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Irs 1040ez 2012

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Irs 1040ez 2012

Irs 1040ez 2012 7. Irs 1040ez 2012   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. Irs 1040ez 2012 For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. Irs 1040ez 2012 There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. Irs 1040ez 2012 However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. Irs 1040ez 2012 See Contributions , later. Irs 1040ez 2012 This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. Irs 1040ez 2012 What is the tax benefit of the Coverdell ESA. Irs 1040ez 2012   Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. Irs 1040ez 2012   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. Irs 1040ez 2012 See Tax-Free Distributions , later. Irs 1040ez 2012    Table 7-1 summarizes the main features of the Coverdell ESA. Irs 1040ez 2012 Table 7-1. Irs 1040ez 2012 Coverdell ESA at a Glance Do not rely on this table alone. Irs 1040ez 2012 It provides only general highlights. Irs 1040ez 2012 See the text for definitions of terms in bold type and for more complete explanations. Irs 1040ez 2012 Question Answer What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary. Irs 1040ez 2012 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. Irs 1040ez 2012 Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary. Irs 1040ez 2012 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). Irs 1040ez 2012 Are distributions tax free? Yes, if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year. Irs 1040ez 2012 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. Irs 1040ez 2012 When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary. Irs 1040ez 2012 To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. Irs 1040ez 2012 The document creating and governing the account must be in writing and must satisfy the following requirements. Irs 1040ez 2012 The trustee or custodian must be a bank or an entity approved by the IRS. Irs 1040ez 2012 The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions. Irs 1040ez 2012 The contribution is in cash. Irs 1040ez 2012 The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Irs 1040ez 2012 The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000. Irs 1040ez 2012 Money in the account cannot be invested in life insurance contracts. Irs 1040ez 2012 Money in the account cannot be combined with other property except in a common trust fund or common investment fund. Irs 1040ez 2012 The balance in the account generally must be distributed within 30 days after the earlier of the following events. Irs 1040ez 2012 The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. Irs 1040ez 2012 The beneficiary's death. Irs 1040ez 2012 Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. Irs 1040ez 2012 For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. Irs 1040ez 2012 Designated beneficiary. Irs 1040ez 2012   This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account. Irs 1040ez 2012 Contributions to a qualified tuition program (QTP). Irs 1040ez 2012   A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. Irs 1040ez 2012 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. Irs 1040ez 2012 See chapter 8, Qualified Tuition Program . Irs 1040ez 2012 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. Irs 1040ez 2012 Eligible postsecondary school. Irs 1040ez 2012   This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Irs 1040ez 2012 S. Irs 1040ez 2012 Department of Education. Irs 1040ez 2012 It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Irs 1040ez 2012 The educational institution should be able to tell you if it is an eligible educational institution. Irs 1040ez 2012   Certain educational institutions located outside the United States also participate in the U. Irs 1040ez 2012 S. Irs 1040ez 2012 Department of Education's Federal Student Aid (FSA) programs. Irs 1040ez 2012 Eligible elementary or secondary school. Irs 1040ez 2012   This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. Irs 1040ez 2012 Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. Irs 1040ez 2012 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. Irs 1040ez 2012 The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. Irs 1040ez 2012 Tuition and fees. Irs 1040ez 2012 Books, supplies, and equipment. Irs 1040ez 2012 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. Irs 1040ez 2012 Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). Irs 1040ez 2012 The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Irs 1040ez 2012 