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Income Tax Preparation

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Income Tax Preparation

Income tax preparation 3. Income tax preparation   SIMPLE Plans Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: SIMPLE IRA PlanWho Can Set Up a SIMPLE IRA Plan? Who Can Participate in a SIMPLE IRA Plan? How To Set Up a SIMPLE IRA Plan Notification Requirement Contribution Limits When To Deduct Contributions Where To Deduct Contributions Tax Treatment of Contributions Distributions (Withdrawals) More Information on SIMPLE IRA Plans SIMPLE 401(k) Plan Topics - This chapter discusses: SIMPLE IRA plan SIMPLE 401(k) plan Useful Items - You may want to see: Publications 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4284 SIMPLE IRA Plan Checklist 4334 SIMPLE IRA Plans for Small Businesses Forms (and Instructions) W-2 Wage and Tax Statement 5304-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)–Not for Use With a Designated Financial Institution 5305-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)–for Use With a Designated Financial Institution 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A savings incentive match plan for employees (SIMPLE plan) is a written arrangement that provides you and your employees with a simplified way to make contributions to provide retirement income. Income tax preparation Under a SIMPLE plan, employees can choose to make salary reduction contributions to the plan rather than receiving these amounts as part of their regular pay. Income tax preparation In addition, you will contribute matching or nonelective contributions. Income tax preparation SIMPLE plans can only be maintained on a calendar-year basis. Income tax preparation A SIMPLE plan can be set up in either of the following ways. Income tax preparation Using SIMPLE IRAs (SIMPLE IRA plan). Income tax preparation As part of a 401(k) plan (SIMPLE 401(k) plan). Income tax preparation Many financial institutions will help you set up a SIMPLE plan. Income tax preparation SIMPLE IRA Plan A SIMPLE IRA plan is a retirement plan that uses SIMPLE IRAs for each eligible employee. Income tax preparation Under a SIMPLE IRA plan, a SIMPLE IRA must be set up for each eligible employee. Income tax preparation For the definition of an eligible employee, see Who Can Participate in a SIMPLE IRA Plan , later. Income tax preparation Who Can Set Up a SIMPLE IRA Plan? You can set up a SIMPLE IRA plan if you meet both the following requirements. Income tax preparation You meet the employee limit. Income tax preparation You do not maintain another qualified plan unless the other plan is for collective bargaining employees. Income tax preparation Employee limit. Income tax preparation   You can set up a SIMPLE IRA plan only if you had 100 or fewer employees who received $5,000 or more in compensation from you for the preceding year. Income tax preparation Under this rule, you must take into account all employees employed at any time during the calendar year regardless of whether they are eligible to participate. Income tax preparation Employees include self-employed individuals who received earned income and leased employees (defined in chapter 1). Income tax preparation   Once you set up a SIMPLE IRA plan, you must continue to meet the 100-employee limit each year you maintain the plan. Income tax preparation Grace period for employers who cease to meet the 100-employee limit. Income tax preparation   If you maintain the SIMPLE IRA plan for at least 1 year and you cease to meet the 100-employee limit in a later year, you will be treated as meeting it for the 2 calendar years immediately following the calendar year for which you last met it. Income tax preparation   A different rule applies if you do not meet the 100-employee limit because of an acquisition, disposition, or similar transaction. Income tax preparation Under this rule, the SIMPLE IRA plan will be treated as meeting the 100-employee limit for the year of the transaction and the 2 following years if both the following conditions are satisfied. Income tax preparation Coverage under the plan has not significantly changed during the grace period. Income tax preparation The SIMPLE IRA plan would have continued to qualify after the transaction if you had remained a separate employer. Income tax preparation    The grace period for acquisitions, dispositions, and similar transactions also applies if, because of these types of transactions, you do not meet the rules explained under Other qualified plan or Who Can Participate in a SIMPLE IRA Plan, below. Income tax preparation Other qualified plan. Income tax preparation   The SIMPLE IRA plan generally must be the only retirement plan to which you make contributions, or to which benefits accrue, for service in any year beginning with the year the SIMPLE IRA plan becomes effective. Income tax preparation Exception. Income tax preparation   If you maintain a qualified plan for collective bargaining employees, you are permitted to maintain a SIMPLE IRA plan for other employees. Income