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How to file state and federal taxes for free 7. How to file state and federal taxes for free   Coverdell Education Savings Account (ESA) Table of Contents Introduction What Is a Coverdell ESAQualified Education Expenses ContributionsContribution Limits Additional Tax on Excess Contributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Transfer Because of Divorce DistributionsTax-Free Distributions Taxable Distributions When Assets Must Be Distributed Introduction If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. How to file state and federal taxes for free For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. How to file state and federal taxes for free There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. How to file state and federal taxes for free However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. How to file state and federal taxes for free See Contributions , later. How to file state and federal taxes for free This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. How to file state and federal taxes for free What is the tax benefit of the Coverdell ESA. How to file state and federal taxes for free   Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. How to file state and federal taxes for free   If, for a year, distributions from an account are not more than a designated beneficiary's qualified education expenses at an eligible educational institution, the beneficiary will not owe tax on the distributions. How to file state and federal taxes for free See Tax-Free Distributions , later. How to file state and federal taxes for free    Table 7-1 summarizes the main features of the Coverdell ESA. How to file state and federal taxes for free Table 7-1. How to file state and federal taxes for free Coverdell ESA at a Glance Do not rely on this table alone. How to file state and federal taxes for free It provides only general highlights. How to file state and federal taxes for free See the text for definitions of terms in bold type and for more complete explanations. How to file state and federal taxes for free Question Answer What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary. How to file state and federal taxes for free Where can it be established? It can be opened in the United States at any bank or other IRS-approved entity that offers Coverdell ESAs. How to file state and federal taxes for free Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary. How to file state and federal taxes for free Who can contribute to a Coverdell ESA? Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return). How to file state and federal taxes for free Are distributions tax free? Yes, if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year. How to file state and federal taxes for free What Is a Coverdell ESA A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the Designated beneficiary (defined later) of the account. How to file state and federal taxes for free When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary. How to file state and federal taxes for free To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. How to file state and federal taxes for free The document creating and governing the account must be in writing and must satisfy the following requirements. How to file state and federal taxes for free The trustee or custodian must be a bank or an entity approved by the IRS. How to file state and federal taxes for free The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions. How to file state and federal taxes for free The contribution is in cash. How to file state and federal taxes for free The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. How to file state and federal taxes for free The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000. How to file state and federal taxes for free Money in the account cannot be invested in life insurance contracts. How to file state and federal taxes for free Money in the account cannot be combined with other property except in a common trust fund or common investment fund. How to file state and federal taxes for free The balance in the account generally must be distributed within 30 days after the earlier of the following events. How to file state and federal taxes for free The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. How to file state and federal taxes for free The beneficiary's death. How to file state and federal taxes for free Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. How to file state and federal taxes for free For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. How to file state and federal taxes for free Designated beneficiary. How to file state and federal taxes for free   This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account. How to file state and federal taxes for free Contributions to a qualified tuition program (QTP). How to file state and federal taxes for free   A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. How to file state and federal taxes for free In the case of a change in beneficiary, this is a qualified expense only if the new beneficiary is a family member of that designated beneficiary. How to file state and federal taxes for free See chapter 8, Qualified Tuition Program . How to file state and federal taxes for free Eligible Educational Institution For purposes of Coverdell ESAs, an eligible educational institution can be either an eligible postsecondary school or an eligible elementary or secondary school. How to file state and federal taxes for free Eligible postsecondary school. How to file state and federal taxes for free   This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. How to file state and federal taxes for free S. How to file state and federal taxes for free Department of Education. How to file state and federal taxes for free It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. How to file state and federal taxes for free The educational institution should be able to tell you if it is an eligible educational institution. How to file state and federal taxes for free   Certain educational institutions located outside the United States also participate in the U. How to file state and federal taxes for free S. How to file state and federal taxes for free Department of Education's Federal Student Aid (FSA) programs. How to file state and federal taxes for free Eligible elementary or secondary school. How to file state and federal taxes for free   This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. How to file state and federal taxes for free Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. How to file state and federal taxes for free As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time. How to file state and federal taxes for free The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. How to file state and federal taxes for free Tuition and fees. How to file state and federal taxes for free Books, supplies, and equipment. How to file state and federal taxes for free Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school. How to file state and federal taxes for free Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). How to file state and federal taxes for free The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. How to file state and federal taxes for free The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. How to file state and federal taxes for free The actual amount charged if the student is residing in housing owned or operated by the school. How to file state and federal taxes for free Half-time student. How to file state and federal taxes for free   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. How to file state and federal taxes for free Qualified Elementary and Secondary Education Expenses These are expenses related to enrollment or attendance at an eligible elementary or secondary school. How to file state and federal taxes for free As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. How to file state and federal taxes for free There are special rules for computer-related expenses. How to file state and federal taxes for free The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. How to file state and federal taxes for free Tuition and fees. How to file state and federal taxes for free Books, supplies, and equipment. How to file state and federal taxes for free Academic tutoring. How to file state and federal taxes for free Special needs services for a special needs beneficiary. How to file state and federal taxes for free The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school. How to file state and federal taxes for free Room and board. How to file state and federal taxes for free Uniforms. How to file state and federal taxes for free Transportation. How to file state and federal taxes for free Supplementary items and services (including extended day programs). How to file state and federal taxes for free The purchase of computer technology, equipment, or Internet access and related services is a qualified elementary and secondary education expense if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in elementary or secondary school. How to file state and federal taxes for free (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. How to file state and federal taxes for free ) Contributions Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI (defined later under Contribution Limits ) for the year is less than $110,000. How to file state and federal taxes for free For individuals filing joint returns, that amount is $220,000. How to file state and federal taxes for free Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. How to file state and federal taxes for free There is no requirement that an organization's income be below a certain level. How to file state and federal taxes for free Contributions must meet all of the following requirements. How to file state and federal taxes for free They must be in cash. How to file state and federal taxes for free They cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. How to file state and federal taxes for free They must be made by the due date of the contributor's tax return (not including extensions). How to file state and federal taxes for free Contributions can be made to one or several Coverdell ESAs for the same designated beneficiary provided that the total contributions are not more than the contribution limits (defined later) for a year. How to file state and federal taxes for free Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary. How to file state and federal taxes for free Table 7-2 summarizes many of the features of contributing to a Coverdell ESA. How to file state and federal taxes for free When contributions considered made. How to file state and federal taxes for free   Contributions made to a Coverdell ESA for the preceding tax year are considered to have been made on the last day of the preceding year. How to file state and federal taxes for free They must be made by the due date (not including extensions) for filing your return for the preceding year. How to file state and federal taxes for free   For example, if you make a contribution to a Coverdell ESA in February 2014, and you designate it as a contribution for 2013, you are considered to have made that contribution on December 31, 2013. How to file state and federal taxes for free Contribution Limits There are two yearly limits: One on the total amount that can be contributed for each designated beneficiary in any year, and One on the amount that any individual can contribute for any one designated beneficiary for a year. How to file state and federal taxes for free Limit for each designated beneficiary. How to file state and federal taxes for free   For 2013, the total of all contributions to all Coverdell ESAs set up for the benefit of any one designated beneficiary cannot be more than $2,000. How to file state and federal taxes for free This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. How to file state and federal taxes for free Rollovers are discussed under Rollovers and Other Transfers , later. How to file state and federal taxes for free Example. How to file state and federal taxes for free When Maria Luna was born in 2012, three separate Coverdell ESAs were set up for her, one by her parents, one by her grandfather, and one by her aunt. How to file state and federal taxes for free In 2013, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. How to file state and federal taxes for free For example, if her grandfather contributed $2,000 to one of her Coverdell ESAs, no one else could contribute to any of her three accounts. How to file state and federal taxes for free Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. How to file state and federal taxes for free These contributions could be put into any of Maria's Coverdell ESA accounts. How to file state and federal taxes for free Limit for each contributor. How to file state and federal taxes for free   Generally, you can contribute up to $2,000 for each designated beneficiary for 2013. How to file state and federal taxes for free This is the most you can contribute for the benefit of any one beneficiary for the year, regardless of the number of Coverdell ESAs set up for the beneficiary. How to file state and federal taxes for free Example. How to file state and federal taxes for free The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. How to file state and federal taxes for free If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2013, he could also contribute $2,000 to Edgar's Coverdell ESA. How to file state and federal taxes for free Reduced limit. How to file state and federal taxes for free   Your contribution limit may be reduced. How to file state and federal taxes for free If your MAGI (defined on this page) is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced (see Figuring the limit , later). How to file state and federal taxes for free If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you cannot contribute to anyone's Coverdell ESA. How to file state and federal taxes for free Table 7-2. How to file state and federal taxes for