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. Irs 1040ez 2012 The actual amount charged if the student is residing in housing owned or operated by the school. Irs 1040ez 2012 Half-time student. Irs 1040ez 2012   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. Irs 1040ez 2012 Qualified Elementary and Secondary Education Expenses These are expenses related to enrollment or attendance at an eligible elementary or secondary school. Irs 1040ez 2012 As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. Irs 1040ez 2012 There are special rules for computer-related expenses. Irs 1040ez 2012 The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. Irs 1040ez 2012 Tuition and fees. Irs 1040ez 2012 Books, supplies, and equipment. Irs 1040ez 2012 Academic tutoring. Irs 1040ez 2012 Special needs services for a special needs beneficiary. Irs 1040ez 2012 The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school. Irs 1040ez 2012 Room and board. Irs 1040ez 2012 Uniforms. Irs 1040ez 2012 Transportation. Irs 1040ez 2012 Supplementary items and services (including extended day programs). Irs 1040ez 2012 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. Irs 1040ez 2012 (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. Irs 1040ez 2012 ) 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. Irs 1040ez 2012 For individuals filing joint returns, that amount is $220,000. Irs 1040ez 2012 Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. Irs 1040ez 2012 There is no requirement that an organization's income be below a certain level. Irs 1040ez 2012 Contributions must meet all of the following requirements. Irs 1040ez 2012 They must be in cash. Irs 1040ez 2012 They cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Irs 1040ez 2012 They must be made by the due date of the contributor's tax return (not including extensions). Irs 1040ez 2012 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. Irs 1040ez 2012 Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary. Irs 1040ez 2012 Table 7-2 summarizes many of the features of contributing to a Coverdell ESA. Irs 1040ez 2012 When contributions considered made. Irs 1040ez 2012   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. Irs 1040ez 2012 They must be made by the due date (not including extensions) for filing your return for the preceding year. Irs 1040ez 2012   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. Irs 1040ez 2012 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. Irs 1040ez 2012 Limit for each designated beneficiary. Irs 1040ez 2012   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. Irs 1040ez 2012 This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. Irs 1040ez 2012 Rollovers are discussed under Rollovers and Other Transfers , later. Irs 1040ez 2012 Example. Irs 1040ez 2012 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. Irs 1040ez 2012 In 2013, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. Irs 1040ez 2012 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. Irs 1040ez 2012 Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. Irs 1040ez 2012 These contributions could be put into any of Maria's Coverdell ESA accounts. Irs 1040ez 2012 Limit for each contributor. Irs 1040ez 2012   Generally, you can contribute up to $2,000 for each designated beneficiary for 2013. Irs 1040ez 2012 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. Irs 1040ez 2012 Example. Irs 1040ez 2012 The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. Irs 1040ez 2012 If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2013, he could also contribute $2,000 to Edgar's Coverdell ESA. Irs 1040ez 2012 Reduced limit. Irs 1040ez 2012   Your contribution limit may be reduced. Irs 1040ez 2012 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). Irs 1040ez 2012 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. Irs 1040ez 2012 Table 7-2. Irs 1040ez 2012 Coverdell ESA Contributions at a Glance Do not rely on this table alone. Irs 1040ez 2012 It provides only general highlights. Irs 1040ez 2012 See the text for more complete explanations. Irs 1040ez 2012 Question Answer Are contributions deductible? No. Irs 1040ez 2012 What is the annual contribution limit per designated beneficiary? $2,000 for each designated beneficiary. Irs 1040ez 2012 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. Irs 1040ez 2012 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. Irs 1040ez 2012 Can contributions other than cash be made to a Coverdell ESA? No. Irs 1040ez 2012 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. Irs 1040ez 2012 Modified adjusted gross income (MAGI). Irs 1040ez 