tax preparation Who Can Participate in a SIMPLE IRA Plan? Eligible employee. Income tax preparation   Any employee who received at least $5,000 in compensation during any 2 years preceding the current calendar year and is reasonably expected to receive at least $5,000 during the current calendar year is eligible to participate. Income tax preparation The term “employee” includes a self-employed individual who received earned income. Income tax preparation   You can use less restrictive eligibility requirements (but not more restrictive ones) by eliminating or reducing the prior year compensation requirements, the current year compensation requirements, or both. Income tax preparation For example, you can allow participation for employees who received at least $3,000 in compensation during any preceding calendar year. Income tax preparation However, you cannot impose any other conditions for participating in a SIMPLE IRA plan. Income tax preparation Excludable employees. Income tax preparation   The following employees do not need to be covered under a SIMPLE IRA plan. Income tax preparation Employees who are covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. Income tax preparation Nonresident alien employees who have received no U. Income tax preparation S. Income tax preparation source wages, salaries, or other personal services compensation from you. Income tax preparation Compensation. Income tax preparation   Compensation for employees is the total wages, tips, and other compensation from the employer subject to federal income tax withholding and the amounts paid for domestic service in a private home, local college club, or local chapter of a college fraternity or sorority. Income tax preparation Compensation also includes the employee's salary reduction contributions made under this plan and, if applicable, elective deferrals under a section 401(k) plan, a SARSEP, or a section 403(b) annuity contract and compensation deferred under a section 457 plan required to be reported by the employer on Form W-2. Income tax preparation If you are self-employed, compensation is your net earnings from self-employment (line 4 of Short Schedule SE or line 6 of Long Schedule SE (Form 1040)) before subtracting any contributions made to the SIMPLE IRA plan for yourself. Income tax preparation How To Set Up a SIMPLE IRA Plan You can use Form 5304-SIMPLE or Form 5305-SIMPLE to set up a SIMPLE IRA plan. Income tax preparation Each form is a model savings incentive match plan for employees (SIMPLE) plan document. Income tax preparation Which form you use depends on whether you select a financial institution or your employees select the institution that will receive the contributions. Income tax preparation Use Form 5304-SIMPLE if you allow each plan participant to select the financial institution for receiving his or her SIMPLE IRA plan contributions. Income tax preparation Use Form 5305-SIMPLE if you require that all contributions under the SIMPLE IRA plan be deposited initially at a designated financial institution. Income tax preparation The SIMPLE IRA plan is adopted when you have completed all appropriate boxes and blanks on the form and you (and the designated financial institution, if any) have signed it. Income tax preparation Keep the original form. Income tax preparation Do not file it with the IRS. Income tax preparation Other uses of the forms. Income tax preparation   If you set up a SIMPLE IRA plan using Form 5304-SIMPLE or Form 5305-SIMPLE, you can use the form to satisfy other requirements, including the following. Income tax preparation Meeting employer notification requirements for the SIMPLE IRA plan. Income tax preparation Form 5304-SIMPLE and Form 5305-SIMPLE contain a Model Notification to Eligible Employees that provides the necessary information to the employee. Income tax preparation Maintaining the SIMPLE IRA plan records and proving you set up a SIMPLE IRA plan for employees. Income tax preparation Deadline for setting up a SIMPLE IRA plan. Income tax preparation   You can set up a SIMPLE IRA plan effective on any date from January 1 through October 1 of a year, provided you did not previously maintain a SIMPLE IRA plan. Income tax preparation This requirement does not apply if you are a new employer that comes into existence after October 1 of the year the SIMPLE IRA plan is set up and you set up a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence. Income tax preparation If you previously maintained a SIMPLE IRA plan, you can set up a SIMPLE IRA plan effective only on January 1 of a year. Income tax preparation A SIMPLE IRA plan cannot have an effective date that is before the date you actually adopt the plan. Income tax preparation Setting up a SIMPLE IRA. Income tax preparation   SIMPLE IRAs are the individual retirement accounts or annuities into which the contributions are deposited. Income tax preparation A SIMPLE IRA must be set up for each eligible employee. Income tax preparation Forms 5305-S, SIMPLE Individual Retirement Trust Account, and 5305-SA, SIMPLE Individual Retirement