest state taxes If you choose to exclude this income, you must reduce (but not below zero) the basis of your principal residence by the amount excluded from gross income. Highest state taxes   File Form 982 with your tax return. Highest state taxes See the form's instructions for detailed information. Highest state taxes    A decrease in basis due to a discharge of qualified principal residence indebtedness that is excluded from income occurs only if you retain ownership of the principal residence after a discharge. Highest state taxes In most cases, this would occur in a refinancing or a restructuring of the mortgage. Highest state taxes Excluding the Gain You may qualify to exclude from your income all or part of any gain from the sale of your main home. Highest state taxes This means that, if you qualify, you will not have to pay tax on the gain up to the limit described under Maximum Exclusion , next. Highest state taxes To qualify, you must meet the ownership and use tests described later. Highest state taxes You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale. Highest state taxes This choice can be made (or revoked) at any time before the expiration of a 3-year period beginning on the due date of your return (not including extensions) for the year of the sale. Highest state taxes You can use Worksheet 2 (near the end of this publication) to figure the amount of your exclusion and your taxable gain, if any. Highest state taxes If you have any taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. Highest state taxes See Publication 505, Tax Withholding and Estimated Tax. Highest state taxes Maximum Exclusion You can exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true. Highest state taxes You meet the ownership test. Highest state taxes You meet the use test. Highest state taxes During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home. Highest state taxes For details on gain allocated to periods of nonqualified use, see Nonqualified Use , later. Highest state taxes If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions just listed. Highest state taxes You may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons . Highest state taxes Ownership and Use Tests To claim the exclusion, you must meet the ownership and use tests. Highest state taxes This means that during the 5-year period ending on the date of the sale, you must have: Owned the home for at least 2 years (the ownership test), and Lived in the home as your main home for at least 2 years (the use test). Highest state taxes Exception. Highest state taxes   If you owned and lived in the property as your main home for less than 2 years, you can still claim an exclusion in some cases. Highest state taxes However, the maximum amount you may be able to exclude will be reduced. Highest state taxes See Reduced Maximum Exclusion , later. Highest state taxes Example 1—home owned and occupied for at least 2 years. Highest state taxes Mya bought and moved into her main home in September 2011. Highest state taxes She sold the home at a gain in October 2013. Highest state taxes During the 5-year period ending on the date of sale in October 2013, she owned and lived in the home for more than 2 years. Highest state taxes She meets the ownership and use tests. Highest state taxes Example 2—ownership test met but use test not met. Highest state taxes Ayden bought a home, lived in it for 6 months, moved out, and never occupied the home again. Highest state taxes He later sold the home for a gain in June 2013. Highest state taxes He owned the home during the entire 5-year period ending on the date of sale. Highest state taxes He meets the ownership test but not the use test. Highest state taxes He cannot exclude any part of his gain on the sale unless he qualified for a reduced maximum exclusion (explained later). Highest state taxes Period of Ownership and Use The required 2 years of ownership and use during the 5-year period ending on the date of the sale do not have to be continuous nor do they both have to occur at the same time. Highest state taxes You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days (365 × 2) during the 5-year period ending on the date of sale. Highest state taxes Example. Highest state taxes Naomi bought and moved into a house in July 2009. Highest state taxes She lived there for 13 months and then moved in with a friend. Highest state taxes She later moved back into her house and lived there for 12 months until she sold it in August 2013. Highest state taxes Naomi meets the ownership and use tests because, during the 5-year period ending on the date of sale, she owned the house for more than 2 years and lived in it for a total of 25 (13 + 12) months. Highest state taxes Temporary absence. Highest state taxes   Short temporary absences for vacations or other seasonal absences, even if you rent out the property during the absences, are counted as periods of use. Highest state taxes The following examples assume that the reduced maximum exclusion (discussed later) does not apply to the sales. Highest state taxes Example 1. Highest state taxes David Johnson, who is single, bought and moved into his home on February 1, 2011. Highest state taxes Each year during 2011 and 2012, David left his home for a 2-month summer vacation. Highest state taxes David sold the house on March 1, 2013. Highest state taxes Although the total time David lived in his home is less than 2 years (21 months), he meets the use requirement and may exclude gain. Highest state taxes The 2-month vacations are short temporary absences and are counted as periods of use in determining whether David used the home for the required 2 years. Highest state taxes Example 2. Highest state taxes Professor Paul Beard, who is single, bought and moved into a house in December 2010, went abroad for a 1-year sabbatical leave in January 2012, returned to the house in January 2013, and sold it at a gain in February 2013. Highest state taxes Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test. Highest state taxes He cannot exclude any part of his gain because he did not use the residence for the required 2 years. Highest state taxes Ownership and use tests met at different times. Highest state taxes   You can meet the ownership and use tests during different 2-year periods. Highest state taxes However, you must meet both tests during the 5-year period ending on the date of the sale. Highest state taxes Example. Highest state taxes Beginning in 2002, Helen Jones lived in a rented apartment. Highest state taxes The apartment