free Coverdell ESA Contributions at a Glance Do not rely on this table alone. How to file state and federal taxes for free It provides only general highlights. How to file state and federal taxes for free See the text for more complete explanations. How to file state and federal taxes for free Question Answer Are contributions deductible? No. How to file state and federal taxes for free What is the annual contribution limit per designated beneficiary? $2,000 for each designated beneficiary. How to file state and federal taxes for free What if more than one Coverdell ESA has been opened for the same designated beneficiary? The annual contribution limit is $2,000 for each beneficiary, no matter how many Coverdell ESAs are set up for that beneficiary. How to file state and federal taxes for free What if more than one individual makes contributions for the same designated beneficiary? The annual contribution limit is $2,000 per beneficiary, no matter how many individuals contribute. How to file state and federal taxes for free Can contributions other than cash be made to a Coverdell ESA? No. How to file state and federal taxes for free When must contributions stop? No contributions can be made to a beneficiary's Coverdell ESA after he or she reaches age 18, unless the beneficiary is a special needs beneficiary. How to file state and federal taxes for free Modified adjusted gross income (MAGI). How to file state and federal taxes for free   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. How to file state and federal taxes for free MAGI when using Form 1040A. How to file state and federal taxes for free   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. How to file state and federal taxes for free MAGI when using Form 1040. How to file state and federal taxes for free   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. How to file state and federal taxes for free MAGI when using Form 1040NR. How to file state and federal taxes for free   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form. How to file state and federal taxes for free MAGI when using Form 1040NR-EZ. How to file state and federal taxes for free   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form. How to file state and federal taxes for free   If you have any of these adjustments, you can use Worksheet 7-1. How to file state and federal taxes for free MAGI for a Coverdell ESA , later, to figure your MAGI for Form 1040. How to file state and federal taxes for free Worksheet 7-1. How to file state and federal taxes for free MAGI for a Coverdell ESA 1. How to file state and federal taxes for free Enter your adjusted gross income  (Form 1040, line 38)   1. How to file state and federal taxes for free   2. How to file state and federal taxes for free Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. How to file state and federal taxes for free       3. How to file state and federal taxes for free Enter your foreign housing deduction (Form 2555, line 50)   3. How to file state and federal taxes for free         4. How to file state and federal taxes for free Enter the amount of income from Puerto Rico you are excluding   4. How to file state and federal taxes for free       5. How to file state and federal taxes for free Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. How to file state and federal taxes for free       6. How to file state and federal taxes for free Add lines 2, 3, 4, and 5   6. How to file state and federal taxes for free   7. How to file state and federal taxes for free Add lines 1 and 6. How to file state and federal taxes for free This is your  modified adjusted gross income   7. How to file state and federal taxes for free   Figuring the limit. How to file state and federal taxes for free    To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. How to file state and federal taxes for free The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). How to file state and federal taxes for free The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). How to file state and federal taxes for free Subtract the result from $2,000. How to file state and federal taxes for free This is the amount you can contribute for each beneficiary. How to file state and federal taxes for free You can use Worksheet 7-2. How to file state and federal taxes for free Coverdell ESA Contribution Limit to figure the limit on contributions. How to file state and federal taxes for free    Worksheet 7-2. How to file state and federal taxes for free Coverdell ESA Contribution Limit 1. How to file state and federal taxes for free Maximum contribution   1. How to file state and federal taxes for free $2,000 2. How to file state and federal taxes for free Enter your modified adjusted gross income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. How to file state and federal taxes for free   3. How to file state and federal taxes for free Enter $190,000 if married filing jointly; $95,000 for all other filers   3. How to file state and federal taxes for free   4. How to file state and federal taxes for free Subtract line 3 from line 2. How to file state and federal taxes for free If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. How to file state and federal taxes for free   5. How to file state and federal taxes for free Enter $30,000 if married filing jointly; $15,000 for all other filers   5. How to file state and federal taxes for free     Note. How to file state and federal taxes for free If the amount on line 4 is greater than or equal to the amount on line 5, stop here. How to file state and federal taxes for free You are not allowed to contribute to a Coverdell ESA for 2013. How to file state and federal taxes for free       6. How to file state and federal taxes for free Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. How to file state and federal taxes for free . How to file state and federal taxes for free 7. How to file state and federal taxes for free Multiply line 1 by line 6   7. How to file state and federal taxes for free   8. How to file state and federal taxes for free Subtract line 7 from line 1   8. How to file state and federal taxes for free   Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. How to file state and federal taxes for free Example. How to file state and federal taxes for free Paul, who is single, had a MAGI of $96,500 for 2013. How to file state and federal taxes for free Paul can contribute up to $1,800 in 2013 for each beneficiary, as shown in the illustrated Worksheet 7-2, Coverdell ESA Contribution Limit–Illustrated. How to file state and federal taxes for free Worksheet 7-2. How to file state and federal taxes for free Coverdell ESA Contribution Limit—Illustrated 1. How to file state and federal taxes for free Maximum contribution   1. How to file state and federal taxes for free $2,000 2. How to file state and federal taxes for free Enter your modified adjusted gross  income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. How to file state and federal taxes for free 96,500 3. How to file state and federal taxes for free Enter $190,000 if married filing jointly; $95,000 for all other filers   3. How to file state and federal taxes for free 95,000 4. How to file state and federal taxes for free Subtract line 3 from line 2. How to file state and federal taxes for free If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. How to file state and federal taxes for free 1,500 5. How to file state and federal taxes for free Enter $30,000 if married filing jointly; $15,000 for all other filers   5. How to file state and federal taxes for free 15,000   Note. How to file state and federal taxes for free If the amount on line 4 is greater than or equal to the amount on line 5,  stop here. How to file state and federal taxes for free You are not allowed to  contribute to a Coverdell ESA for 2013. How to file state and federal taxes for free       6. How to file state and federal taxes for free Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. How to file state and federal taxes for free . How to file state and federal taxes for free 100 7. How to file state and federal taxes for free Multiply line 1 by line 6   7. How to file state and federal taxes for free 200 8. How to file state and federal taxes for free Subtract line 7 from line 1   8. How to file state and federal taxes for free 1,800 Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. How to file state and federal taxes for free Additional Tax on Excess Contributions The beneficiary must pay a 6% excise tax each year on excess contributions that are in a Coverdell ESA at the end of the year. How to file state and federal taxes for free Excess contributions are the total of the following two amounts. How to file state and federal taxes for free Contributions to any designated beneficiary's Coverdell ESA for the year that are more than $2,000 (or, if less, the total of each contributor's limit for the year, as discussed earlier). How to file state and federal taxes for free Excess contributions for the preceding year, reduced by the total of the following two amounts: Distributions (other than those rolled over as discussed later) during the year, and The contribution limit for the current year minus the amount contributed for the current year. How to file state and federal taxes for free Exceptions. How to file state and federal taxes for free   The excise tax does not apply if excess contributions made during 2013 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2014, for a calendar year taxpayer). How to file state and federal taxes for free   However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. How to file state and federal taxes for free You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. How to file state and federal taxes for free Box 2 of that form will show the amount of earnings on your excess contributions. How to file state and federal taxes for free Code “2” or “3” entered in the blank box below boxes 5 and 6 indicate the year in which the earnings are taxable. How to file state and federal taxes for free See Instructions for Recipient on the back of copy B of your Form 1099-Q. How to file state and federal taxes for free Enter the amount of earnings on line 21 of Form 1040 (or Form 1040NR) for the applicable tax year. How to file state and federal taxes for free For more information, see Taxable Distributions , later. How to file state and federal taxes for free   The excise tax does not apply to any rollover contribution. How to file state and federal taxes for free Note. How to file state and federal taxes for free Contributions made in one year for the preceding tax year are considered to have been made on the last day of the preceding year. How to file state and federal taxes for free Example. How to file state and federal taxes for free In 2012, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. How to file state and federal taxes for free Because Greta did not withdraw the excess before June 1, 2013, she had to pay an additional tax of $18 (6% × $300) when she filed her 2012 tax return. How to file state and federal taxes for free In 2013, excess contributions of $500 were made to Greta's account, however, she withdrew $250 from that account to use for qualified education expenses. How to file state and federal taxes for free Using the steps shown earlier under Additional Tax on Excess Contributions , Greta figures the excess contribution in her account at the end of 2013 as follows. How to file state and federal taxes for free (1)   $500 excess contributions made in 2013     + (2)   $300 excess contributions in ESA at end of 2012     − (2a)   $250 distribution during 2013         $550 excess at end of 2013   × 6%=$33           If Greta limits 2014 contributions to $1,450 ($2,000 maximum allowed − $550 excess contributions from 2013), she will not owe any additional tax in 2014 for excess contributions. How to file state and federal taxes for free Figuring and reporting the additional tax. How to file state and federal taxes for free   You figure this excise tax in Part V of Form 5329. How to file state and federal taxes for free Report the additional tax on Form 1040, line 58 (or Form 1040NR, line 56). How to file state and federal taxes for free Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary can be changed. How to file state and federal taxes for free The beneficiary's interest can be transferred to a spouse or former spouse because of divorce. How to file state and federal taxes for free Rollovers Any amount distributed from a Coverdell ESA is not taxable if it is rolled over to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary's family (including the beneficiary's spouse) who is under age 30. How to file state and federal taxes for free This age limitation does not apply if the new beneficiary is a special needs beneficiary. How to file state and federal taxes for free An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution. How to file state and federal taxes for free Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. How to file state and federal taxes for free These are not taxable distributions. How to file state and federal taxes for free Members of the beneficiary's family. How to file state and federal taxes for free   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. How to file state and federal taxes for free Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. How to file state and federal taxes for free Brother, sister, stepbrother, or stepsister. How to file state and federal taxes for free Father or mother or ancestor of either. How to file state and federal taxes for free Stepfather or stepmother. How to file state and federal taxes for free Son or daughter of a brother or sister. How to file state and federal taxes for free Brother or sister of father or mother. How to file state and federal taxes for free Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. How to file state and federal taxes for free The spouse of any individual listed above. How to file state and federal taxes for free First cousin. How to file state and federal taxes for free Example. How to file state and federal taxes for free When