2012   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Irs 1040ez 2012 MAGI when using Form 1040A. Irs 1040ez 2012   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Irs 1040ez 2012 MAGI when using Form 1040. Irs 1040ez 2012   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. Irs 1040ez 2012 MAGI when using Form 1040NR. Irs 1040ez 2012   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form. Irs 1040ez 2012 MAGI when using Form 1040NR-EZ. Irs 1040ez 2012   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form. Irs 1040ez 2012   If you have any of these adjustments, you can use Worksheet 7-1. Irs 1040ez 2012 MAGI for a Coverdell ESA , later, to figure your MAGI for Form 1040. Irs 1040ez 2012 Worksheet 7-1. Irs 1040ez 2012 MAGI for a Coverdell ESA 1. Irs 1040ez 2012 Enter your adjusted gross income  (Form 1040, line 38)   1. Irs 1040ez 2012   2. Irs 1040ez 2012 Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Irs 1040ez 2012       3. Irs 1040ez 2012 Enter your foreign housing deduction (Form 2555, line 50)   3. Irs 1040ez 2012         4. Irs 1040ez 2012 Enter the amount of income from Puerto Rico you are excluding   4. Irs 1040ez 2012       5. Irs 1040ez 2012 Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Irs 1040ez 2012       6. Irs 1040ez 2012 Add lines 2, 3, 4, and 5   6. Irs 1040ez 2012   7. Irs 1040ez 2012 Add lines 1 and 6. Irs 1040ez 2012 This is your  modified adjusted gross income   7. Irs 1040ez 2012   Figuring the limit. Irs 1040ez 2012    To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. Irs 1040ez 2012 The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). Irs 1040ez 2012 The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). Irs 1040ez 2012 Subtract the result from $2,000. Irs 1040ez 2012 This is the amount you can contribute for each beneficiary. Irs 1040ez 2012 You can use Worksheet 7-2. Irs 1040ez 2012 Coverdell ESA Contribution Limit to figure the limit on contributions. Irs 1040ez 2012    Worksheet 7-2. Irs 1040ez 2012 Coverdell ESA Contribution Limit 1. Irs 1040ez 2012 Maximum contribution   1. Irs 1040ez 2012 $2,000 2. Irs 1040ez 2012 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. Irs 1040ez 2012   3. Irs 1040ez 2012 Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Irs 1040ez 2012   4. Irs 1040ez 2012 Subtract line 3 from line 2. Irs 1040ez 2012 If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Irs 1040ez 2012   5. Irs 1040ez 2012 Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Irs 1040ez 2012     Note. Irs 1040ez 2012 If the amount on line 4 is greater than or equal to the amount on line 5, stop here. Irs 1040ez 2012 You are not allowed to contribute to a Coverdell ESA for 2013. Irs 1040ez 2012       6. Irs 1040ez 2012 Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Irs 1040ez 2012 . Irs 1040ez 2012 7. Irs 1040ez 2012 Multiply line 1 by line 6   7. Irs 1040ez 2012   8. Irs 1040ez 2012 Subtract line 7 from line 1   8. Irs 1040ez 2012   Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Irs 1040ez 2012 Example. Irs 1040ez 2012 Paul, who is single, had a MAGI of $96,500 for 2013. Irs 1040ez 2012 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. Irs 1040ez 2012 Worksheet 7-2. Irs 1040ez 2012 Coverdell ESA Contribution Limit—Illustrated 1. Irs 1040ez 2012 Maximum contribution   1. Irs 1040ez 2012 $2,000 2. Irs 1040ez 2012 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. Irs 1040ez 2012 96,500 3. Irs 1040ez 2012 Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Irs 1040ez 2012 95,000 4. Irs 1040ez 2012 Subtract line 3 from line 2. Irs 1040ez 2012 If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Irs 1040ez 2012 1,500 5. Irs 1040ez 2012 Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Irs 1040ez 2012 15,000   Note. Irs 1040ez 2012 If the amount on line 4 is greater than or equal to the amount on line 5,  stop here. Irs 1040ez 2012 You are not allowed to  contribute to a Coverdell ESA for 2013. Irs 1040ez 2012       6. Irs 1040ez 2012 Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Irs 1040ez 2012 . Irs 1040ez 2012 100 7. Irs 1040ez 2012 Multiply line 1 by line 6   7. Irs 1040ez 2012 200 8. Irs 1040ez 2012 Subtract line 7 from line 1   8. Irs 1040ez 2012 1,800 Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Irs 1040ez 2012 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. Irs 1040ez 2012 Excess contributions are the total of the following two amounts. Irs 1040ez 2012 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). Irs 1040ez 2012 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. Irs 1040ez 2012 Exceptions. Irs 1040ez 2012   