building was later converted to condominiums, and she bought her same apartment on December 3, 2010. Highest state taxes In 2011, Helen became ill and on April 14 of that year she moved to her daughter's home. Highest state taxes On July 12, 2013, while still living in her daughter's home, she sold her condominium. Highest state taxes Helen can exclude gain on the sale of her condominium because she met the ownership and use tests during the 5-year period from July 13, 2008, to July 12, 2013, the date she sold the condominium. Highest state taxes She owned her condominium from December 3, 2010, to July 12, 2013 (more than 2 years). Highest state taxes She lived in the property from July 13, 2008 (the beginning of the 5-year period), to April 14, 2011 (more than 2 years). Highest state taxes The time Helen lived in her daughter's home during the 5-year period can be counted toward her period of ownership, and the time she lived in her rented apartment during the 5-year period can be counted toward her period of use. Highest state taxes Cooperative apartment. Highest state taxes   If you sold stock as a tenant-shareholder in a cooperative housing corporation, the ownership and use tests are met if, during the 5-year period ending on the date of sale, you: Owned the stock for at least 2 years, and Lived in the house or apartment that the stock entitled you to occupy as your main home for at least 2 years. Highest state taxes Exceptions to Ownership and Use Tests The following sections contain exceptions to the ownership and use tests for certain taxpayers. Highest state taxes Exception for individuals with a disability. Highest state taxes   There is an exception to the use test if: You become physically or mentally unable to care for yourself, and You owned and lived in your home as your main home for a total of at least 1 year during the 5-year period before the sale of your home. Highest state taxes Under this exception, you are considered to live in your home during any time within the 5-year period that you own the home and live in a facility (including a nursing home) licensed by a state or political subdivision to care for persons in your condition. Highest state taxes   If you meet this exception to the use test, you still have to meet the 2-out-of-5-year ownership test to claim the exclusion. Highest state taxes Previous home destroyed or condemned. Highest state taxes   For the ownership and use tests, you add the time you owned and lived in a previous home that was destroyed or condemned to the time you owned and lived in the replacement home on whose sale you wish to exclude gain. Highest state taxes This rule applies if any part of the basis of the home you sold depended on the basis of the destroyed or condemned home (see Involuntary Conversions in Publication 551). Highest state taxes Otherwise, you must have owned and lived in the same home for 2 of the 5 years before the sale to qualify for the exclusion. Highest state taxes Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps. Highest state taxes   You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on qualified official extended duty (defined later) as a member of the uniformed services or Foreign Service of the United States, or as an employee of the intelligence community. Highest state taxes You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve outside the United States either as an employee of the Peace Corps on qualified official extended duty (defined later) or as an enrolled volunteer or volunteer leader of the Peace Corps. Highest state taxes This means that you may be able to meet the 2-year use test even if, because of your service, you did not actually live in your home for at least the required 2 years during the 5-year period ending on the date of sale. Highest state taxes   If this helps you qualify to exclude gain, you can choose to have the 5-year test period suspended by filing a return for the year of sale that does not include the gain. Highest state taxes Example. Highest state taxes John bought and moved into a home in 2005. Highest state taxes He lived in it as his main home for 2½ years. Highest state taxes For the next 6 years, he did not live in it because he was on qualified official extended duty with the Army. Highest state taxes He then sold the home at a gain in 2013. Highest state taxes To meet the use test, John chooses to suspend the 5-year test period for the 6 years he was on qualified official extended duty. Highest state taxes This means he can disregard those 6 years. Highest state taxes Therefore, John's 5-year test period consists of the 5 years before he went on qualified official extended duty. Highest state taxes He meets the ownership and use tests because he owned and lived in the home for 2½ years during this test period. Highest state taxes Period of suspension. Highest state taxes   The period of suspension cannot last more than 10 years. Highest state taxes Together, the 10-year suspension period and the 5-year test period can be as long as, but no more than, 15 years. Highest state taxes You cannot suspend the 5-year period for more than one property at a time. Highest state taxes You can revoke your choice to suspend the 5-year period at any time. Highest state taxes Example. Highest state taxes Mary bought a home on April 1, 1997. Highest state taxes She used it as her main home until August 31, 2000. Highest state taxes On September 1, 2000, she went on qualified official extended duty with the Navy. Highest state taxes She did not live in the house again before selling it on July 31, 2013. Highest state taxes Mary chooses to use the entire 10-year suspension period. Highest state taxes Therefore, the suspension period would extend back from July 31, 2013, to August 1, 2003, and the 5-year test period would extend back to August 1, 1998. Highest state taxes During that period, Mary owned the house all 5 years and lived in it as her main home from August 1, 1998, until August 31, 2000, a period of more than 24 months. Highest state taxes She meets the ownership and use tests because she owned and lived in the home for at least 2 years during this test period. Highest state taxes Uniformed services. Highest state taxes   The uniformed services are: The Armed Forces (the Army, Navy, Air Force, Marine Corps, and Coast Guard), The commissioned corps of the National Oceanic and Atmospheric Administration, and The commissioned corps of the Public Health Service. Highest state taxes Foreign Service member. Highest state taxes   For purposes of the choice to suspend the 