Aaron graduated from college last year he had $5,000 left in his Coverdell ESA. How to file state and federal taxes for free He wanted to give this money to his younger sister, who was still in high school. How to file state and federal taxes for free In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his sister's Coverdell ESA within 60 days of the distribution. How to file state and federal taxes for free Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or distribution. How to file state and federal taxes for free This rule does not apply to the rollover of a military death gratuity or payment from Servicemembers' Group Life Insurance (SGLI). How to file state and federal taxes for free Military death gratuity. How to file state and federal taxes for free   If you received a military death gratuity or a payment from Servicemembers' Group Life Insurance (SGLI), you may roll over all or part of the amount received to one or more Coverdell ESAs for the benefit of members of the beneficiary's family (see Members of the beneficiary's family , earlier). How to file state and federal taxes for free Such payments are made to an eligible survivor upon the death of a member of the armed forces. How to file state and federal taxes for free The contribution to a Coverdell ESA from survivor benefits received cannot be made later than 1 year after the date on which you receive the gratuity or SGLI payment. How to file state and federal taxes for free   This rollover contribution is not subject to (but is in addition to) the contribution limits discussed earlier under Contribution Limits . How to file state and federal taxes for free The amount you roll over cannot exceed the total survivor benefits you received, reduced by contributions from these benefits to a Roth IRA or other Coverdell ESAs. How to file state and federal taxes for free   The amount contributed from the survivor benefits is treated as part of your basis (cost) in the Coverdell ESA, and will not be taxed when distributed. How to file state and federal taxes for free See Distributions , later. How to file state and federal taxes for free The limit of one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment. How to file state and federal taxes for free Changing the Designated Beneficiary The designated beneficiary can be changed. How to file state and federal taxes for free See Members of the beneficiary's family , earlier. How to file state and federal taxes for free There are no tax consequences if, at the time of the change, the new beneficiary is under age 30 or is a special needs beneficiary. How to file state and federal taxes for free Example. How to file state and federal taxes for free Assume the same situation for Aaron as in the last example (see Rollovers , earlier). How to file state and federal taxes for free Instead of closing his Coverdell ESA and paying the distribution into his sister's Coverdell ESA, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his sister. How to file state and federal taxes for free Transfer Because of Divorce If a spouse or former spouse receives a Coverdell ESA under a divorce or separation instrument, it is not a taxable transfer. How to file state and federal taxes for free After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own. How to file state and federal taxes for free Example. How to file state and federal taxes for free In their divorce settlement, Peg received her ex-husband's Coverdell ESA. How to file state and federal taxes for free In this process, the account was transferred into her name. How to file state and federal taxes for free Peg now treats the funds in this Coverdell ESA as if she were the original owner. How to file state and federal taxes for free Distributions The designated beneficiary of a Coverdell ESA can take a distribution at any time. How to file state and federal taxes for free Whether the distributions are tax free depends, in part, on whether the distributions are equal to or less than the amount of Adjusted qualified education expenses (defined later) that the beneficiary has in the same tax year. How to file state and federal taxes for free See Table 7-3, Coverdell ESA Distributions at a Glance, for highlights. How to file state and federal taxes for free Table 7-3. How to file state and federal taxes for free Coverdell ESA Distributions at a Glance Do not rely on this table alone. How to file state and federal taxes for free It provides only general highlights. How to file state and federal taxes for free See the text for definitions of terms in bold type and for more complete explanations. How to file state and federal taxes for free Question Answer Is a distribution from a Coverdell ESA to pay for a designated beneficiary's qualified education expenses tax free? Generally, yes, to the extent the amount of the distribution is not more than the designated beneficiary's adjusted qualified education expenses. How to file state and federal taxes for free After the designated beneficiary completes his or her education at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed? Yes. How to file state and federal taxes for free Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. How to file state and federal taxes for free Also, certain transfers to members of the beneficiary's family are permitted. How to file state and federal taxes for free Does the designated beneficiary need to be enrolled for a minimum number of courses to take a tax-free distribution? No. How to file state and federal taxes for free Adjusted qualified education expenses. How to file state and federal taxes for free   To determine if total distributions for the year are more than the amount of qualified education expenses, reduce total qualified education expenses by any tax-free educational assistance. How to file state and federal taxes for free Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. How to file state and federal taxes for free The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses. How to file state and federal taxes for free Tax-Free Distributions Generally, distributions are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year. How to file state and federal taxes for free Do not report tax-free distributions (including qualifying rollovers) on your tax return. How to file state and federal taxes for free Taxable Distributions A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the beneficiary's adjusted qualified education expenses for the year. How to file state and federal taxes for free Excess distribution. How to file state and federal taxes for free   This is the part of the total distribution that is more than the beneficiary's adjusted qualified education expenses for the year. How to file state and federal taxes for free Earnings and basis. How to file state and federal taxes for free   You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2013. How to file state and federal taxes for free The amount of your gross distribution will be shown in box 1. How to file state and federal taxes for free For 2013, instead of dividing the gross distribution between your earnings (box 2) and your basis (already-taxed amount) (box 3), the payer or trustee may report the fair market value (account balance) of the Coverdell ESA as of December 31, 2013. How to file state and federal taxes for free This will be shown in the blank box below boxes 5 and 6. How to file state and federal taxes for free   The amount contributed from survivor benefits (see Military death gratuity , earlier) is treated as part of your basis and will not be taxed when distributed. How to file state and federal taxes for free Figuring the Taxable Portion of a Distribution The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. How to file state and federal taxes for free Figure the taxable portion for 2013 as shown in the following steps. How to file state and federal taxes for free Multiply the total amount distributed by a fraction. How to file state and federal taxes for free The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the value (balance) of the account at the end of 2013 plus the amount distributed during 2013. How to file state and federal taxes for free Subtract the amount figured in (1) from the total amount distributed during 2013. How to file state and federal taxes for free The result is the amount of earnings included in the distribution(s). How to file state and federal taxes for free Multiply the amount of earnings figured in (2) by a fraction. How to file state and federal taxes for free The numerator is the adjusted qualified education expenses paid during 2013 and the denominator is the total amount distributed during 2013. How to file state and federal taxes for free Subtract the amount figured in (3) from the amount figured in (2). How to file state and federal taxes for free The result is the amount the beneficiary must include in income. How to file state and federal taxes for free The taxable amount must be reported on Form 1040 or Form 1040NR, line 21. How to file state and federal taxes for free Example. How to file state and federal taxes for free You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2013. How to file state and federal taxes for free There were no contributions in 2013. How to file state and federal taxes for free This is your first distribution from the account, so your basis in the account on December 31, 2012, was $1,500. How to file state and federal taxes for free The value (balance) of your account on December 31, 2013, was $950. How to file state and federal taxes for free You had $700 of adjusted qualified education expenses (AQEE) for the year. How to file state and federal taxes for free Using the steps in Figuring the Taxable Portion of a Distribution , earlier, figure the taxable portion of your distribution as follows. How to file state and federal taxes for free   1. How to file state and federal taxes for free $850 (distribution) × $1,500 basis + $0 contributions  $950 value + $850 distribution       =$708 (basis portion of distribution)     2. How to file state and federal taxes for free $850 (distribution)−$708 (basis portion of distribution)     =$142 (earnings included in distribution)   3. How to file state and federal taxes for free $142 (earnings) × $700 AQEE  $850 distribution           =$117 (tax-free earnings)     4. How to file state and federal taxes for free $142 (earnings)−$117 (tax-free earnings)=$25 (taxable earnings)                 You must include $25 in income as distributed earnings not used for qualified education expenses. How to file state and federal taxes for free Report this amount on Form 1040, line 21, listing the type and amount of income on the dotted line. How to file state and federal taxes for free Worksheet 7-3, Coverdell ESA–Taxable Distributions and Basis , at the end of this chapter, can help you figure your adjusted qualified education expenses, how much of your distribution must be included in income, and the remaining basis in your Coverdell ESA(s). How to file state and federal taxes for free Coordination With American Opportunity and Lifetime Learning Credits The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. How to file state and federal taxes for free This means the beneficiary must reduce qualified higher education expenses by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit. How to file state and federal taxes for free Example. How to file state and federal taxes for free Derek Green had $5,800 of qualified higher education expenses for 2013, his first year in college. How to file state and federal taxes for free He paid his college expenses from the following sources. How to file state and federal taxes for free     Partial tuition scholarship (tax free) $1,500     Coverdell ESA distribution 1,000     Gift from parents 2,100     Earnings from part-time job 1,200           Of his $5,800 of qualified higher education expenses, $4,000 was tuition and related expenses that also qualified for an American opportunity credit. How to file state and federal taxes for free Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. How to file state and federal taxes for free Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses. How to file state and federal taxes for free     Total qualified higher education expenses $5,800     Minus: Tax-free educational assistance −1,500     Minus: Expenses taken into account in  figuring American opportunity credit − 4,000     Equals: Adjusted qualified higher education  expenses (AQHEE) $ 300           Since the adjusted qualified higher education expenses ($300) are less than the Coverdell ESA distribution ($1,000), part of the distribution will be taxable. How to file state and federal taxes for free The balance in Derek's account was $1,800 on December 31, 2013. How to file state and federal taxes for free Prior to 2013, $2,100 had been contributed to this account. How to file state and federal taxes for free Contributions for 2013 totaled $400. How to file state and federal taxes for free Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below. How to file state and federal taxes for free   1. How to file state and federal taxes for free $1,000 (distribution) × $2,100 basis + $400 contributions  $1,800 value + $1,000 distribution           =$893 (basis portion of distribution)     2. How to file state and federal taxes for free $1,000 (distribution)−$893 (basis portion of distribution)     = $107 (earnings included in distribution)   3. How to file state and federal taxes for free $107 (earnings) × $300 AQHEE  $1,000 distribution       =$32 (tax-free earnings)     4. How to file state and federal taxes for free $107 (earnings)−$32 (tax-free earnings)=$75 (taxable earnings)                 Derek must include $75 in income (Form 1040, line 21). How to file state and federal taxes for free This is the amount of distributed earnings not used for adjusted qualified higher education expenses. How to file state and federal taxes for free Coordination With Qualified Tuition Program (QTP) Distributions If a designated beneficiary receives distributions from both a Coverdell ESA and a QTP in the same year, and the total