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). Irs 1040ez 2012   However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. Irs 1040ez 2012 You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. Irs 1040ez 2012 Box 2 of that form will show the amount of earnings on your excess contributions. Irs 1040ez 2012 Code “2” or “3” entered in the blank box below boxes 5 and 6 indicate the year in which the earnings are taxable. Irs 1040ez 2012 See Instructions for Recipient on the back of copy B of your Form 1099-Q. Irs 1040ez 2012 Enter the amount of earnings on line 21 of Form 1040 (or Form 1040NR) for the applicable tax year. Irs 1040ez 2012 For more information, see Taxable Distributions , later. Irs 1040ez 2012   The excise tax does not apply to any rollover contribution. Irs 1040ez 2012 Note. Irs 1040ez 2012 Contributions made in one year for the preceding tax year are considered to have been made on the last day of the preceding year. Irs 1040ez 2012 Example. Irs 1040ez 2012 In 2012, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. Irs 1040ez 2012 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. Irs 1040ez 2012 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. Irs 1040ez 2012 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. Irs 1040ez 2012 (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. Irs 1040ez 2012 Figuring and reporting the additional tax. Irs 1040ez 2012   You figure this excise tax in Part V of Form 5329. Irs 1040ez 2012 Report the additional tax on Form 1040, line 58 (or Form 1040NR, line 56). Irs 1040ez 2012 Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary can be changed. Irs 1040ez 2012 The beneficiary's interest can be transferred to a spouse or former spouse because of divorce. Irs 1040ez 2012 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. Irs 1040ez 2012 This age limitation does not apply if the new beneficiary is a special needs beneficiary. Irs 1040ez 2012 An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution. Irs 1040ez 2012 Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. Irs 1040ez 2012 These are not taxable distributions. Irs 1040ez 2012 Members of the beneficiary's family. Irs 1040ez 2012   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. Irs 1040ez 2012 Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. Irs 1040ez 2012 Brother, sister, stepbrother, or stepsister. Irs 1040ez 2012 Father or mother or ancestor of either. Irs 1040ez 2012 Stepfather or stepmother. Irs 1040ez 2012 Son or daughter of a brother or sister. Irs 1040ez 2012 Brother or sister of father or mother. Irs 1040ez 2012 Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Irs 1040ez 2012 The spouse of any individual listed above. Irs 1040ez 2012 First cousin. Irs 1040ez 2012 Example. Irs 1040ez 2012 When Aaron graduated from college last year he had $5,000 left in his Coverdell ESA. Irs 1040ez 2012 He wanted to give this money to his younger sister, who was still in high school. Irs 1040ez 2012 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. Irs 1040ez 2012 Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or distribution. Irs 1040ez 2012 This rule does not apply to the rollover of a military death gratuity or payment from Servicemembers' Group Life Insurance (SGLI). Irs 1040ez 2012 Military death gratuity. Irs 1040ez 2012   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). Irs 1040ez 2012 Such payments are made to an eligible survivor upon the death of a member of the armed forces. Irs 1040ez 2012 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. Irs 1040ez 2012   This rollover contribution is not subject to (but is in addition to) the contribution limits discussed earlier under Contribution Limits . Irs 1040ez 2012 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. Irs 1040ez 2012   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. Irs 1040ez 2012 See Distributions , later. Irs 1040ez 2012 The limit of one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment. Irs 1040ez 2012 Changing the Designated Beneficiary The designated beneficiary can be changed. Irs 1040ez 2012 See Members of the beneficiary's family , earlier. Irs 1040ez 2012 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. Irs 1040ez 2012 Example. Irs 1040ez 2012 Assume the same situation for Aaron as in the last example (see Rollovers , earlier). Irs 1040ez 2012 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. Irs 1040ez 2012 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. Irs 1040ez 2012 After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own. Irs 1040ez 2012 Example. Irs 