5-year test period for ownership and use, you are a member of the Foreign Service if you are any of the following. Highest state taxes A Chief of mission. Highest state taxes An Ambassador at large. Highest state taxes A member of the Senior Foreign Service. Highest state taxes A Foreign Service officer. Highest state taxes Part of the Foreign Service personnel. Highest state taxes Employee of the intelligence community. Highest state taxes   For purposes of the choice to suspend the 5-year test period for ownership and use, you are an employee of the intelligence community if you are an employee of any of the following. Highest state taxes The Office of the Director of National Intelligence. Highest state taxes The Central Intelligence Agency. Highest state taxes The National Security Agency. Highest state taxes The Defense Intelligence Agency. Highest state taxes The National Geospatial-Intelligence Agency. Highest state taxes The National Reconnaissance Office and any other office within the Department of Defense for the collection of specialized national intelligence through reconnaissance programs. Highest state taxes Any of the intelligence elements of the Army, the Navy, the Air Force, the Marine Corps, the Federal Bureau of Investigation, the Department of Treasury, the Department of Energy, and the Coast Guard. Highest state taxes The Bureau of Intelligence and Research of the Department of State. Highest state taxes Any of the elements of the Department of Homeland Security concerned with the analyses of foreign intelligence information. Highest state taxes Qualified official extended duty. Highest state taxes   You are on qualified official extended duty if you are on extended duty while: Serving at a duty station at least 50 miles from your main home, or Living in Government quarters under Government orders. Highest state taxes   You are on extended duty when you are called or ordered to active duty for a period of more than 90 days or for an indefinite period. Highest state taxes Married Persons If you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use tests, you can exclude up to $250,000 of the gain. Highest state taxes (But see Special rules for joint returns, next. Highest state taxes ) Special rules for joint returns. Highest state taxes   You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true. Highest state taxes You are married and file a joint return for the year. Highest state taxes Either you or your spouse meets the ownership test. Highest state taxes Both you and your spouse meet the use test. Highest state taxes During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home. Highest state taxes If either spouse does not satisfy all these requirements, the maximum exclusion that can be claimed by the couple is the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured separately. Highest state taxes For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. Highest state taxes Example 1—one spouse sells a home. Highest state taxes Emily sells her home in June 2013 for a gain of $300,000. Highest state taxes She marries Jamie later in the year. Highest state taxes She meets the ownership and use tests, but Jamie does not. Highest state taxes Emily can exclude up to $250,000 of gain on a separate or joint return for 2013. Highest state taxes The $500,000 maximum exclusion for certain joint returns does not apply because Jamie does not meet the use test. Highest state taxes Example 2—each spouse sells a home. Highest state taxes The facts are the same as in Example 1 except that Jamie also sells a home in 2013 for a gain of $200,000 before he marries Emily. Highest state taxes He meets the ownership and use tests on his home, but Emily does not. Highest state taxes Emily can exclude $250,000 of gain and Jamie can exclude $200,000 of gain on the respective sales of their individual homes. Highest state taxes However, Emily cannot use Jamie's unused exclusion to exclude more than $250,000 of gain. Highest state taxes Therefore, Emily and Jamie must recognize $50,000 of gain on the sale of Emily's home. Highest state taxes The $500,000 maximum exclusion for certain joint returns does not apply because Emily and Jamie do not both meet the use test for the same home. Highest state taxes Sale of main home by surviving spouse. Highest state taxes   If your spouse died and you did not remarry before the date of sale, you are considered to have owned and lived in the property as your main home during any period of time when your spouse owned and lived in it as a main home. Highest state taxes   If you meet all of the following requirements, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home. Highest state taxes The sale or exchange took place after 2008. Highest state taxes The sale or exchange took place no more than 2 years after the date of death of your spouse. Highest state taxes You have not remarried. Highest state taxes You and your spouse met the use test at the time of your spouse's death. Highest state taxes You or your spouse met the ownership test at the time of your spouse's death. Highest state taxes Neither you nor your spouse excluded gain from the sale of another home during the last 2 years before the date of death. Highest state taxes The ownership and use tests were described earlier. Highest state taxes Example. Highest state taxes Harry owned and used a house as his main home since 2009. Highest state taxes Harry and Wilma married on July 1, 2013, and from that date they used Harry's house as their main home. Highest state taxes Harry died on August 15, 2013, and Wilma inherited the property. Highest state taxes Wilma sold the property on September 1, 2013, at which time she had not remarried. Highest state taxes Although Wilma owned and used the house for less than 2 years, Wilma is considered to have satisfied the ownership and use tests because her period of ownership and use includes the period that Harry owned and used the property before death. Highest state taxes Home transferred from spouse. Highest state taxes   If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it. Highest state taxes Use of home after divorce. Highest state taxes   You are considered to have used property as your main home during any period when: You owned it, and Your spouse or former spouse is allowed to live in it under a divorce or separation instrument and uses it as his or her main home. Highest state taxes Reduced Maximum Exclusion If you fail to meet the requirements to qualify for the $250,000 or $500,000 exclusion, you may still qualify