distribution is more than the beneficiary's adjusted qualified higher education expenses, those expenses must be allocated between the distribution from the Coverdell ESA and the distribution from the QTP before figuring how much of each distribution is taxable. How to file state and federal taxes for free The following two examples illustrate possible allocations. How to file state and federal taxes for free Example 1. How to file state and federal taxes for free In 2013, Beatrice graduated from high school and began her first semester of college. How to file state and federal taxes for free That year, she had $1,000 of qualified elementary and secondary education expenses (QESEE) for high school and $3,000 of qualified higher education expenses (QHEE) for college. How to file state and federal taxes for free To pay these expenses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. How to file state and federal taxes for free No one claimed Beatrice as a dependent, nor was she eligible for an education credit. How to file state and federal taxes for free She did not receive any tax-free educational assistance in 2013. How to file state and federal taxes for free Beatrice must allocate her total qualified education expenses between the two distributions. How to file state and federal taxes for free Beatrice knows that tax-free treatment will be available if she applies her $800 Coverdell ESA distribution toward her $1,000 of qualified education expenses for high school. How to file state and federal taxes for free The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free. How to file state and federal taxes for free Next, Beatrice matches her $4,200 QTP distribution to her $3,000 of QHEE, and finds she has an excess QTP distribution of $1,200 ($4,200 QTP − $3,000 QHEE). How to file state and federal taxes for free She cannot use the extra $200 of high school expenses (from (1) above) against the QTP distribution because those expenses do not qualify a QTP for tax-free treatment. How to file state and federal taxes for free Finally, Beatrice figures the taxable and tax-free portions of her QTP distribution based on her $3,000 of QHEE. How to file state and federal taxes for free (See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program for more information. How to file state and federal taxes for free ) Example 2. How to file state and federal taxes for free Assume the same facts as in Example 1 , except that Beatrice withdrew $1,800 from her Coverdell ESA and $3,200 from her QTP. How to file state and federal taxes for free In this case, she allocates her qualified education expenses as follows. How to file state and federal taxes for free Using the same reasoning as in Example 1, Beatrice matches $1,000 of her Coverdell ESA distribution to her $1,000 of QESEE—she has $800 of her distribution remaining. How to file state and federal taxes for free Because higher education expenses can also qualify a Coverdell ESA distribution for tax-free treatment, Beatrice allocates her $3,000 of QHEE between the remaining $800 Coverdell ESA and the $3,200 QTP distributions ($4,000 total). How to file state and federal taxes for free   $3,000 QHEE × $800 ESA distribution  $4,000 total distribution = $600 QHEE (ESA)     $3,000 QHEE × $3,200 QTP distribution  $4,000 total distribution = $2,400 QHEE (QTP)   Beatrice then figures the taxable part of her: Coverdell ESA distribution based on qualified education expenses of $1,600 ($1,000 QESEE + $600 QHEE). How to file state and federal taxes for free See Figuring the Taxable Portion of a Distribution , earlier, in this chapter. How to file state and federal taxes for free   QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program). How to file state and federal taxes for free The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. How to file state and federal taxes for free However, you do not have to allocate your expenses in the same way. How to file state and federal taxes for free You can use any reasonable method. How to file state and federal taxes for free Losses on Coverdell ESA Investments If you have a loss on your investment in a Coverdell ESA, you may be able to deduct the loss on your income tax return. How to file state and federal taxes for free You can deduct the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. How to file state and federal taxes for free Your basis is the total amount of contributions to that Coverdell ESA. How to file state and federal taxes for free You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. How to file state and federal taxes for free If you have distributions from more than one Coverdell ESA account during a year, you must combine the information (amount of distribution, basis, etc. How to file state and federal taxes for free ) from all such accounts in order to determine your taxable earnings for the year. How to file state and federal taxes for free By doing this, the loss from one ESA account reduces the distributed earnings (if any) from any other ESA account. How to file state and federal taxes for free For examples of the calculation, see Losses on QTP Investments in chapter 8, Qualified Tuition Program. How to file state and federal taxes for free Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. How to file state and federal taxes for free Exceptions. How to file state and federal taxes for free   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. How to file state and federal taxes for free Made because the designated beneficiary is disabled. How to file state and federal taxes for free A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. How to file state and federal taxes for free A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. How to file state and federal taxes for free Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. How to file state and federal taxes for free Made on account of the attendance of the designated beneficiary at a U. How to file state and federal taxes for free S. How to file state and federal taxes for free military academy (such as the USMA at West Point). How to file state and federal taxes for free This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. How to file state and federal taxes for free S. How to file state and federal taxes for free Code) attributable to such attendance. How to file state and federal taxes for free Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier). How to file state and federal taxes for free Made before June 1, 2014, of an excess 2013 contribution (and any earnings on it). How to file state and federal taxes for free The distributed earnings must be included in gross income for the year in which the excess contribution was made. How to file state and federal taxes for free Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. How to file state and federal taxes for free Figuring the additional tax. How to file state and federal taxes for free    Use Part II of Form 5329, to figure any additional tax. How to file state and federal taxes for free Report the amount on Form 1040, line 58, or Form 1040NR, line 56. How to file state and federal taxes for free When Assets Must Be Distributed Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs. How to file state and federal taxes for free The designated beneficiary reaches age 30. How to file state and federal taxes for free In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. How to file state and federal taxes for free However, this rule does not apply if the beneficiary is a special needs beneficiary. How to file state and federal taxes for free The designated beneficiary dies before reaching age 30. How to file state and federal taxes for free In this case, the remaining assets must generally be distributed within 30 days after the date of death. How to file state and federal taxes for free Exception for Transfer to Surviving Spouse or Family Member If a Coverdell ESA is transferred to a surviving spouse or other family member as the result of the death of the designated beneficiary, the Coverdell ESA retains its status. How to file state and federal taxes for free (“Family member” was defined earlier under Rollovers . How to file state and federal taxes for free ) This means the spouse or other family member can treat the Coverdell ESA as his or her own and does not need to withdraw the assets until he or she reaches age 30. How to file state and federal taxes for free This age limitation does not apply if the new beneficiary is a special needs beneficiary. How to file state and federal taxes for free There are no tax consequences as a result of the transfer. How to file state and federal taxes for free How To Figure the Taxable Earnings When a total distribution is made because the designated beneficiary either reached age 30 or died, the earnings that accumulated tax free in the account must be included in taxable income. How to file state and federal taxes for free You determine these earnings as shown in the following two steps. How to file state and federal taxes for free Multiply the amount distributed by a fraction. How to file state and federal taxes for free The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the balance in the account at the end of 2013 plus the amount distributed during 2013. How to file state and federal taxes for free Subtract the amount figured in (1) from the total amount distributed during 2013. How to file state and federal taxes for free The result is the amount of earnings included in the distribution. How to file state and federal taxes for free For an example, see steps (1) and (2) of the Example under Figuring the Taxable Portion of a Distribution, earlier. How to file state and federal taxes for free The beneficiary or other person receiving the distribution must report this amount on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line. How to file state and federal taxes for free Worksheet 7-3 Instructions. How to file state and federal taxes for free Coverdell ESA—Taxable Distributions and Basis Line G. How to file state and federal taxes for free Enter the total distributions received from all Coverdell ESAs during 2013. How to file state and federal taxes for free Do not include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). How to file state and federal taxes for free Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year for which the contributions were made. How to file state and federal taxes for free Line 2. How to file state and federal taxes for free Your basis (amount already taxed) in this Coverdell ESA as of December 31, 2012, is the total of:   •All contributions to this Coverdell ESA before 2013 •Minus the tax-free portion of any distributions from this Coverdell ESA before 2013. How to file state and federal taxes for free   If your last distribution from this Coverdell ESA was before 2013, you must start with the basis in your account as of the end of the last year in which you took a distribution. How to file state and federal taxes for free For years before 2002, you can find that amount on the last line of the worksheet in the Instructions for Form 8606, Nondeductible IRAs, that you completed for that year. How to file state and federal taxes for free For years after 2001, you can find that amount by using the ending basis from the worksheet in Publication 970 for that year. How to file state and federal taxes for free You can determine your basis in this Coverdell ESA as of December 31, 2012, by adding to the basis as of the end of that year any contributions made to that account after the year of the distribution and before 2013. How to file state and federal taxes for free Line 4. How to file state and federal taxes for free Enter the total distributions received from this Coverdell ESA in 2013. How to file state and federal taxes for free Do not include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). How to file state and federal taxes for free   Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year of the contributions. How to file state and federal taxes for free Line 7. How to file state and federal taxes for free Enter the total value of this Coverdell ESA as of December 31, 2013, plus any outstanding rollovers contributed to the account after 2012, but before the end of the 60-day rollover period. How to file state and federal taxes for free A statement should be sent to you by January 31, 2014, for this Coverdell ESA showing the value on December 31, 2013. How to file state and federal taxes for free   A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. How to file state and federal taxes for free An outstanding rollover is any amount withdrawn within 60 days before the end of 2013 (November 2 through December 31) that was rolled over after December 31, 2013, but within the 60-day rollover period. How to file state and federal taxes for free Worksheet 7-3. How to file state and federal taxes for free Coverdell ESA—Taxable Distributions and Basis How to complete this worksheet. How to file state and federal taxes for free • • • Complete Part I, lines A through H, on only one worksheet. How to file state and federal taxes for free  Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs. How to file state and federal taxes for free  Complete Part III, the Summary (line 16), on only one worksheet. How to file state and federal taxes for free Part I. How to file state and federal taxes for free Qualified Education Expenses (Complete for total expenses)       A. How to file state and federal taxes for free Enter your total qualified education expenses for 2013   A. How to file state and federal taxes for free   B. How to file state and federal taxes for free Enter those qualified education expenses paid for with tax-free educational assistance (for example, tax-free scholarships, veterans' educational benefits, Pell grants, employer-provided educational assistance)   B. How to file state and federal taxes for free         C. How to file state and federal taxes for free Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040). How to file state and federal taxes for free Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040 or 1040NR)   C. How to