1040ez 2012 In their divorce settlement, Peg received her ex-husband's Coverdell ESA. Irs 1040ez 2012 In this process, the account was transferred into her name. Irs 1040ez 2012 Peg now treats the funds in this Coverdell ESA as if she were the original owner. Irs 1040ez 2012 Distributions The designated beneficiary of a Coverdell ESA can take a distribution at any time. Irs 1040ez 2012 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. Irs 1040ez 2012 See Table 7-3, Coverdell ESA Distributions at a Glance, for highlights. Irs 1040ez 2012 Table 7-3. Irs 1040ez 2012 Coverdell ESA Distributions at a Glance Do not rely on this table alone. Irs 1040ez 2012 It provides only general highlights. Irs 1040ez 2012 See the text for definitions of terms in bold type and for more complete explanations. Irs 1040ez 2012 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. Irs 1040ez 2012 After the designated beneficiary completes his or her education at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed? Yes. Irs 1040ez 2012 Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. Irs 1040ez 2012 Also, certain transfers to members of the beneficiary's family are permitted. Irs 1040ez 2012 Does the designated beneficiary need to be enrolled for a minimum number of courses to take a tax-free distribution? No. Irs 1040ez 2012 Adjusted qualified education expenses. Irs 1040ez 2012   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. Irs 1040ez 2012 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. Irs 1040ez 2012 The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses. Irs 1040ez 2012 Tax-Free Distributions Generally, distributions are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year. Irs 1040ez 2012 Do not report tax-free distributions (including qualifying rollovers) on your tax return. Irs 1040ez 2012 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. Irs 1040ez 2012 Excess distribution. Irs 1040ez 2012   This is the part of the total distribution that is more than the beneficiary's adjusted qualified education expenses for the year. Irs 1040ez 2012 Earnings and basis. Irs 1040ez 2012   You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2013. Irs 1040ez 2012 The amount of your gross distribution will be shown in box 1. Irs 1040ez 2012 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. Irs 1040ez 2012 This will be shown in the blank box below boxes 5 and 6. Irs 1040ez 2012   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. Irs 1040ez 2012 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. Irs 1040ez 2012 Figure the taxable portion for 2013 as shown in the following steps. Irs 1040ez 2012 Multiply the total amount distributed by a fraction. Irs 1040ez 2012 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. Irs 1040ez 2012 Subtract the amount figured in (1) from the total amount distributed during 2013. Irs 1040ez 2012 The result is the amount of earnings included in the distribution(s). Irs 1040ez 2012 Multiply the amount of earnings figured in (2) by a fraction. Irs 1040ez 2012 The numerator is the adjusted qualified education expenses paid during 2013 and the denominator is the total amount distributed during 2013. Irs 1040ez 2012 Subtract the amount figured in (3) from the amount figured in (2). Irs 1040ez 2012 The result is the amount the beneficiary must include in income. Irs 1040ez 2012 The taxable amount must be reported on Form 1040 or Form 1040NR, line 21. Irs 1040ez 2012 Example. Irs 1040ez 2012 You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2013. Irs 1040ez 2012 There were no contributions in 2013. Irs 1040ez 2012 This is your first distribution from the account, so your basis in the account on December 31, 2012, was $1,500. Irs 1040ez 2012 The value (balance) of your account on December 31, 2013, was $950. Irs 1040ez 2012 You had $700 of adjusted qualified education expenses (AQEE) for the year. Irs 1040ez 2012 Using the steps in Figuring the Taxable Portion of a Distribution , earlier, figure the taxable portion of your distribution as follows. Irs 1040ez 2012   1. Irs 1040ez 2012 $850 (distribution) × $1,500 basis + $0 contributions  $950 value + $850 distribution       =$708 (basis portion of distribution)     2. Irs 1040ez 2012 $850 (distribution)−$708 (basis portion of distribution)     =$142 (earnings included in distribution)   3. Irs 1040ez 2012 $142 (earnings) × $700 AQEE  $850 distribution           =$117 (tax-free earnings)     4. Irs 1040ez 2012 $142 (earnings)−$117 (tax-free earnings)=$25 (taxable earnings)                 You must include $25 in income as distributed earnings not used for