for a reduced exclusion. Highest state taxes This applies to those who: Fail to meet the ownership and use tests, or Have used the exclusion within 2 years of selling their current home. Highest state taxes In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons. Highest state taxes A change in place of employment. Highest state taxes Health. Highest state taxes Unforeseen circumstances. Highest state taxes Qualified individual. Highest state taxes   For purposes of the reduced maximum exclusion, a qualified individual is any of the following. Highest state taxes You. Highest state taxes Your spouse. Highest state taxes A co-owner of the home. Highest state taxes A person whose main home is the same as yours. Highest state taxes Primary reason for sale. Highest state taxes   One of the three reasons above will be considered to be the primary reason you sold your home if either (1) or (2) is true. Highest state taxes You qualify under a “safe harbor. Highest state taxes ” This is a specific set of facts and circumstances that, if applicable, qualifies you to claim a reduced maximum exclusion. Highest state taxes Safe harbors corresponding to the reasons listed above are described later. Highest state taxes A safe harbor does not apply, but you can establish, based on facts and circumstances, that the primary reason for the sale is a change in place of employment, health, or unforeseen circumstances. Highest state taxes  Factors that may be relevant in determining your primary reason for sale include whether: Your sale and the circumstances causing it were close in time, The circumstances causing your sale occurred during the time you owned and used the property as your main home, The circumstances causing your sale were not reasonably foreseeable when you began using the property as your main home, Your financial ability to maintain the property became materially impaired, The suitability of the property as your main home materially changed, and During the time you owned the property, you used it as your home. Highest state taxes Change in Place of Employment You may qualify for a reduced exclusion if the primary reason for the sale of your main home is a change in the location of employment of a qualified individual. Highest state taxes Employment. Highest state taxes   For this purpose, employment includes the start of work with a new employer or continuation of work with the same employer. Highest state taxes It also includes the start or continuation of self-employment. Highest state taxes Distance safe harbor. Highest state taxes   A change in place of employment is considered to be the reason you sold your home if: The change occurred during the period you owned and used the property as your main home, and The new place of employment is at least 50 miles farther from the home you sold than was the former place of employment (or, if there was no former place of employment, the distance between your new place of employment and the home sold is at least 50 miles). Highest state taxes Example. Highest state taxes Justin was unemployed and living in a townhouse in Florida he had owned and used as his main home since 2012. Highest state taxes He got a job in North Carolina and sold his townhouse in 2013. Highest state taxes Because the distance between Justin's new place of employment and the home he sold is at least 50 miles, the sale satisfies the conditions of the distance safe harbor. Highest state taxes Justin's sale of his home is considered to be because of a change in place of employment, and he is entitled to claim a reduced maximum exclusion of gain from the sale. Highest state taxes Health The sale of your main home is because of health if your primary reason for the sale is: To obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury of a qualified individual, or To obtain or provide medical or personal care for a qualified individual suffering from a disease, illness, or injury. Highest state taxes The sale of your home is not because of health if the sale merely benefits a qualified individual's general health or well-being. Highest state taxes For purposes of this reason, a qualified individual includes, in addition to the individuals listed earlier under Qualified individual , any of the following family members of these individuals. Highest state taxes Parent, grandparent, stepmother, stepfather. Highest state taxes Child, grandchild, stepchild, adopted child, eligible foster child. Highest state taxes Brother, sister, stepbrother, stepsister, half-brother, half-sister. Highest state taxes Mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, or daughter-in-law. Highest state taxes Uncle, aunt, nephew, niece, or cousin. Highest state taxes Example. Highest state taxes In 2012, Chase and Lauren, spouses, bought a house that they used as their main home. Highest state taxes Lauren's father has a chronic disease and is unable to care for himself. Highest state taxes In 2013, Chase and Lauren sold their home in order to move into Lauren's father's house to provide care for him. Highest state taxes Because the primary reason for the sale of their home was to provide care for Lauren's father, Chase and Lauren are entitled to a reduced maximum exclusion. Highest state taxes Doctor's recommendation safe harbor. Highest state taxes   Health is considered to be the reason you sold your home if, for one or more of the reasons listed at the beginning of this discussion, a doctor recommends a change of residence. Highest state taxes Unforeseen Circumstances The sale of your main home is because of an unforeseen circumstance if your primary reason for the sale is the occurrence of an event that you could not reasonably have anticipated before buying and occupying that home. Highest state taxes You are not considered to have an unforeseen circumstance if the primary reason you sold your home was that you preferred to get a different home or because your finances improved. Highest state taxes Specific event safe harbors. Highest state taxes   Unforeseen circumstances are considered to be the reason for selling your home if any of the following events occurred while you owned and used the property as your main home. Highest state taxes An involuntary conversion of your home, such as when your home is destroyed or condemned. Highest state taxes Natural or man-made disasters or acts of war or terrorism resulting in a casualty to your home, whether or not your loss is deductible. Highest state taxes In the case of qualified individuals (listed earlier under Qualified individual ): Death, Unemployment (if the individual is eligible for unemployment compensation), A change in employment or self-employment status that results in the individual's inability to pay reasonable basic living expenses (listed under Reasonable basic living expenses , later) for his or her household, Divorce or legal separation under a decree of divorce or separate maintenance, or Multiple births resulting from the same pregnancy. Highest state taxes An event the IRS determined to be an unforeseen circumstance in published guidance of general applicability. Highest state taxes For example, the IRS determined the September 11, 2001, terrorist attacks to be an unforeseen circumstance. Highest state taxes Reasonable basic living expenses. Highest state taxes   Reasonable basic living expenses for your household include the following. Highest state taxes Amounts spent for food. Highest state taxes Amounts spent for clothing. Highest state taxes Housing and related expenses. Highest state taxes Medical expenses. Highest state taxes Transportation expenses. Highest state taxes Tax payments. Highest state taxes Court-ordered payments. Highest state taxes Expenses reasonably necessary to produce income. Highest state taxes   Any of these amounts spent to maintain an affluent or luxurious standard of living are not reasonable basic living expenses. Highest state taxes Nonqualified Use Gain from the sale or exchange of the main home is not excludable from income if it is allocable to periods of nonqualified use. Highest state taxes Nonqualified use means any period after 2008 where neither you nor your spouse (or your former spouse) used the property as a main home, with certain exceptions (see next). Highest state taxes Exceptions. Highest state taxes   A period of nonqualified use does not include: Any portion of the 5-year period ending on the date of the sale or exchange after the last date you (or your spouse) use the property as a main home; Any period (not to exceed an aggregate period of 10 years) during which you (or your spouse) are serving on qualified official extended duty: As a member of the uniformed services; As a member of the Foreign Service of the United States; or As an employee of the intelligence community; and Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS. Highest state taxes Calculation. Highest state taxes   To figure the portion of the gain allocated to the period of nonqualified use, multiply the gain (net of any depreciation allowed or allowable on the property for periods after May 6, 1997) by the following fraction:   Total nonqualified use during the period of ownership after 2008     Total period of ownership     This calculation can be found in Worksheet 2, line 10, later in this publication. Highest state taxes   For examples of this calculation, see Business Use or Rental of Home , next. Highest state taxes Business Use or Rental of Home You may be able to exclude gain from the sale of a home you have used for business or to produce rental income if you meet the ownership and use tests. Highest state taxes Example 1. Highest state taxes On May 23, 2007, Amy, who is unmarried for all years in this example, bought a house. Highest state taxes She moved in on that date and lived in it until May 31, 2009, when she moved out of the house and put it up for rent. Highest state taxes The house was rented from June 1, 2009, to March 31, 2011. Highest state taxes Amy claimed depreciation deductions in 2009 through 2011 totaling $10,000. Highest state taxes Amy moved back into the house on April 1, 2011, and lived there until she sold it on January 31, 2013, for a gain of $200,000. Highest state taxes During the 5-year period ending on the date of the sale (January 31, 2008–January 31, 2013), Amy owned and lived in the house for more than 2 years as shown in the following table. Highest state taxes Five-Year Period Used as Home Used as Rental 1/31/08 – 5/31/09 16 months   6/01/09 – 3/31/11   22 months 4/01/11 – 1/31/13 22 months     38 months 22 months       During the period Amy owned the house (2,080 days), her period of nonqualified use was 668 days. Highest state taxes Because the gain attributable to periods of nonqualified use is $60,990, Amy can exclude $129,010 of her gain, as shown on Worksheet 2. Highest state taxes Example 2. Highest state taxes William owned and used a house as his main home from 2007 through 2010. Highest state taxes On January 1, 2011, he moved to another state. Highest state taxes He rented his house from that date until April 30, 2013, when he sold it. Highest state taxes During the 5-year period ending on the date of sale (May 1, 2008-April 30, 2013), William owned and lived in the house for more than 2 years. Highest state taxes Because it was rental property at the time of the sale, he must report the sale on Form 4797. Highest state taxes Because the period of nonqualified use does not include any part of the 5-year period after the last date William lived in the house, he has no period of nonqualified use. Highest state taxes Because he met the ownership and use tests, he can exclude gain up to $250,000. Highest state taxes However, he cannot exclude the part of the gain equal to the depreciation he claimed or could have claimed for renting the house, as explained next. Highest state taxes Depreciation after May 6, 1997. Highest state taxes   If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. Highest state taxes If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, then you may limit the amount of gain recognized to the depreciation allowed. Highest state taxes Unrecaptured section 1250 gain. Highest state taxes   This is the part of any long-term capital gain from the sale of your home that is due to depreciation and cannot be excluded. Highest state taxes To figure the amount of unrecaptured section 1250 gain to be reported on Schedule D (Form 1040), you must also take into account certain gains or losses from the sale of property other than your home. Highest state taxes Use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions for this purpose. Highest state taxes Worksheet 2. Highest state taxes Taxable Gain on Sale of Home—Completed Example 1 for Amy Part 1. Highest state taxes Gain or (Loss) on Sale       1. Highest state taxes   Selling price of home 1. Highest state taxes     2. Highest state taxes   Selling expenses (including commissions, advertising and legal fees, and seller-paid loan charges) 2. Highest state taxes     3. Highest state taxes   Subtract line 2 from line 1. Highest state taxes This is the