Custodial Account, are model trust and custodial account documents the participant and the trustee (or custodian) can use for this purpose. Income tax preparation   A SIMPLE IRA cannot be a Roth IRA. Income tax preparation Contributions to a SIMPLE IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. Income tax preparation Deadline for setting up a SIMPLE IRA. Income tax preparation   A SIMPLE IRA must be set up for an employee before the first date by which a contribution is required to be deposited into the employee's IRA. Income tax preparation See Time limits for contributing funds , later, under Contribution Limits. Income tax preparation Credit for startup costs. Income tax preparation   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SIMPLE IRA plan that first became effective in 2013. Income tax preparation For more information, see Credit for startup costs under Reminders, earlier. Income tax preparation Notification Requirement If you adopt a SIMPLE IRA plan, you must notify each employee of the following information before the beginning of the election period. Income tax preparation The employee's opportunity to make or change a salary reduction choice under a SIMPLE IRA plan. Income tax preparation Your decision to make either matching contributions or nonelective contributions (discussed later). Income tax preparation A summary description provided by the financial institution. Income tax preparation Written notice that his or her balance can be transferred without cost or penalty if they use a designated financial institution. Income tax preparation Election period. Income tax preparation   The election period is generally the 60-day period immediately preceding January 1 of a calendar year (November 2 to December 31 of the preceding calendar year). Income tax preparation However, the dates of this period are modified if you set up a SIMPLE IRA plan in mid-year (for example, on July 1) or if the 60-day period falls before the first day an employee becomes eligible to participate in the SIMPLE IRA plan. Income tax preparation   A SIMPLE IRA plan can provide longer periods for permitting employees to enter into salary reduction agreements or to modify prior agreements. Income tax preparation For example, a SIMPLE IRA plan can provide a 90-day election period instead of the 60-day period. Income tax preparation Similarly, in addition to the 60-day period, a SIMPLE IRA plan can provide quarterly election periods during the 30 days before each calendar quarter, other than the first quarter of each year. Income tax preparation Contribution Limits Contributions are made up of salary reduction contributions and employer contributions. Income tax preparation You, as the employer, must make either matching contributions or nonelective contributions, defined later. Income tax preparation No other contributions can be made to the SIMPLE IRA plan. Income tax preparation These contributions, which you can deduct, must be made timely. Income tax preparation See Time limits for contributing funds , later. Income tax preparation Salary reduction contributions. Income tax preparation   The amount the employee chooses to have you contribute to a SIMPLE IRA on his or her behalf cannot be more than $12,000 for 2013 and 2014. Income tax preparation These contributions must be expressed as a percentage of the employee's compensation unless you permit the employee to express them as a specific dollar amount. Income tax preparation You cannot place restrictions on the contribution amount (such as limiting the contribution percentage), except to comply with the $12,000 limit. Income tax preparation   If you or an employee participates in any other qualified plan during the year and you or your employee have salary reduction contributions (elective deferrals) under those plans, the salary reduction contributions under a SIMPLE IRA plan also count toward the overall annual limit ($17,500 for 2013 and 2014) on exclusion of salary reduction contributions and other elective deferrals. Income tax preparation Catch-up contributions. Income tax preparation   A SIMPLE IRA plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. Income tax preparation The catch-up contribution limit for 2013 and 2014 for SIMPLE IRA plans is $2,500. Income tax preparation Salary reduction contributions are not treated as catch-up contributions for 2013 or 2014 until they exceed $12,000. Income tax preparation However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Income tax preparation The catch-up contribution limit. Income tax preparation The excess of the participant's compensation over the salary reduction contributions that are not catch-up contributions. Income tax preparation Employer matching contributions. Income tax preparation   You are generally required to match each employee's salary reduction contributions on a dollar-for-dollar basis up to 3% of the employee's compensation. Income tax preparation This requirement does not apply if you make nonelective contributions as discussed later. Income tax preparation Example. Income tax