qualified education expenses. Irs 1040ez 2012 Report this amount on Form 1040, line 21, listing the type and amount of income on the dotted line. Irs 1040ez 2012 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). Irs 1040ez 2012 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. Irs 1040ez 2012 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. Irs 1040ez 2012 Example. Irs 1040ez 2012 Derek Green had $5,800 of qualified higher education expenses for 2013, his first year in college. Irs 1040ez 2012 He paid his college expenses from the following sources. Irs 1040ez 2012     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. Irs 1040ez 2012 Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. Irs 1040ez 2012 Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses. Irs 1040ez 2012     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. Irs 1040ez 2012 The balance in Derek's account was $1,800 on December 31, 2013. Irs 1040ez 2012 Prior to 2013, $2,100 had been contributed to this account. Irs 1040ez 2012 Contributions for 2013 totaled $400. Irs 1040ez 2012 Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below. Irs 1040ez 2012   1. Irs 1040ez 2012 $1,000 (distribution) × $2,100 basis + $400 contributions  $1,800 value + $1,000 distribution           =$893 (basis portion of distribution)     2. Irs 1040ez 2012 $1,000 (distribution)−$893 (basis portion of distribution)     = $107 (earnings included in distribution)   3. Irs 1040ez 2012 $107 (earnings) × $300 AQHEE  $1,000 distribution       =$32 (tax-free earnings)     4. Irs 1040ez 2012 $107 (earnings)−$32 (tax-free earnings)=$75 (taxable earnings)                 Derek must include $75 in income (Form 1040, line 21). Irs 1040ez 2012 This is the amount of distributed earnings not used for adjusted qualified higher education expenses. Irs 1040ez 2012 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. Irs 1040ez 2012 The following two examples illustrate possible allocations. Irs 1040ez 2012 Example 1. Irs 1040ez 2012 In 2013, Beatrice graduated from high school and began her first semester of college. Irs 1040ez 2012 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. Irs 1040ez 2012 To pay these expenses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. Irs 1040ez 2012 No one claimed Beatrice as a dependent, nor was she eligible for an education credit. Irs 1040ez 2012 She did not receive any tax-free educational assistance in 2013. Irs 1040ez 2012 Beatrice must allocate her total qualified education expenses between the two distributions. Irs 1040ez 2012 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. Irs 1040ez 2012 The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free. Irs 1040ez 2012 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). Irs 1040ez 2012 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. Irs 1040ez 2012 Finally, Beatrice figures the taxable and tax-free portions of her QTP distribution based on her $3,000 of QHEE. Irs 1040ez 2012 (See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program for more information. Irs 1040ez 2012 ) Example 2. Irs 1040ez 2012 Assume the same facts as in Example 1 , except that Beatrice withdrew $1,800 from her Coverdell ESA and $3,200 from her QTP. Irs 1040ez 2012 In this case, she allocates her qualified education expenses as follows. Irs 1040ez 2012 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. Irs 1040ez 2012 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). Irs 1040ez 2012   $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). Irs 1040ez 2012 See Figuring the Taxable Portion of a Distribution , earlier, in this chapter. Irs 1040ez 2012   QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program). Irs 1040ez 2012 The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. Irs 1040ez 2012 However, you do not have to allocate your expenses in the same way. Irs 1040ez 2012 You can use any reasonable method. Irs 1040ez 2012 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. Irs 1040ez 2012 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. Irs 1040ez 2012 Your basis is the total amount of contributions to that Coverdell ESA. Irs 1040ez 2012 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. Irs 1040ez 2012 If you have distributions from more than one Coverdell ESA account during a year, you must combine the information (amount of distribution, basis, etc. Irs 1040ez 2012 ) from all such accounts in order to determine your taxable earnings for the year. Irs 1040ez 2012 By doing this, the loss from one ESA account reduces the distributed earnings (if any) from any other ESA