amount realized 3. Highest state taxes     4. Highest state taxes   Adjusted basis of home sold (from Worksheet 1, line 13) 4. Highest state taxes     5. Highest state taxes   Gain or (loss) on the sale. Highest state taxes Subtract line 4 from line 3. Highest state taxes If this is a loss, stop here 5. Highest state taxes 200,000   Part 2. Highest state taxes Exclusion and Taxable Gain       6. Highest state taxes   Enter any depreciation allowed or allowable on the property for periods after May 6, 1997. Highest state taxes If none, enter -0- 6. Highest state taxes 10,000   7. Highest state taxes   Subtract line 6 from line 5. Highest state taxes If the result is less than zero, enter -0- 7. Highest state taxes 190,000   8. Highest state taxes   Aggregate number of days of nonqualified use after 2008. Highest state taxes If none, enter -0-. Highest state taxes  If line 8 is equal to zero, skip to line 12 and enter the amount from line 7 on line 12 8. Highest state taxes 668   9. Highest state taxes   Number of days taxpayer owned the property 9. Highest state taxes 2,080   10. Highest state taxes   Divide the amount on line 8 by the amount on line 9. Highest state taxes Enter the result as a decimal (rounded to at least 3 places). Highest state taxes But do not enter an amount greater than 1. Highest state taxes 00 10. Highest state taxes 0. Highest state taxes 321   11. Highest state taxes   Gain allocated to nonqualified use. Highest state taxes (Line 7 multiplied by line 10) 11. Highest state taxes 60,990   12. Highest state taxes   Gain eligible for exclusion. Highest state taxes Subtract line 11 from line 7 12. Highest state taxes 129,010   13. Highest state taxes   If you qualify to exclude gain on the sale, enter your maximum exclusion (see Maximum Exclusion ). Highest state taxes  If you qualify for a reduced maximum exclusion, enter the amount from Worksheet 3, line 7. Highest state taxes If you do  not qualify to exclude gain, enter -0- 13. Highest state taxes 250,000   14. Highest state taxes   Exclusion. Highest state taxes Enter the smaller of line 12 or line 13 14. Highest state taxes 129,010   15. Highest state taxes   Taxable gain. Highest state taxes Subtract line 14 from line 5. Highest state taxes Report your taxable gain as described under Reporting the Sale . Highest state taxes If the amount on line 6 is more than zero, complete line 16 15. Highest state taxes 70,990   16. Highest state taxes   Enter the smaller of line 6 or line 15. Highest state taxes Enter this amount on line 12 of the Unrecaptured Section 1250 Gain  Worksheet in the instructions for Schedule D (Form 1040) 16. Highest state taxes 10,000 Property Used Partly for Business or Rental If you use property partly as a home and partly for business or to produce rental income, the treatment of any gain on the sale depends partly on whether the business or rental part of the property is part of your home or separate from it. Highest state taxes Part of Home Used for Business or Rental If the part of your property used for business or to produce rental income is within your home, such as a room used as a home office for a business, you do not need to allocate gain on the sale of the property between the business part of the property and the part used as a home. Highest state taxes In addition, you do not need to report the sale of the business or rental part on Form 4797. Highest state taxes This is true whether or not you were entitled to claim any depreciation. Highest state taxes However, you cannot exclude the part of any gain equal to any depreciation allowed or allowable after May 6, 1997. Highest state taxes See Depreciation after May 6, 1997, earlier. Highest state taxes Example 1. Highest state taxes Ray sold his main home in 2013 at a $30,000 gain. Highest state taxes He has no gains or losses from the sale of property other than the gain from the sale of his home. Highest state taxes He meets the ownership and use tests to exclude the gain from his income. Highest state taxes However, he used part of the home as a business office in 2012 and claimed $500 depreciation. Highest state taxes Because the business office was part of his home (not separate from it), he does not have to allocate the gain on the sale between the business part of the property and the part used as a home. Highest state taxes In addition, he does not have to report any part of the gain on Form 4797. Highest state taxes Because Ray was entitled to take a depreciation deduction, he must recognize $500 of the gain as unrecaptured section 1250 gain. Highest state taxes He reports his gain, exclusion, and the taxable gain of $500 on Form 8949 and Schedule D (Form 1040). Highest state taxes Example 2. Highest state taxes The facts are the same as in Example 1 except that Ray was not entitled to claim depreciation for the business use of his home. Highest state taxes Since Ray did not claim any depreciation, he can exclude the entire $30,000 gain. Highest state taxes Separate Part of Property Used for Business or Rental You may have used part of your property as your home and a separate part of it for business or to produce rental income. Highest state taxes Examples are: A working farm on which your house was located, A duplex in w
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Low Income Taxpayer Clinics (LITCs) represent low income individuals in disputes with the Internal Revenue Service, including audits, appeals, collection matters, and federal tax litigation. LITCs can also help taxpayers respond to IRS notices and correct account problems. Some LITCs provide education for low income taxpayers and taxpayers who speak English as a second language (ESL) about their taxpayer rights and responsibilities.

LITC services are free or low cost for eligible taxpayers. LITCs are independent from the IRS but receive some of their funding from the IRS through the LITC grant program. Each clinic determines whether prospective clients meet income guidelines and other criteria before agreeing to represent them.

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The LITC program is administered by the Taxpayer Advocate Service (TAS). TAS is your voice at the IRS. We help taxpayers whose problems with the IRS are causing financial difficulties, who have tried but haven’t been able to resolve their problems with the IRS, and those who believe an IRS system or procedure isn’t working as it should. If you believe you’re eligible for TAS assistance, call us toll-free at 1–877–777–4778. For more information, go to www.irs.gov/advocate.