file state and federal taxes for free         D. How to file state and federal taxes for free Enter those qualified higher education expenses on which  an American opportunity or lifetime learning credit was based   D. How to file state and federal taxes for free         E. How to file state and federal taxes for free Add lines B, C, and D   D. How to file state and federal taxes for free   F. How to file state and federal taxes for free Subtract line E from line A. How to file state and federal taxes for free This is your adjusted qualified education expense for 2013   E. How to file state and federal taxes for free   G. How to file state and federal taxes for free Enter your total distributions from all Coverdell ESAs during 2013. How to file state and federal taxes for free Do not include rollovers  or the return of excess contributions (see instructions)   F. How to file state and federal taxes for free   H. How to file state and federal taxes for free Divide line F by line G. How to file state and federal taxes for free Enter the result as a decimal (rounded to at least 3 places). How to file state and federal taxes for free If the  result is 1. How to file state and federal taxes for free 000 or more, enter 1. How to file state and federal taxes for free 000   G. How to file state and federal taxes for free . How to file state and federal taxes for free Part II. How to file state and federal taxes for free Taxable Distributions and Basis (Complete separately for each account) 1. How to file state and federal taxes for free Enter the amount contributed to this Coverdell ESA for 2013, including contributions made for 2013 from January 1, 2014, through April 15, 2014. How to file state and federal taxes for free Do not include rollovers or the return of excess contributions   1. How to file state and federal taxes for free   2. How to file state and federal taxes for free Enter your basis in this Coverdell ESA as of December 31, 2012 (see instructions)   2. How to file state and federal taxes for free   3. How to file state and federal taxes for free Add lines 1 and 2   3. How to file state and federal taxes for free   4. How to file state and federal taxes for free Enter the total distributions from this Coverdell ESA during 2013. How to file state and federal taxes for free Do not include rollovers  or the return of excess contributions (see instructions)   4. How to file state and federal taxes for free   5. How to file state and federal taxes for free Multiply line 4 by line H. How to file state and federal taxes for free This is the amount of adjusted qualified  education expense attributable to this Coverdell ESA   5. How to file state and federal taxes for free         6. How to file state and federal taxes for free Subtract line 5 from line 4   6. How to file state and federal taxes for free         7. How to file state and federal taxes for free Enter the total value of this Coverdell ESA as of December 31, 2013,  plus any outstanding rollovers (see instructions)   7. How to file state and federal taxes for free         8. How to file state and federal taxes for free Add lines 4 and 7   8. How to file state and federal taxes for free         9. How to file state and federal taxes for free Divide line 3 by line 8. How to file state and federal taxes for free Enter the result as a decimal (rounded to  at least 3 places). How to file state and federal taxes for free If the result is 1. How to file state and federal taxes for free 000 or more, enter 1. How to file state and federal taxes for free 000   9. How to file state and federal taxes for free . How to file state and federal taxes for free       10. How to file state and federal taxes for free Multiply line 4 by line 9. How to file state and federal taxes for free This is the amount of basis allocated to your  distributions, and is tax free   10. How to file state and federal taxes for free     Note. How to file state and federal taxes for free If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15. How to file state and federal taxes for free       11. How to file state and federal taxes for free Subtract line 10 from line 4   11. How to file state and federal taxes for free   12. How to file state and federal taxes for free Divide line 5 by line 4. How to file state and federal taxes for free Enter the result as a decimal (rounded to  at least 3 places). How to file state and federal taxes for free If the result is 1. How to file state and federal taxes for free 000 or more, enter 1. How to file state and federal taxes for free 000   12. How to file state and federal taxes for free . How to file state and federal taxes for free       13. How to file state and federal taxes for free Multiply line 11 by line 12. How to file state and federal taxes for free This is the amount of qualified education  expenses allocated to your distributions, and is tax free   13. How to file state and federal taxes for free   14. How to file state and federal taxes for free Subtract line 13 from line 11. How to file state and federal taxes for free This is the portion of the distributions from this  Coverdell ESA in 2013 that you must include in income   14. How to file state and federal taxes for free   15. How to file state and federal taxes for free Subtract line 10 from line 3. How to file state and federal taxes for free This is your basis in this Coverdell ESA as of December 31, 2013   15. How to file state and federal taxes for free   Part III. How to file state and federal taxes for free Summary (Complete only once)       16. How to file state and federal taxes for free Taxable amount. How to file state and federal taxes for free Add together all amounts on line 14 for all your Coverdell ESAs. How to file state and federal taxes for free Enter here  and include on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line   16. How to file state and federal taxes for free   Prev  Up  Next   Home   More Online Publications
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The How To File State And Federal Taxes For Free

How to file state and federal taxes for free Internal Revenue Bulletin:  2013-7  February 11, 2013  Rev. How to file state and federal taxes for free Proc. How to file state and federal taxes for free 2013-16 Table of Contents SECTION 1. How to file state and federal taxes for free PURPOSE SECTION 2. How to file state and federal taxes for free BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE SECTION 3. How to file state and federal taxes for free BACKGROUND—APPLICABLE PROVISIONS OF LAW SECTION 4. How to file state and federal taxes for free FEDERAL INCOME TAX TREATMENT SECTION 5. How to file state and federal taxes for free INFORMATION-REPORTING OBLIGATIONS SECTION 6. How to file state and federal taxes for free HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA SECTION 7. How to file state and federal taxes for free PENALTY RELIEF FOR 2012 SECTION 8. How to file state and federal taxes for free SCOPE AND EFFECTIVE DATE SECTION 9. How to file state and federal taxes for free DRAFTING INFORMATION SECTION 1. How to file state and federal taxes for free PURPOSE This revenue procedure provides guidance to mortgage loan holders, loan servicers, and borrowers who are participating in the Department of the Treasury’s (Treasury) and Department of Housing and Urban Development’s (HUD) Home Affordable Modification Program® (HAMP®). How to file state and federal taxes for free Under HAMP, a borrower may be eligible for principal reduction of the outstanding balance of a qualifying mortgage pursuant to the program’s Principal Reduction AlternativeSM (PRA). How to file state and federal taxes for free In appropriate cases, HAMP has been offering the PRA as part of a HAMP loan modification since the last quarter of 2010. How to file state and federal taxes for free Current plans call for HAMP to continue accepting new borrowers through the end of 2013. How to file state and federal taxes for free The Internal Revenue Service (Service) is providing this guidance to address the tax consequences for borrowers (HAMP-PRA borrowers) who are participating in the PRA and the reporting obligations for participating mortgage loan holders and servicers. How to file state and federal taxes for free SECTION 2. How to file state and federal taxes for free BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE . How to file state and federal taxes for free 01 To help distressed borrowers lower their monthly mortgage payments, Treasury and HUD established HAMP for mortgage loans that are not owned or guaranteed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). How to file state and federal taxes for free A description of the program can be found at www. How to file state and federal taxes for free makinghomeaffordable. How to file state and federal taxes for free gov. How to file state and federal taxes for free . How to file state and federal taxes for free 02 Under HAMP, a participating loan servicer, acting on behalf of the mortgage loan holder, must consider a sequence of modification steps for each eligible borrower’s mortgage loan until the borrower’s monthly payment is reduced to a monthly payment amount determined under the HAMP guidelines. How to file state and federal taxes for free These steps include a reduction in the mortgage loan’s interest rate, an extension of the mortgage loan’s term, and a reduction in the mortgage loan’s principal balance. How to file state and federal taxes for free . How to file state and federal taxes for free 03 In some cases, the unpaid principal balance of the modified mortgage loan is divided into (1) an amount that bears stated interest and that is used to calculate the borrower’s new monthly mortgage payment (the “Non-forbearance Portion”), and (2) a forbearance amount, which does not bear stated interest and on which periodic payments of stated principal are not required. How to file state and federal taxes for free The stated principal of the forbearance amount is due upon the earliest of the borrower’s transfer of the property, payoff of the balance on the Non-forbearance Portion of the mortgage loan, or maturity of the mortgage loan. How to file state and federal taxes for free However, as noted in section 2. How to file state and federal taxes for free 06 of this revenue procedure, a HAMP-PRA borrower sometimes may not have to pay all or a portion of the forbearance amount. How to file state and federal taxes for free (The forbearance amount associated with a HAMP-PRA principal reduction is called the “PRA Forbearance Amount. How to file state and federal taxes for free ”) . How to file state and federal taxes for free 04 If a mortgage loan is being considered for a HAMP modification and the amount owed on the mortgage loan is greater than 115 percent of the value of the property, then the servicer must consider whether principal reduction under PRA should be used as part of the HAMP modification. How to file state and federal taxes for free . How to file state and federal taxes for free 05 The first step toward a HAMP modification is a trial period plan, in which the borrower’s monthly mortgage payment is set at a monthly payment amount determined under the HAMP guidelines. How to file state and federal taxes for free The trial period plan effective date is the due date for the first of the reduced payments that are to be made under the trial period plan. How to file state and federal taxes for free (It is the first day of either the first or the second month after the servicer transmits the trial period notice to the borrower. How to file state and federal taxes for free ) In general, the trial period is three months, and, during this period, the borrower must satisfy certain conditions before the changes to the terms of the mortgage loan become permanent (the “Trial Period Conditions”). How to file state and federal taxes for free Specifically, depending on the borrower’s trial period payment history, the borrower’s compliance with HAMP and servicer guidelines, and his or her satisfaction of all other Trial Period Conditions, the borrower will be offered a permanent modification of the terms of the mortgage loan, including monthly mortgage payments that are lower than those under the old mortgage loan. How to file state and federal taxes for free Until the effective date of a permanent modification, the terms of the existing mortgage loan continue to apply. How to file state and federal taxes for free . How to file state and federal taxes for free 06 After the mortgage loan is permanently modified under HAMP, if the modified mortgage loan is in good standing on the first, second, or third annual anniversary of the trial period plan effective date (the “Three-year Period”), the servicer must reduce the unpaid principal balance of the mortgage loan on the respective anniversary date by one-third of the initial PRA Forbearance Amount. How to file state and federal taxes for free (The servicer allocates the entire reduction to the remaining PRA Forbearance Amount. How to file state and federal taxes for free ) In general, if a HAMP-PRA borrower’s mortgage loan is in good standing and if the HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan prior to the reduction of the entire PRA Forbearance Amount, the servicer must reduce the remaining outstanding principal balance of the mortgage loan by the remaining PRA Forbearance Amount. How to file state and federal taxes for free . How to file state and federal taxes for free 07 In connection with every HAMP loan modification, the HAMP program administrator (acting on behalf of the federal government) provides incentives to the borrower, the servicer, and the investor (that is, the holder of the mortgage loan). How to file state and federal taxes for free If a HAMP loan modification includes a PRA principal reduction, the HAMP program administrator makes additional incentive payments to the investor. How to file state and federal taxes for free These additional incentives are called “PRA Investor Incentive Payments” and are generally spread over three years. How to file state and federal taxes for free The size of the PRA Investor Incentive