account. Irs 1040ez 2012 For examples of the calculation, see Losses on QTP Investments in chapter 8, Qualified Tuition Program. Irs 1040ez 2012 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. Irs 1040ez 2012 Exceptions. Irs 1040ez 2012   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. Irs 1040ez 2012 Made because the designated beneficiary is disabled. Irs 1040ez 2012 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. Irs 1040ez 2012 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. Irs 1040ez 2012 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. Irs 1040ez 2012 Made on account of the attendance of the designated beneficiary at a U. Irs 1040ez 2012 S. Irs 1040ez 2012 military academy (such as the USMA at West Point). Irs 1040ez 2012 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. Irs 1040ez 2012 S. Irs 1040ez 2012 Code) attributable to such attendance. Irs 1040ez 2012 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). Irs 1040ez 2012 Made before June 1, 2014, of an excess 2013 contribution (and any earnings on it). Irs 1040ez 2012 The distributed earnings must be included in gross income for the year in which the excess contribution was made. Irs 1040ez 2012 Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. Irs 1040ez 2012 Figuring the additional tax. Irs 1040ez 2012    Use Part II of Form 5329, to figure any additional tax. Irs 1040ez 2012 Report the amount on Form 1040, line 58, or Form 1040NR, line 56. Irs 1040ez 2012 When Assets Must Be Distributed Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs. Irs 1040ez 2012 The designated beneficiary reaches age 30. Irs 1040ez 2012 In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. Irs 1040ez 2012 However, this rule does not apply if the beneficiary is a special needs beneficiary. Irs 1040ez 2012 The designated beneficiary dies before reaching age 30. Irs 1040ez 2012 In this case, the remaining assets must generally be distributed within 30 days after the date of death. Irs 1040ez 2012 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. Irs 1040ez 2012 (“Family member” was defined earlier under Rollovers . Irs 1040ez 2012 ) 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. Irs 1040ez 2012 This age limitation does not apply if the new beneficiary is a special needs beneficiary. Irs 1040ez 2012 There are no tax consequences as a result of the transfer. Irs 1040ez 2012 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. Irs 1040ez 2012 You determine these earnings as shown in the following two steps. Irs 1040ez 2012 Multiply the amount distributed by a fraction. Irs 1040ez 2012 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. Irs 1040ez 2012 Subtract the amount figured in (1) from the total amount distributed during 2013. Irs 1040ez 2012 The result is the amount of earnings included in the distribution. Irs 1040ez 2012 For an example, see steps (1) and (2) of the Example under Figuring the Taxable Portion of a Distribution, earlier. Irs 1040ez 2012 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. Irs 1040ez 2012 Worksheet 7-3 Instructions. Irs 1040ez 2012 Coverdell ESA—Taxable Distributions and Basis Line G. Irs 1040ez 2012 Enter the total distributions received from all Coverdell ESAs during 2013. Irs 1040ez 2012 Do not include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). Irs 1040ez 2012 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. Irs 1040ez 2012 Line 2. Irs 1040ez 2012 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. Irs 1040ez 2012   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. Irs 1040ez 2012 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. Irs 1040ez 2012 For years after 2001, you can find that amount by using the ending basis from the worksheet in Publication 970 for that year. Irs 1040ez 2012 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. Irs 1040ez 2012 Line 4. Irs 1040ez 2012 Enter the total distributions received from this Coverdell ESA in 2013. Irs 1040ez 2012 Do not include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). Irs 1040ez 2012   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. Irs 1040ez 2012 Line 7. Irs 1040ez 2012 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. Irs 1040ez 2012 A statement should be sent to you by January 31, 2014, for this Coverdell ESA showing the value on December 31, 2013. Irs 1040ez 2012   A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. Irs 1040ez 2012 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. Irs 1040ez 2012 Worksheet 7-3. Irs 1040ez 2012 Coverdell ESA—Taxable Distributions and Basis How to complete this