preparation In 2013, your employee, John Rose, earned $25,000 and chose to defer 5% of his salary. Income tax preparation Your net earnings from self-employment are $40,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. Income tax preparation You make 3% matching contributions. Income tax preparation The total contribution you make for John is $2,000, figured as follows. Income tax preparation Salary reduction contributions ($25,000 × . Income tax preparation 05) $1,250 Employer matching contribution ($25,000 × . Income tax preparation 03) 750 Total contributions $2,000     The total contribution you make for yourself is $5,200, figured as follows. Income tax preparation Salary reduction contributions ($40,000 × . Income tax preparation 10) $4,000 Employer matching contribution ($40,000 × . Income tax preparation 03) 1,200 Total contributions $5,200 Lower percentage. Income tax preparation   If you choose a matching contribution less than 3%, the percentage must be at least 1%. Income tax preparation You must notify the employees of the lower match within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. Income tax preparation You cannot choose a percentage less than 3% for more than 2 years during the 5-year period that ends with (and includes) the year for which the choice is effective. Income tax preparation Nonelective contributions. Income tax preparation   Instead of matching contributions, you can choose to make nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 (or some lower amount you select) of compensation from you for the year. Income tax preparation If you make this choice, you must make nonelective contributions whether or not the employee chooses to make salary reduction contributions. Income tax preparation Only $255,000 of the employee's compensation can be taken into account to figure the contribution limit in 2013 ($260,000 in 2014). Income tax preparation   If you choose this 2% contribution formula, you must notify the employees within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. Income tax preparation Example 1. Income tax preparation In 2013, your employee, Jane Wood, earned $36,000 and chose to have you contribute 10% of her salary. Income tax preparation Your net earnings from self-employment are $50,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. Income tax preparation You make a 2% nonelective contribution. Income tax preparation Both of you are under age 50. Income tax preparation The total contribution you make for Jane is $4,320, figured as follows. Income tax preparation Salary reduction contributions ($36,000 × . Income tax preparation 10) $3,600 2% nonelective contributions ($36,000 × . Income tax preparation 02) 720 Total contributions $4,320     The total contribution you make for yourself is $6,000, figured as follows. Income tax preparation Salary reduction contributions ($50,000 × . Income tax preparation 10) $5,000 2% nonelective contributions ($50,000 × . Income tax preparation 02) 1,000 Total contributions $6,000 Example 2. Income tax preparation Using the same facts as in Example 1, above, the maximum contribution you make for Jane or for yourself if you each earned $75,000 is $13,500, figured as follows. Income tax preparation Salary reduction contributions (maximum amount allowed) $12,000 2% nonelective contributions ($75,000 × . Income tax preparation 02) 1,500 Total contributions $13,500 Time limits for contributing funds. Income tax preparation   You must make the salary reduction contributions to the SIMPLE IRA within 30 days after the end of the month in which the amounts would otherwise have been payable to the employee in cash. Income tax preparation You must make matching contributions or nonelective contributions by the due date (including extensions) for filing your federal income tax return for the year. Income tax preparation Certain plans subject to Department of Labor rules may have an earlier due date for salary reduction contributions. Income tax preparation When To Deduct Contributions You can deduct SIMPLE IRA contributions in the tax year within which the calendar year for which contributions were made ends. Income tax preparation You can deduct contributions for a particular tax year if they are made for that tax year and are made by the due date (including extensions) of your federal income tax return for that year. Income tax preparation Example 1. Income tax preparation Your tax year is the fiscal year ending June 30. Income tax preparation Contributions under a SIMPLE IRA plan for the calendar year 2013 (including contributions made in 2013 before July 1, 2013) are deductible in the tax year ending June 30, 2014. Income tax preparation Example 2. Income tax preparation You are a sole proprietor whose tax year is the calendar year. Income tax preparation Contributions under a SIMPLE IRA plan for the calendar year 2013 (including contributions made in 2014 by April 15, 2014) are deductible in the 2013 tax year. Income tax preparation Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Income tax preparation