Page Last Reviewed or Updated: 06-Mar-2014

The Highest State Taxes

Highest state taxes Index A Adopted child, Adopted child. Highest state taxes Adoption taxpayer identification number (ATIN), Married child. Highest state taxes Age test (see Qualifying child) Alaska Permanent Fund dividends, Rule 6—Your Investment Income Must Be $3,300 or Less Alimony, Income That Is Not Earned Income Annuities, Income That Is Not Earned Income Armed forces, Nontaxable military pay. Highest state taxes , Military personnel stationed outside the United States. Highest state taxes , Temporary absences. Highest state taxes , Joint Return Test, Military personnel stationed outside the United States. Highest state taxes , Nontaxable combat pay. Highest state taxes Assistance (see Tax help) B Basic Allowance for Housing (BAH), Nontaxable military pay. Highest state taxes Basic Allowance for Subsistence (BAS), Nontaxable military pay. Highest state taxes C Child Adopted child, Adopted child. Highest state taxes Birth or death of, Birth or death of child. Highest state taxes Foster child, Relationship Test, Foster child. Highest state taxes , Rule 10—You Cannot Be a Qualifying Child of Another Taxpayer, Kidnapped child, Kidnapped child. Highest state taxes Married child, Married child. Highest state taxes Child support, Income That Is Not Earned Income Clergy, Clergy. Highest state taxes Combat zone pay, Nontaxable combat pay. Highest state taxes Community property, Community property. Highest state taxes , Community property. Highest state taxes D Detailed examples, Chapter 6—Detailed Examples Disability benefits, Disability Benefits Disallowance of the EIC, Chapter 5—Disallowance of the EIC Dividend income, Income That Is Not Earned Income Divorced parents, special rule, Special rule for divorced or separated parents (or parents who live apart). Highest state taxes Domestic partner, Nevada, Washington, and California domestic partners. Highest state taxes E Earned income, Rule 7—You Must Have Earned Income, Earned Income Earned income credit (EIC), EIC Table EITC Assistant, Is There Help Online? Extended active duty, Extended active duty. Highest state taxes , Military personnel stationed outside the United States. Highest state taxes F Figuring EIC yourself, Chapter 4—Figuring and Claiming the EIC, How To Figure the EIC Yourself Filing status: Head of household, Rule 3—Your Filing Status Cannot Be Married Filing Separately Married filing separately, Rule 3—Your Filing Status Cannot Be Married Filing Separately Forms: 1040, Do I Need This Publication?, Adjusted gross income (AGI). Highest state taxes , No SSN. Highest state taxes , Form 1040. Highest state taxes 1040A, Adjusted gross income (AGI). Highest state taxes , No SSN. Highest state taxes , Form 1040A. Highest state taxes 1040EZ, Adjusted gross income (AGI). Highest state taxes , No SSN. Highest state taxes , Form 1040EZ. Highest state taxes 1040X, Rule 2—You Must Have a Valid Social Security Number (SSN), Filing deadline approaching and still no SSN. Highest state taxes 2555, Rule 5—You Cannot File Form 2555 or Form 2555-EZ 2555–EZ, Rule 5—You Cannot File Form 2555 or Form 2555-EZ 4029, Minister's housing. Highest state taxes , Approved Form 4361 or Form 4029, Form 4029. Highest state taxes 4361, Minister's housing. Highest state taxes , Approved Form 4361 or Form 4029, Form 4361. Highest state taxes 4797, Do I Need This Publication? 4868, Filing deadline approaching and still no SSN. Highest state taxes 8814, Do I Need This Publication? 8862, Chapter 5—Disallowance of the EIC, Form 8862 Foster care payments, Income That Is Not Earned Income Foster child, Relationship Test, Foster child. Highest state taxes , Rule 10—You Cannot Be a Qualifying Child of Another Taxpayer, Fraud, Exception 2. Highest state taxes , Are You Prohibited From Claiming the EIC for a Period of Years? Free tax services, Free help with your tax return. Highest state taxes H Head of household, Community property. Highest state taxes , Spouse did not live with you. Highest state taxes , Community property. Highest state taxes , Rule 9—Your Qualifying Child Cannot Be Used by More Than One Person To Claim the EIC, Applying Rule 9 to divorced or separated parents (or parents who live apart). Highest state taxes Help (see Tax help) Home Homeless shelter, Rule 14—You Must Have Lived in the United States More Than Half of the Year Military, Rule 14—You Must Have Lived in the United States More Than Half of the Year United States, Rule 14—You Must Have Lived in the United States More Than Half of the Year Homeless, Homeless shelter. Highest state taxes , Homeless shelter. Highest state taxes I Income that is not earned income, Income That Is Not Earned Income Individual taxpayer identification number (ITIN), Other taxpayer identification number. Highest state taxes , Married child. Highest state taxes Inmate, Earnings while an inmate. Highest state taxes , Figuring earned income. Highest state taxes Interest, Income That Is Not Earned Income Investment income, Rule 6—Your Investment Income Must Be $3,300 or Less IRS can figure EIC for you, IRS Will Figure the EIC for You J Joint return test (see Qualifying child) K Kidnapped child, Kidnapped child. Highest state taxes M Married child, Married child. Highest state taxes Married filing a joint return, Rule 4—You Must Be a U. Highest state taxes S. Highest state taxes Citizen or Resident Alien All