Payments depends on the amount of principal reduced, the loan-to-value ratio at the time of the HAMP modification, and the loan’s payment history before the modification. How to file state and federal taxes for free The PRA Investor Incentive Payments range from 18 to 63 percent of the principal amounts reduced. How to file state and federal taxes for free For purposes of this revenue procedure, the excess of the initial PRA Forbearance Amount of a mortgage loan over the aggregate PRA Investor Incentive Payments scheduled to be paid with respect to that loan is called the “PRA Adjusted Forbearance Amount. How to file state and federal taxes for free ” . How to file state and federal taxes for free 08 A PRA Investor Incentive Payment is earned by the investor on each date on which the servicer reduces the unpaid principal balance of the mortgage loan by a portion of the PRA Forbearance Amount (generally, on the first three annual anniversaries of the trial period plan effective date). How to file state and federal taxes for free . How to file state and federal taxes for free 09 If a HAMP-PRA borrower’s early payment in full of the Non-forbearance Portion of the mortgage loan accelerates the reduction of the remaining PRA Forbearance Amount (described above in section 2. How to file state and federal taxes for free 06 of this revenue procedure), the remaining PRA Investor Incentive Payments from the HAMP program administrator are also accelerated. How to file state and federal taxes for free . How to file state and federal taxes for free 10 If, prior to completion of the Three-year Period, a mortgage loan ceases to be in good standing because of the HAMP-PRA borrower’s payment history, then the remaining PRA Forbearance Amount is not further reduced and is due when the HAMP-PRA borrower transfers the property, the HAMP-PRA borrower refinances, or otherwise pays off the Non-forbearance Portion of the mortgage loan, or the mortgage loan matures. How to file state and federal taxes for free SECTION 3. How to file state and federal taxes for free BACKGROUND—APPLICABLE PROVISIONS OF LAW . How to file state and federal taxes for free 01 Under § 61 of the Internal Revenue Code, except as otherwise provided in subtitle A, gross income means all income from whatever source derived, including income from discharge of indebtedness. How to file state and federal taxes for free See § 61(a)(12). How to file state and federal taxes for free . How to file state and federal taxes for free 02 Under § 1. How to file state and federal taxes for free 1001-3 of the Income Tax Regulations, if a debt instrument undergoes a significant modification, then the modification results in an exchange of the original debt instrument for the modified debt instrument. How to file state and federal taxes for free In general, an agreement to change a term of a debt instrument is a modification at the time the borrower and holder enter into the agreement, even if the change in term is not immediately effective. How to file state and federal taxes for free However, if the change is conditioned on reasonable closing conditions, a modification occurs on the closing date of the agreement. How to file state and federal taxes for free See § 1. How to file state and federal taxes for free 1001-3(c)(6). How to file state and federal taxes for free . How to file state and federal taxes for free 03 Under § 108(e)(10), in the case of a debt-for-debt exchange (including a deemed exchange under § 1. How to file state and federal taxes for free 1001-3), the borrower is treated as having satisfied the original debt instrument with an amount of money equal to the issue price of the new debt instrument. How to file state and federal taxes for free If the amount of debt satisfied in this manner exceeds that issue price, the borrower realizes discharge of indebtedness income on the exchange. How to file state and federal taxes for free See also § 1. How to file state and federal taxes for free 61-12(c). How to file state and federal taxes for free . How to file state and federal taxes for free 04 The issue price of a non-publicly traded debt instrument issued for non-publicly traded property generally reflects the amount of principal that the borrower is required to pay to the holder of the instrument. How to file state and federal taxes for free If a borrower has the ability to avoid paying certain amounts (including principal) without violating the terms of the instrument, the payment schedule for the instrument is generally determined based on an assumption that the borrower will avoid any requirement to make those payments. How to file state and federal taxes for free See, e. How to file state and federal taxes for free g. How to file state and federal taxes for free , §§ 1. How to file state and federal taxes for free 1272-1(c)(5) and 1. How to file state and federal taxes for free 1274-2(d). How to file state and federal taxes for free . How to file state and federal taxes for free 05 Under § 108(a), gross income does not include any amount that but for § 108(a) would be includible in gross income by reason of the discharge (in whole or in part) of a taxpayer’s indebtedness if (1) the indebtedness discharged is qualified principal residence indebtedness that is discharged before January 1, 2014, or (2) the discharge occurs when the taxpayer is insolvent. How to file state and federal taxes for free Section 108(a)(1)(E) and 108(a)(1)(B). How to file state and federal taxes for free (Although § 108 contains other exclusions as well, this revenue procedure focuses on these two exclusions because they are the most likely to apply to the greatest number of HAMP-PRA borrowers. How to file state and federal taxes for free ) . How to file state and federal taxes for free 06 Under §§ 108(h) and 163(h)(3)(B), qualified principal residence indebtedness is any indebtedness that is incurred by a borrower to buy, build, or substantially improve the borrower’s principal residence and is secured by that residence. How to file state and federal taxes for free . How to file state and federal taxes for free 07 Qualified principal residence indebtedness also includes a loan secured by the borrower’s principal residence that refinances qualified principal residence indebtedness, but only to the extent of the amount of the refinanced indebtedness. How to file state and federal taxes for free See §§ 108(h) and 163(h)(3)(B)(i). How to file state and federal taxes for free . How to file state and federal taxes for free 08 The maximum amount of discharged indebtedness that a borrower may exclude from gross income under the qualified principal residence indebtedness exclusion is $2,000,000 ($1,000,000 for a married individual filing a separate return). How to file state and federal taxes for free Under § 108(h)(4), if only part of the discharged indebtedness is qualified principal residence indebtedness, then the exclusion applies only to the amount of the discharged indebtedness that exceeds the amount of the loan (determined immediately before the discharge) that is not qualified principal residence indebtedness. How to file state and federal taxes for free . How to file state and federal taxes for free 09 Under § 108(a)(3), the insolvency exclusion applies to the lesser of the amount of the debt discharged or the amount by which the taxpayer is insolvent immediately before the discharge. How to file state and federal taxes for free . How to file state and federal taxes for free 10 Section 108(d)(3) provides that, for purposes of the insolvency exclusion, a taxpayer is insolvent to the extent that the taxpayer’s total liabilities exceed the fair market value of all of the taxpayer’s assets immediately before the discharge of indebtedness. How to file state and federal taxes for free Under § 108(a)(2)(C), the qualified principal residence indebtedness exclusion takes precedence over the insolvency exclusion when both exclusions apply to discharged indebtedness, unless the taxpayer elects to apply the insolvency exclusion. How to file state and federal taxes for free . How to file state and federal taxes for free 11 If an amount is excluded from gross income as a discharge of qualified principal residence indebtedness, the taxpayer must reduce the basis of the taxpayer’s principal residence. How to file state and federal taxes for free See § 108(h)(1). How to file state and federal taxes for free If a discharged amount is excluded from gross income because the taxpayer was insolvent when the discharge occurred, the taxpayer must reduce certain tax attributes (possibly including basis). How to file state and federal taxes for free See § 108(b). How to file state and federal taxes for free For further discussion of income from the discharge of indebtedness, the qualified principal residence indebtedness exclusion, the insolvency exclusion, and other exclusions from gross income that may apply, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). How to file state and federal taxes for free . How to file state and federal taxes for free 12 Taxpayers who exclude any discharged amounts from gross income report both the exclusion and the resulting reduction in basis or other tax attributes on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment). How to file state and federal taxes for free See Form 982 instructions and Publication 4681. How to file state and federal taxes for free This form is to be filed with the tax return for the taxable year in which the amount is discharged but is excluded from gross income. How to file state and federal taxes for free . How to file state and federal taxes for free 13 Governmental payments made to or on behalf of individuals or other persons are included within the broad definition of gross income under § 61 unless an exception applies. How to file state and federal taxes for free See Notice 2003-18, 2003-1 C. How to file state and federal taxes for free B. How to file state and federal taxes for free 699, and Rev. How to file state and federal taxes for free Rul. How to file state and federal taxes for free 79-356, 1979-2 C. How to file state and federal taxes for free B. How to file state and federal taxes for free 28. How to file state and federal taxes for free However, if disbursements are made by a governmental unit to individuals in the interest of the general welfare (that is, are generally based on individual or family need) and the disbursements do not represent compensation for services, then the amounts disbursed are excluded from the income of the recipient (general welfare exclusion). How to file state and federal taxes for free See Rev. How to file state and federal taxes for free Rul. How to file state and federal taxes for free 2005-46, 2005-2 C. How to file state and federal taxes for free B. How to file state and federal taxes for free 120, and Rev. How to file state and federal taxes for free Rul. How to file state and federal taxes for free 75-246, 1975-1 C. How to file state and federal taxes for free B. How to file state and federal taxes for free 24. How to file state and federal taxes for free . How to file state and federal taxes for free 14 Under § 451 and § 1. How to file state and federal taxes for free 451-1(a), a taxpayer that uses the cash receipts and disbursements method of accounting includes income in gross income when the taxpayer actually or constructively receives the income. How to file state and federal taxes for free . How to file state and federal taxes for free 15 Section 6041 requires every person engaged in a trade or business (including the United States and its agencies) to (1) file an information return (Form 1099-MISC, Miscellaneous Income, is used for this purpose) for each calendar year in which the person makes, in the course of its trade or business, payments to another person of fixed or determinable income aggregating $600 or more, and (2) furnish a copy of the information return to that other person. How to file state and federal taxes for free See § 6041(a) and (d) and § 1. How to file state and federal taxes for free 6041-1(a)(1) and (b). How to file state and federal taxes for free . How to file state and federal taxes for free 16 Section 6050P requires applicable entities (including the United States and its agencies, financial entities, and any organization a significant trade or business of which is the lending of money) to (1) file an information return (Form 1099-C, Cancellation of Debt, is used for this purpose) for each calendar year in which it discharges indebtedness of another person of $600 or more, and (2) furnish a copy of the information return to that other person. How to file state and federal taxes for free See § 6050P(a)-(c) and §§ 1. How to file state and federal taxes for free 6050P-1(a) and 1. How to file state and federal taxes for free 6050P-2(a) and (d). How to file state and federal taxes for free . How to file state and federal taxes for free 17 Section 6721 imposes penalties with respect to information returns required to be filed with the Service. How to file state and federal taxes for free These penalties apply in the case of a failure to timely file an information return, a failure to include all required information on the return, or the inclusion of incorrect information on the return. How to file state and federal taxes for free Section 6724(d)(1) includes Forms 1099-MISC and 1099-C in the term “information return. How to file state and federal taxes for free ” . How to file state and federal taxes for free 18 Section 6722 imposes penalties with respect to payee statements required to be furnished to payees. How to file state and federal taxes for free These penalties apply in the case of a failure to timely furnish a payee statement, a failure to include all required information on the statement, or the inclusion of incorrect information on the payee statement. How to file state and federal taxes for free Section 6724(d)(2) includes in the term “payee statement” copies of Forms 1099-MISC and 1099-C that are required to be furnished to taxpayers. How to file state and federal taxes for free SECTION 4. How to file state and federal taxes for