For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040); partnerships deduct them on Form 1065; and corporations deduct them on Form 1120 or Form 1120S. Income tax preparation Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Income tax preparation (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you receive from the partnership. Income tax preparation ) Tax Treatment of Contributions You can deduct your contributions and your employees can exclude these contributions from their gross income. Income tax preparation SIMPLE IRA plan contributions are not subject to federal income tax withholding. Income tax preparation However, salary reduction contributions are subject to social security, Medicare, and federal unemployment (FUTA) taxes. Income tax preparation Matching and nonelective contributions are not subject to these taxes. Income tax preparation Reporting on Form W-2. Income tax preparation   Do not include SIMPLE IRA plan contributions in the “Wages, tips, other compensation” box of Form W-2. Income tax preparation You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Income tax preparation You must also include them in box 12. Income tax preparation Mark the “Retirement plan” checkbox in box 13. Income tax preparation For more information, see the Form W-2 instructions. Income tax preparation Distributions (Withdrawals) Distributions from a SIMPLE IRA are subject to IRA rules and generally are includible in income for the year received. Income tax preparation Tax-free rollovers can be made from one SIMPLE IRA into another SIMPLE IRA. Income tax preparation However, a rollover from a SIMPLE IRA to a non-SIMPLE IRA can be made tax free only after a 2-year participation in the SIMPLE IRA plan. Income tax preparation Generally, you or your employee must begin to receive distributions from a SIMPLE IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. Income tax preparation Early withdrawals generally are subject to a 10% additional tax. Income tax preparation However, the additional tax is increased to 25% if funds are withdrawn within 2 years of beginning participation. Income tax preparation More information. Income tax preparation   See Publication 590 for information about IRA rules, including those on the tax treatment of distributions, rollovers, required distributions, and income tax withholding. Income tax preparation More Information on SIMPLE IRA Plans If you need help to set up or maintain a SIMPLE IRA plan, go to the IRS website and search SIMPLE IRA Plan. Income tax preparation SIMPLE 401(k) Plan You can adopt a SIMPLE plan as part of a 401(k) plan if you meet the 100-employee limit as discussed earlier under SIMPLE IRA Plan. Income tax preparation A SIMPLE 401(k) plan is a qualified retirement plan and generally must satisfy the rules discussed under Qualification Rules in chapter 4, including the required distribution rules. Income tax preparation However, a SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy rules discussed in chapter 4 if the plan meets the conditions listed below. Income tax preparation Under the plan, an employee can choose to have you make salary reduction contributions for the year to a trust in an amount expressed as a percentage of the employee's compensation, but not more than $12,000 for 2013 and 2014. Income tax preparation If permitted under the plan, an employee who is age 50 or over can also make a catch-up contribution of up to $2,500 for 2013 and 2014. Income tax preparation See Catch-up contributions , earlier under Contribution Limits. Income tax preparation You must make either: Matching contributions up to 3% of compensation for the year, or Nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 of compensation from you for the year. Income tax preparation No other contributions can be made to the trust. Income tax preparation No contributions are made, and no benefits accrue, for services during the year under any other qualified retirement plan sponsored by you on behalf of any employee eligible to participate in the SIMPLE 401(k) plan. Income tax preparation The employee's rights to any contributions are nonforfeitable. Income tax preparation No more than $255,000 of the employee's compensation can be taken into account in figuring matching contributions and nonelective contributions in 2013 ($260,000 in 2014). Income tax preparation Compensation is defined earlier in this chapter. Income tax preparation Employee notification. Income tax preparation   The notification requirement that applies to SIMPLE IRA plans also applies to SIMPLE 401(k) plans. Income tax preparation See Notification Requirement in this chapter. Income tax preparation Credit for startup costs. Income tax preparation   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SIMPLE 401(k) plan that first became effective in 2013. Income tax preparation For more information, see Credit for startup costs under Reminders, earlier. Income tax preparation Note on Forms. Income tax preparation   Please note that Forms 5304-SIMPLE and 5305-SIMPLE can not be used to establish a SIMPLE 401(k) plan. Income tax preparation To set up a SIMPLE 401(k) plan, see Adopting a Written Plan in chapter 4. Income tax preparation Prev  Up  Next   Home   More Online Publications