Year Married filing separately, Spouse did not live with you. Highest state taxes Military Combat pay, Nontaxable military pay. Highest state taxes Nontaxable pay, Nontaxable military pay. Highest state taxes Outside U. Highest state taxes S. Highest state taxes , Military personnel stationed outside the United States. Highest state taxes Minister, Net earnings from self-employment. Highest state taxes , Minister's housing. Highest state taxes , Church employees. Highest state taxes N Net earnings, self-employment, Net earnings from self-employment. Highest state taxes Nonresident alien, Rule 4—You Must Be a U. Highest state taxes S. Highest state taxes Citizen or Resident Alien All Year, Step 1. Highest state taxes O Online help EITC Assistant, Is There Help Online? P Parents, divorced or separated, Married child. Highest state taxes , Examples. Highest state taxes , Special rule for divorced or separated parents (or parents who live apart). Highest state taxes Passive activity, Worksheet 1. Highest state taxes Investment Income If You Are Filing Form 1040 Pensions, Income That Is Not Earned Income Permanently and totally disabled, Permanently and totally disabled. Highest state taxes Prisoner, Figuring earned income. Highest state taxes Publications (see Tax help) Q Qualifying child, Can I Claim the EIC?, Do I Have To Have A Child To Qualify For The EIC?, Chapter 2—Rules If You Have a Qualifying Child Age test, Rule 8—Your Child Must Meet the Relationship, Age, Residency, and Joint Return Tests, Age Test Home, Residency Test Joint return test, Rule 8—Your Child Must Meet the Relationship, Age, Residency, and Joint Return Tests Permanently and totally disabled, Permanently and totally disabled. Highest state taxes Relationship test, Rule 8—Your Child Must Meet the Relationship, Age, Residency, and Joint Return Tests Residency test, Residency Test United States, Residency Test R Railroad retirement benefits, Income That Is Not Earned Income Registered domestic partner, Nevada, Washington, and California domestic partners. Highest state taxes Relationship test (see Qualifying child) Reminders, Reminders Residency test (see Qualifying child) S Salaries, wages, and tips, Earned Income, Wages, salaries, and tips. Highest state taxes , Earned Income Schedules: C, EIC Worksheet A. Highest state taxes , EIC Worksheet B. Highest state taxes C-EZ, EIC Worksheet A. Highest state taxes , EIC Worksheet B. Highest state taxes EIC, Chapter 2—Rules If You Have a Qualifying Child, Kidnapped child. Highest state taxes , Figuring earned income. Highest state taxes , Nontaxable combat pay. Highest state taxes , How To Figure the EIC Yourself, When to use the optional methods of figuring net earnings. Highest state taxes , Schedule EIC SE, Figuring earned income. Highest state taxes , Clergy. Highest state taxes , Church employees. Highest state taxes , EIC Worksheet A. Highest state taxes , EIC Worksheet B. Highest state taxes , Net earnings from self-employment $400 or more. Highest state taxes , When to use the optional methods of figuring net earnings. Highest state taxes , When both spouses have self-employment income. Highest state taxes School, School defined. Highest state taxes Self-employed persons, Rule 7—You Must Have Earned Income, Figuring earned income. Highest state taxes , EIC Worksheet B. Highest state taxes Self-employment income, Earned Income Self-employment tax, Net earnings from self-employment $400 or more. Highest state taxes Separated parents, special rule, Married child. Highest state taxes Social security benefits, Income That Is Not Earned Income Social security number (SSN), Rule 2—You Must Have a Valid Social Security Number (SSN), Valid for work only with INS authorization or DHS authorization. Highest state taxes , No SSN. Highest state taxes , Getting an SSN. Highest state taxes , Married child. Highest state taxes , Exception for math or clerical errors. Highest state taxes Statutory employee, Statutory employee. Highest state taxes , Figuring earned income. Highest state taxes , EIC Worksheet A. Highest state taxes , Statutory employees. Highest state taxes Strike benefits, Strike benefits. Highest state taxes Student, Student defined. Highest state taxes T Tax help, How To Get Tax Help Taxpayer identification number Adoption identification number (ATIN), Married child. Highest state taxes Individual taxpayer identification number (ITIN), Other taxpayer identification number. Highest state taxes Social security number (SSN), Other taxpayer identification number. Highest state taxes Tiebreaker rules, Tiebreaker rules. Highest state taxes Tips, wages, and salaries, Earned Income, Wages, salaries, and tips. Highest state taxes , Earned Income TTY/TDD information, How To Get Tax Help U Unemployment compensation, Income That Is Not Earned Income United States, United States. Highest state taxes V Veterans' benefits, Income That Is Not Earned Income W Wages, salaries, and tips, Earned Income, Wages, salaries, and tips. Highest state taxes , Earned Income Welfare benefits, Income That Is Not Earned Income Workers' compensation benefits, Income That Is Not Earned Income Workfare payments, Workfare payments. Highest state taxes Worksheet 1, Worksheet 1. Highest state taxes Investment Income If You Are Filing Form 1040 Worksheet 2, Worksheet 2. Highest state taxes Worksheet for Line 4 of Worksheet 1 Prev  Up     Home   More Online Publications