free FEDERAL INCOME TAX TREATMENT . How to file state and federal taxes for free 01 Because a HAMP modification with a PRA principal reduction is a significant modification, it results in a deemed debt-for-debt exchange in which the HAMP-PRA borrower satisfies the old mortgage loan by issuing a new one. How to file state and federal taxes for free See § 1. How to file state and federal taxes for free 1001-3. How to file state and federal taxes for free At the time of the modification, therefore, under § 108 and this revenue procedure, the HAMP-PRA borrower realizes discharge of indebtedness income equal to any excess of the adjusted issue price of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new (post-modification) mortgage loan. How to file state and federal taxes for free See also § 61(a)(12) and § 1. How to file state and federal taxes for free 61-12(c). How to file state and federal taxes for free . How to file state and federal taxes for free 02 A HAMP-PRA borrower has the ability to avoid payment of the PRA Adjusted Forbearance Amount. How to file state and federal taxes for free Because the HAMP-PRA borrower has this ability, that amount should not be taken into account in determining the issue price of the new mortgage loan. How to file state and federal taxes for free Because the issue price of the new mortgage loan does not include the PRA Adjusted Forbearance Amount, the PRA Adjusted Forbearance Amount contributes to the excess of the adjusted issue price of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new mortgage loan. How to file state and federal taxes for free . How to file state and federal taxes for free 03 On the other hand, the investor has not given up its right to receive the remainder of the PRA Forbearance Amount, because the HAMP program administrator is expected to make those payments on the HAMP-PRA borrower’s behalf by making the PRA Investor Incentive Payments. How to file state and federal taxes for free Because the remainder of the PRA Forbearance Amount is payable in this manner, that remainder is included in the issue price of the new mortgage loan. How to file state and federal taxes for free . How to file state and federal taxes for free 04 The Trial Period Conditions are reasonable closing conditions that must be satisfied before the changes to the terms of the mortgage loan become permanent. How to file state and federal taxes for free Therefore, for purposes of § 1. How to file state and federal taxes for free 1001-3, the date of the modification is the date of the permanent modification. How to file state and federal taxes for free . How to file state and federal taxes for free 05 Unless an exclusion applies, the HAMP-PRA borrower includes in gross income the discharge of indebtedness income described in section 4. How to file state and federal taxes for free 01 of this revenue procedure for the taxable year in which the permanent modification occurs. How to file state and federal taxes for free Under certain conditions, however, section 6 of this revenue procedure permits a borrower to report the discharge of indebtedness under HAMP-PRA over the Three-year Period. How to file state and federal taxes for free The qualified principal residence indebtedness exclusion under § 108(a)(1)(E) and the insolvency exclusion under § 108(a)(1)(B) are two exclusions that may apply to the discharge. How to file state and federal taxes for free . How to file state and federal taxes for free 06 The PRA Investor Incentive Payment is treated as a payment on the mortgage loan by the HAMP program administrator on behalf of the HAMP-PRA borrower. How to file state and federal taxes for free . How to file state and federal taxes for free 07 To the extent that the HAMP-PRA borrower uses the property as the HAMP-PRA borrower’s principal residence or the property is occupied by the HAMP-PRA borrower’s legal dependent, parent, or grandparent without rent being charged or collected, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the PRA Investor Incentive Payments that the HAMP program administrator makes to the investor in the mortgage loan. How to file state and federal taxes for free This is consistent with Rev. How to file state and federal taxes for free Rul. How to file state and federal taxes for free 2009-19, 2009-28 I. How to file state and federal taxes for free R. How to file state and federal taxes for free B. How to file state and federal taxes for free 111, which addressed the treatment of Pay-for-Performance Success Payments. How to file state and federal taxes for free . How to file state and federal taxes for free 08 To the extent that the HAMP-PRA borrower uses the property as a rental property or holds the property vacant and available for rent, the HAMP-PRA borrower includes PRA Investor Incentive Payments in gross income. How to file state and federal taxes for free If the HAMP-PRA borrower uses the cash receipts and disbursements method of accounting, then the HAMP-PRA borrower includes a PRA Investor Incentive Payment in gross income in the taxable year in which it is applied as a payment on the HAMP-PRA borrower’s mortgage loan. How to file state and federal taxes for free . How to file state and federal taxes for free 09 As described in section 2. How to file state and federal taxes for free 09 of this revenue procedure, if a HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan while the loan is in good standing and prior to completion of the Three-year Period, that payment accelerates both the reduction in the remaining PRA Forbearance Amount and the PRA Investor Incentive Payments from the HAMP program administrator. How to file state and federal taxes for free To the extent that the HAMP-PRA borrower is described in section 4. How to file state and federal taxes for free 07 of this revenue procedure, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the accelerated PRA Investor Incentive Payments. How to file state and federal taxes for free To the extent that the HAMP-PRA borrower is described in section 4. How to file state and federal taxes for free 08 of this revenue procedure, the HAMP-PRA borrower includes in income in the year of the acceleration the remaining amount of the PRA Investor Incentive Payment. How to file state and federal taxes for free SECTION 5. How to file state and federal taxes for free INFORMATION-REPORTING OBLIGATIONS . How to file state and federal taxes for free 01 Under § 6050P, the investor is required to file a Form 1099-C with respect to a borrower who realizes discharge of indebtedness of $600 or more. How to file state and federal taxes for free A copy of this form is required to be furnished to the borrower. How to file state and federal taxes for free . How to file state and federal taxes for free 02 As stated in sections 4. How to file state and federal taxes for free 01 and 4. How to file state and federal taxes for free 04 of this revenue procedure, the HAMP-PRA discharge of indebtedness is realized at the time of the permanent modification of the mortgage loan. How to file state and federal taxes for free . How to file state and federal taxes for free 03 An investor is an applicable entity that is required under § 1. How to file state and federal taxes for free 6050P-1 and this revenue procedure to issue a Form 1099-C for discharge of indebtedness. How to file state and federal taxes for free Under § 1. How to file state and federal taxes for free 6050P-1(b)(2)(F), the permanent modification of a mortgage loan is an identifiable event. How to file state and federal taxes for free Identifiable events determine when Forms 1099-C have to be issued. How to file state and federal taxes for free Thus, the Form 1099-C is issued for the calendar year in which the permanent mortgage loan modification occurs. How to file state and federal taxes for free This rule under § 1. How to file state and federal taxes for free 6050P-1(b)(2)(F) applies even if, under section 6 of this revenue procedure, the HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the times when the unpaid principal balance of the new mortgage loan is reduced. How to file state and federal taxes for free . How to file state and federal taxes for free 04 The investor (or the loan servicer acting on behalf of the investor) reports the full amount of the discharge on the Form 1099-C regardless of whether some or all of the amount is excludible from income under the qualified principal residence indebtedness exclusion, the insolvency exclusion, or any other exclusion that may apply. How to file state and federal taxes for free That discharged amount will generally be the PRA Adjusted Forbearance Amount (which does not include the amounts expected to be satisfied by PRA Investor Incentive Payments). How to file state and federal taxes for free . How to file state and federal taxes for free 05 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. How to file state and federal taxes for free 07 of this revenue procedure, the PRA Investor Incentive Payments are excluded from the gross income of the HAMP-PRA borrower, and thus they are not fixed or determinable income to the HAMP-PRA borrower. How to file state and federal taxes for free Under § 6041, these payments are not subject to information reporting. How to file state and federal taxes for free See Notice 2011-14, 2011-11 I. How to file state and federal taxes for free R. How to file state and federal taxes for free B. How to file state and federal taxes for free 544, 546. How to file state and federal taxes for free . How to file state and federal taxes for free 06 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. How to file state and federal taxes for free 08 of this revenue procedure, the PRA Investor Incentive Payments are includible in gross income as fixed or determinable income in the taxable year required by the HAMP-PRA borrower’s method of accounting. How to file state and federal taxes for free The payment is subject to the information reporting requirements of § 6041, as described in section 3. How to file state and federal taxes for free 15 of this revenue procedure. How to file state and federal taxes for free Accordingly, the HAMP program administrator is required to issue a Form 1099-MISC reporting the PRA Investor Incentive Payment. How to file state and federal taxes for free SECTION 6. How to file state and federal taxes for free HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA . How to file state and federal taxes for free 01 In general. How to file state and federal taxes for free The HAMP-PRA program began in the last quarter of 2010, and since that time there has been uncertainty about whether the amount of the discharge of indebtedness should be reported in the year of the permanent modification or over the Three-year Period (when the unpaid principal balance on the new mortgage loan is reduced). How to file state and federal taxes for free As a result, some HAMP-PRA borrowers have been reporting the discharge of indebtedness under HAMP-PRA over the Three-year Period. How to file state and federal taxes for free Given the temporary nature of the program and the issuance of this guidance after participation in the program has begun, in the interests of equitable and sound tax administration, HAMP-PRA borrowers may report discharges of indebtedness under HAMP-PRA under the rules in this section 6. How to file state and federal taxes for free A HAMP-PRA borrower may choose to report discharges of indebtedness under HAMP-PRA pursuant to the rules in this section 6 only if the borrower applies the same borrower option under section 6. How to file state and federal taxes for free 02 of this revenue procedure consistently to the taxable year of the permanent modification and to all subsequent taxable years. How to file state and federal taxes for free Thus, a HAMP-PRA borrower may not choose a borrower option under section 6. How to file state and federal taxes for free 02 of this revenue procedure if a statute of limitations has expired for any of the taxable years that are necessary for consistent application of that option. How to file state and federal taxes for free . How to file state and federal taxes for free 02 HAMP-PRA borrower options. How to file state and federal taxes for free A HAMP-PRA borrower may treat the HAMP-PRA discharge as being realized in either of the following ways— (1) One hundred percent of the PRA Adjusted Forbearance Amount at the time of the permanent modification; or (2) One third of the PRA Adjusted Forbearance Amount on each of the first three annual anniversaries of the trial period plan effective date (described in section 2. How to file state and federal taxes for free 06 of this revenue procedure), when, as required by the terms of the new mortgage loan, the servicer reduces the unpaid principal balance of the new mortgage loan. How to file state and federal taxes for free If some or all of the reduction in the unpaid principal balance is accelerated (as described in section 2. How to file state and federal taxes for free 06 of this revenue procedure) because the HAMP-PRA borrower prepays the Non-forbearance Portion of the mortgage loan, then the HAMP-PRA discharge represented by the amount of the reduction that was accelerated is treated as being realized at the time of the accelerated reduction. How to file state and federal taxes for free . How to file state and federal taxes for free 03 HAMP-PRA borrowers who choose to realize the HAMP-PRA discharge at the time of the permanent modification. How to file state and federal taxes for free (1) If a HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the time of the permanent modification, then for the taxable year in which the permanent modification occurs, the HAMP-PRA borrower reports on Form 982 the amount, if any, of the discharge that is excluded from gross income and includes in gross income any remaining discharge. How to file state and federal taxes for free (2) If a HAMP-PRA borrower’s mortgage loan was permanently modified under HAMP in 2010 or 2011, and if the borrower was reporting the discharge of indebtedness using the method described in section 6. How