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The Income Tax Preparation

Income tax preparation 10. Income tax preparation   Education Savings Bond Program Table of Contents Introduction Who Can Cash In Bonds Tax FreeAdjusted qualified education expenses. Income tax preparation Eligible educational institution. Income tax preparation Dependent for whom you claim an exemption. Income tax preparation MAGI when using Form 1040A. Income tax preparation MAGI when using Form 1040. Income tax preparation Figuring the Tax-Free AmountEffect of the Amount of Your Income on the Amount of Your Exclusion Claiming the Exclusion Introduction Generally, you must pay tax on the interest earned on U. Income tax preparation S. Income tax preparation savings bonds. Income tax preparation If you do not include the interest in income in the years it is earned, you must include it in your income in the year in which you cash in the bonds. Income tax preparation However, when you cash in certain savings bonds under an education savings bond program, you may be able to exclude the interest from income. Income tax preparation Who Can Cash In Bonds Tax Free You may be able to cash in qualified U. Income tax preparation S. Income tax preparation savings bonds without having to include in your income some or all of the interest earned on the bonds if you meet the following conditions. Income tax preparation You pay qualified education expenses for yourself, your spouse, or a dependent for whom you claim an exemption on your return. Income tax preparation Your modified adjusted gross income (MAGI) is less than the amount specified for your filing status. Income tax preparation Your filing status is not married filing separately. Income tax preparation Qualified U. Income tax preparation S. Income tax preparation savings bonds. Income tax preparation   A qualified U. Income tax preparation S. Income tax preparation savings bond is a series EE bond issued after 1989 or a series I bond. Income tax preparation The bond must be issued either in your name (as the sole owner) or in the name of both you and your spouse (as co-owners). Income tax preparation   The owner must be at least 24 years old before the bond's issue date. Income tax preparation The issue date is printed on the front of the savings bond. Income tax preparation    The issue date is not necessarily the date of purchase—it will be the first day of the month in which the bond is purchased (or posted, if bought electronically). Income tax preparation Qualified education expenses. Income tax preparation   These include the following items you pay for either yourself, your spouse, or a dependent for whom you claim an exemption. Income tax preparation Tuition and fees required to enroll at or attend an eligible educational institution. Income tax preparation Qualified education expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program. Income tax preparation Contributions to a qualified tuition program (QTP) (see How Much Can You Contribute in chapter 8, Qualified Tuition Program). Income tax preparation Contributions to a Coverdell education savings account (ESA) (see Contributions in chapter 7, Coverdell Education Savings Account). Income tax preparation Adjusted qualified education expenses. Income tax preparation   You must reduce your qualified education expenses by all of the following tax-free benefits. Income tax preparation Tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions). Income tax preparation Expenses used to figure the tax-free portion of distributions from a Coverdell ESA (see Qualified Education Expenses in chapter 7, Coverdell Education Savings Account). Income tax preparation Expenses used to figure the tax-free portion of distributions from a QTP (see Qualified education expenses in chapter 8, Qualified Tuition Program). Income tax preparation Any tax-free payments (other than gifts or inheritances) received as educational assistance, such as: Veterans' educational assistance benefits (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Qualified tuition reductions (see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), or Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ). Income tax preparation Any expenses used in figuring the American opportunity and lifetime learning credits. Income tax preparation See What Expenses Qualify in chapter 2, American Opportunity Credit, and What Expenses Qualify in chapter 3, Lifetime Learning Credit, for more information. Income tax preparation Eligible educational institution. Income tax preparation   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Income tax preparation S. Income tax preparation Department of Education. Income tax preparation It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Income tax preparation The educational institution should be able to tell you if it is an eligible educational institution. Income tax preparation   