to file state and federal taxes for free 02(2) of this revenue procedure, then the borrower may change to reporting the discharge of indebtedness using the method described in section 6. How to file state and federal taxes for free 02(1) of this revenue procedure by filing a 2012 Form 982 with the borrower’s timely filed (with extensions) 2012 income tax return. How to file state and federal taxes for free This section 6. How to file state and federal taxes for free 03(2) applies only if the change to reporting the discharge using the method described in section 6. How to file state and federal taxes for free 02(1) of this revenue procedure does not change the borrower’s federal income tax liability (including any change in federal income tax liability due to a change in basis or tax attributes (under § 108(h)(1) or § 108(b))) for any taxable year prior to the borrower’s 2012 taxable year. How to file state and federal taxes for free To make this change, the borrower must— (i) Compute the amount of discharge of indebtedness that would be included in income under § 61(a)(12) or excluded from gross income under § 108, basing the computation of the discharge on the facts as of the year of the permanent modification; and (ii) Report on a 2012 Form 982 the reduction in basis or tax attributes (under § 108(h)(1) or § 108(b)) due to the permanent modification that the borrower would have reported on the Form 982 for the taxable year of the permanent modification, minus any reductions due to the permanent modification that the borrower actually reported on Forms 982 for taxable years prior to 2012. How to file state and federal taxes for free (3) Example. How to file state and federal taxes for free The following example illustrates the application of section 6. How to file state and federal taxes for free 03(2) of this revenue procedure. How to file state and federal taxes for free In 2010, B’s basis in B’s principal residence was $330,000. How to file state and federal taxes for free In 2010, B’s mortgage loan on the principal residence is permanently modified under HAMP-PRA. How to file state and federal taxes for free B realized $30,000 of cancellation of indebtedness from the permanent modification, all of which qualifies for the exclusion from income for qualified principal residence indebtedness under § 108(a)(1)(E). How to file state and federal taxes for free The trial period plan effective date also fell in 2010. How to file state and federal taxes for free B’s federal income tax return for 2010 was consistent with B’s reporting this discharge of indebtedness using the method described in section 6. How to file state and federal taxes for free 02(2) of this revenue procedure. How to file state and federal taxes for free That is, B’s 2010 return did not include income from discharge of indebtedness under HAMP-PRA, nor did the return contain a Form 982 reporting exclusion of any such discharge of indebtedness. How to file state and federal taxes for free The next year, B reported on line 10(b) of the 2011 Form 982 that B filed with B’s 2011 federal income tax return a $10,000 reduction in basis in the principal residence. How to file state and federal taxes for free For 2012, B chooses to change to reporting the discharge of indebtedness using the method described in section 6. How to file state and federal taxes for free 02(1) of this revenue procedure. How to file state and federal taxes for free Thus, B files a 2012 Form 982 with B’s timely filed (including extensions) 2012 federal income tax return, and on line 10(b) of that form, B reports a $20,000 basis reduction in the principal residence ($30,000 basis reduction that B would have excluded from income in 2010 using the method described in section 6. How to file state and federal taxes for free 02(1) of this revenue procedure, minus the $10,000 basis reduction that B reported on B’s 2011 Form 982). How to file state and federal taxes for free (4) If a HAMP-PRA borrower reports the entire HAMP-PRA discharge using the method described in section 6. How to file state and federal taxes for free 02(1) of this revenue procedure, and if that HAMP-PRA borrower’s mortgage loan ceases to be in good standing during the Three-year Period as described in section 2. How to file state and federal taxes for free 10 of this revenue procedure, then some or all of the anticipated reductions in the PRA Adjusted Forbearance Amount will not take place. How to file state and federal taxes for free Because the amount of these anticipated reductions was not included in determining the issue price of the new mortgage loan that, pursuant to § 1. How to file state and federal taxes for free 1001-3, the HAMP-PRA borrower is deemed to issue in satisfaction of the old mortgage loan, the issue price of the new mortgage loan was understated. How to file state and federal taxes for free Under these circumstances, the discharge of indebtedness income determined as of the date of the permanent modification will have been overstated. How to file state and federal taxes for free (5) The Service will not challenge a HAMP-PRA borrower who is described in section 6. How to file state and federal taxes for free 03(4) of this revenue procedure and who takes the following corrective measures: (i) If a HAMP-PRA borrower included any of the discharge of indebtedness in gross income, the HAMP-PRA borrower may file an amended return that does not include the amount of the discharge of indebtedness that was previously reported as gross income but that, because of the HAMP-PRA borrower’s failure to keep the new mortgage loan in good standing, was not ultimately discharged. How to file state and federal taxes for free The amended return should be for the taxable year in which the income was included (that is, the year of the permanent modification), provided the applicable statute of limitations remains open for that taxable year. How to file state and federal taxes for free (ii) If the HAMP-PRA borrower did not include any of the discharge of indebtedness in gross income (that is, if the HAMP-PRA borrower excluded all of it), the HAMP-PRA borrower may file a new Form 982 that the Service will treat as superseding the earlier Form 982. How to file state and federal taxes for free The new Form 982 will reflect the revised reduction in basis or in tax attributes (under § 108(h)(1) or § 108(b)). How to file state and federal taxes for free The new Form 982 should be the Form 982 for the year of the permanent modification and should be filed with the return for the taxable year in which the HAMP-PRA borrower’s mortgage loan ceased to be in good standing. How to file state and federal taxes for free . How to file state and federal taxes for free 04 HAMP-PRA borrowers who choose to treat the HAMP-PRA discharge as being realized on the dates on which the unpaid principal balance of the mortgage loan is reduced. How to file state and federal taxes for free (1) If a HAMP-PRA borrower chooses to realize the HAMP-PRA discharge at the times that the unpaid principal balance on the new mortgage loan is reduced, instead of at the time of the permanent modification, then the HAMP-PRA borrower’s federal income tax returns for the taxable year that contains the permanent modification and for the subsequent taxable years must not treat any of the discharge as being realized at the time of the permanent modification and must treat the entire HAMP-PRA discharge as being realized in the amounts—and at the times—of the reductions in the unpaid principal balance. How to file state and federal taxes for free Except as described in the last sentence of this paragraph, therefore, the income tax return for the year of the permanent modification must include no gross income from—nor report on Form 982 an exclusion of—any amount of the HAMP-PRA discharge. How to file state and federal taxes for free Instead, the HAMP-PRA discharge is included in gross income (or is reported on Form 982 as excluded from gross income) in the subsequent years in which the unpaid principal balance is reduced. How to file state and federal taxes for free If the first such reduction occurs in the year of the permanent modification, however, then the amount of any such reduction is reflected as an inclusion or exclusion on the federal income tax return for that year. How to file state and federal taxes for free (2) A HAMP-PRA borrower who has been using the method described in section 6. How to file state and federal taxes for free 02(1) of this revenue procedure may change to the method described in section 6. How to file state and federal taxes for free 02(2) but must comply with the consistency and open-year requirements described in section 6. How to file state and federal taxes for free 01 of this revenue procedure. How to file state and federal taxes for free SECTION 7. How to file state and federal taxes for free PENALTY RELIEF FOR 2012 . How to file state and federal taxes for free 01 The Service will not assert penalties under § 6721 or § 6722 against an investor for failing to timely file and furnish a 2012 Form 1099-C as required by section 5. How to file state and federal taxes for free 03 through 5. How to file state and federal taxes for free 04 and section 8. How to file state and federal taxes for free 02 of this revenue procedure with respect to discharge of indebtedness resulting from HAMP-PRA permanent modifications that take place during calendar year 2012 if the following requirements are satisfied: (1) Not later than February 28, 2013, a statement is sent to the HAMP-PRA borrower containing the following: (a) The HAMP-PRA borrower’s name, address, and taxpayer identification number; and (b) The date and amount of the discharge of indebtedness (as described in sections 4. How to file state and federal taxes for free 01 through 4. How to file state and federal taxes for free 04 of this revenue procedure) that is required to be reported for 2012. How to file state and federal taxes for free (2) Not later than March 28, 2013, a statement is sent to the Service. How to file state and federal taxes for free It must be in the form of a single statement that separately lists for each HAMP-PRA borrower the information specified in section 7. How to file state and federal taxes for free 01(1) of this revenue procedure. How to file state and federal taxes for free The statement should be sent to the Service at the following address: Internal Revenue Service Center Stop 6728AUSC Austin, TX 73301 . How to file state and federal taxes for free 02 The Service will not assert penalties under § 6721 or § 6722 with respect to any Forms 1099-MISC for 2012 that sections 5. How to file state and federal taxes for free 06 and 8. How to file state and federal taxes for free 02 of this revenue procedure require to be filed with the Service and furnished to taxpayers. How to file state and federal taxes for free . How to file state and federal taxes for free 03 Section 8. How to file state and federal taxes for free 03 and 8. How to file state and federal taxes for free 04 of this revenue procedure, below, describes penalty relief regarding Forms 1099-C and 1099-MISC for 2010 and 2011. How to file state and federal taxes for free SECTION 8. How to file state and federal taxes for free SCOPE AND EFFECTIVE DATE . How to file state and federal taxes for free 01 This revenue procedure applies to all borrowers, investors, and servicers who participate, or have participated, in the HAMP-PRA, regardless of when the permanent modification occurs. How to file state and federal taxes for free . How to file state and federal taxes for free 02 Section 5 of this revenue procedure is effective for Forms 1099-C and 1099-MISC due or filed after January 24, 2013. How to file state and federal taxes for free . How to file state and federal taxes for free 03 Because of the effective date in section 8. How to file state and federal taxes for free 02 of this revenue procedure, an investor is not subject to penalties under § 6721 or § 6722 on the grounds that the investor failed to timely file and furnish a 2010 or 2011 Form 1099-C as described in section 5. How to file state and federal taxes for free 03 through 5. How to file state and federal taxes for free 04 of this revenue procedure (or on the grounds that the investor filed or furnished a 2010 or 2011 Form 1099-C that is inconsistent with section 5. How to file state and federal taxes for free 03 through 5. How to file state and federal taxes for free 04 of this revenue procedure), provided that the investor demonstrates a good faith attempt to comply with the requirements of § 6050P and that the failure was not due to willful neglect. How to file state and federal taxes for free . How to file state and federal taxes for free 04 Because of the effective date in section 8. How to file state and federal taxes for free 02 of this revenue procedure, the Service will not assert penalties under § 6721 or § 6722 on the grounds of a failure to timely file and furnish a 2010 or 2011 Form 1099-MISC, as described in section 5. How to file state and federal taxes for free 06 of this revenue procedure. How to file state and federal taxes for free SECTION 9. How to file state and federal taxes for free DRAFTING INFORMATION The principal authors of this revenue procedure are Ronald J. How to file state and federal taxes for free Goldstein of the Office of Chief Counsel (Procedure and Administration); Shareen S. How to file state and federal taxes for free Pflanz and Sheldon A. How to file state and federal taxes for free Iskow of the Office of Chief Counsel (Income Tax and Accounting); and Andrea M. How to file state and federal taxes for free Hoffenson of the Office of Chief Counsel (Financial Institutions and Products). How to file state and federal taxes for free For further information regarding this revenue procedure, contact Procedure and Administration branch 1 at (202) 622-4910, Income Tax and Accounting branch 4 at (202) 622-4920, or Financial Institutions and Products branch 1 at (202) 622-3920 (not toll-free calls). How to file state and federal taxes for free Prev  Up  Next   Home   More Internal Revenue Bulletins