Certain educational institutions located outside the United States also participate in the U. Income tax preparation S. Income tax preparation Department of Education's Federal Student Aid (FSA) programs. Income tax preparation Dependent for whom you claim an exemption. Income tax preparation   You claim an exemption for a person if you list his or her name and other required information on Form 1040 (or Form 1040A), line 6c. Income tax preparation Modified adjusted gross income (MAGI). Income tax preparation   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return without taking into account this interest exclusion. Income tax preparation However, as discussed below, there may be other modifications. Income tax preparation MAGI when using Form 1040A. Income tax preparation   If you file Form 1040A, your MAGI is the AGI on line 22 of that form figured without taking into account any savings bond interest exclusion and modified by adding back any amount on line 18 (student loan interest deduction) and line 19 (tuition and fees deduction). Income tax preparation MAGI when using Form 1040. Income tax preparation   If you file Form 1040, your MAGI is the AGI on line 38 of that form figured without taking into account any savings bond interest exclusion and 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, Exclusion of income by bona fide residents of Puerto Rico, Exclusion for adoption benefits received under an employer's adoption assistance program, Deduction for student loan interest, Deduction for tuition and fees, and Deduction for domestic production activities. Income tax preparation    Use the worksheet in the instructions for line 9 of Form 8815 to figure your MAGI. Income tax preparation If you claim any of the exclusion or deduction items (1)–(6) listed above, add the amount of the exclusion or deduction to the amount on line 5 of the worksheet. Income tax preparation Do not add in the deduction for (7) student loan interest, and (8) tuition and fees, or (9) domestic production activities because line 4 of the worksheet already includes these amounts. Income tax preparation Enter the total on Form 8815, line 9, as your modified adjusted gross income (MAGI). Income tax preparation    Because the deduction for interest expenses attributable to royalties and other investments is limited to your net investment income, you cannot figure the deduction until you have figured this interest exclusion. Income tax preparation Therefore, if you had interest expenses attributable to royalties and deductible on Schedule E (Form 1040), Supplemental Income and Loss, you must make a special computation of your deductible interest without regard to this exclusion to figure the net royalty income included in your MAGI. Income tax preparation See Royalties included in MAGI under Education Savings Bond Program in Publication 550, chapter 1. Income tax preparation Figuring the Tax-Free Amount If the total you receive when you cash in the bonds is not more than the adjusted qualified education expenses for the year, all of the interest on the bonds may be tax free. Income tax preparation However, if the total you receive when you cash in the bonds is more than the adjusted expenses, only part of the interest may be tax free. Income tax preparation To determine the tax-free amount, multiply the interest part of the proceeds by a fraction. Income tax preparation The numerator (top part) of the fraction is the adjusted qualified education expenses (AQEE) you paid during the year. Income tax preparation The denominator (bottom part) of the fraction is the total proceeds you received during the year. Income tax preparation Example. Income tax preparation In February 2013, Mark and Joan Washington, a married couple, cashed a qualified series EE U. Income tax preparation S. Income tax preparation savings bond. Income tax preparation They received proceeds of $9,000, representing principal of $6,000 and interest of $3,000. Income tax preparation In 2013, they paid $7,650 of their daughter's college tuition. Income tax preparation They are not claiming an American opportunity or lifetime learning credit for those expenses, and their daughter does not have any tax-free educational assistance. Income tax preparation Their MAGI for 2013 was $80,000. Income tax preparation   $3,000 interest × $7,650 AQEE  $9,000 proceeds = $2,550 tax-free interest   They can exclude $2,550 of interest in 2013. Income tax preparation They must pay tax on the remaining $450 ($3,000 − $2,550) interest. Income tax preparation Effect of the Amount of Your Income on the Amount of Your Exclusion The amount of your interest exclusion is gradually reduced (phased out) based on your MAGI and filing status. Income tax preparation Claiming the Exclusion Use Form 8815 to figure your education savings bond interest exclusion. Income tax preparation Enter your exclusion on line 3 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. Income tax preparation Attach Form 8815 to your tax return. Income tax preparation Prev  Up  Next   Home   More Online Publications