worksheet. Irs 1040ez 2012 • • • Complete Part I, lines A through H, on only one worksheet. Irs 1040ez 2012  Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs. Irs 1040ez 2012  Complete Part III, the Summary (line 16), on only one worksheet. Irs 1040ez 2012 Part I. Irs 1040ez 2012 Qualified Education Expenses (Complete for total expenses)       A. Irs 1040ez 2012 Enter your total qualified education expenses for 2013   A. Irs 1040ez 2012   B. Irs 1040ez 2012 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. Irs 1040ez 2012         C. Irs 1040ez 2012 Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040). Irs 1040ez 2012 Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040 or 1040NR)   C. Irs 1040ez 2012         D. Irs 1040ez 2012 Enter those qualified higher education expenses on which  an American opportunity or lifetime learning credit was based   D. Irs 1040ez 2012         E. Irs 1040ez 2012 Add lines B, C, and D   D. Irs 1040ez 2012   F. Irs 1040ez 2012 Subtract line E from line A. Irs 1040ez 2012 This is your adjusted qualified education expense for 2013   E. Irs 1040ez 2012   G. Irs 1040ez 2012 Enter your total distributions from all Coverdell ESAs during 2013. Irs 1040ez 2012 Do not include rollovers  or the return of excess contributions (see instructions)   F. Irs 1040ez 2012   H. Irs 1040ez 2012 Divide line F by line G. Irs 1040ez 2012 Enter the result as a decimal (rounded to at least 3 places). Irs 1040ez 2012 If the  result is 1. Irs 1040ez 2012 000 or more, enter 1. Irs 1040ez 2012 000   G. Irs 1040ez 2012 . Irs 1040ez 2012 Part II. Irs 1040ez 2012 Taxable Distributions and Basis (Complete separately for each account) 1. Irs 1040ez 2012 Enter the amount contributed to this Coverdell ESA for 2013, including contributions made for 2013 from January 1, 2014, through April 15, 2014. Irs 1040ez 2012 Do not include rollovers or the return of excess contributions   1. Irs 1040ez 2012   2. Irs 1040ez 2012 Enter your basis in this Coverdell ESA as of December 31, 2012 (see instructions)   2. Irs 1040ez 2012   3. Irs 1040ez 2012 Add lines 1 and 2   3. Irs 1040ez 2012   4. Irs 1040ez 2012 Enter the total distributions from this Coverdell ESA during 2013. Irs 1040ez 2012 Do not include rollovers  or the return of excess contributions (see instructions)   4. Irs 1040ez 2012   5. Irs 1040ez 2012 Multiply line 4 by line H. Irs 1040ez 2012 This is the amount of adjusted qualified  education expense attributable to this Coverdell ESA   5. Irs 1040ez 2012         6. Irs 1040ez 2012 Subtract line 5 from line 4   6. Irs 1040ez 2012         7. Irs 1040ez 2012 Enter the total value of this Coverdell ESA as of December 31, 2013,  plus any outstanding rollovers (see instructions)   7. Irs 1040ez 2012         8. Irs 1040ez 2012 Add lines 4 and 7   8. Irs 1040ez 2012         9. Irs 1040ez 2012 Divide line 3 by line 8. Irs 1040ez 2012 Enter the result as a decimal (rounded to  at least 3 places). Irs 1040ez 2012 If the result is 1. Irs 1040ez 2012 000 or more, enter 1. Irs 1040ez 2012 000   9. Irs 1040ez 2012 . Irs 1040ez 2012       10. Irs 1040ez 2012 Multiply line 4 by line 9. Irs 1040ez 2012 This is the amount of basis allocated to your  distributions, and is tax free   10. Irs 1040ez 2012     Note. Irs 1040ez 2012 If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15. Irs 1040ez 2012       11. Irs 1040ez 2012 Subtract line 10 from line 4   11. Irs 1040ez 2012   12. Irs 1040ez 2012 Divide line 5 by line 4. Irs 1040ez 2012 Enter the result as a decimal (rounded to  at least 3 places). Irs 1040ez 2012 If the result is 1. Irs 1040ez 2012 000 or more, enter 1. Irs 1040ez 2012 000   12. Irs 1040ez 2012 . Irs 1040ez 2012       13. Irs 1040ez 2012 Multiply line 11 by line 12. Irs 1040ez 2012 This is the amount of qualified education  expenses allocated to your distributions, and is tax free   13. Irs 1040ez 2012   14. Irs 1040ez 2012 Subtract line 13 from line 11. Irs 1040ez 2012 This is the portion of the distributions from this  Coverdell ESA in 2013 that you must include in income   14. Irs 1040ez 2012   15. Irs 1040ez 2012 Subtract line 10 from line 3. Irs 1040ez 2012 This is your basis in this Coverdell ESA as of December 31, 2013   15. Irs 1040ez 2012   Part III. Irs 1040ez 2012 Summary (Complete only once)       16. Irs 1040ez 2012 Taxable amount. Irs 1040ez 2012 Add together all amounts on line 14 for all your Coverdell ESAs. Irs 1040ez 2012 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. Irs 1040ez 2012   Prev  Up  Next   Home   More Online Publications
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The Irs 1040ez 2012

Irs 1040ez 2012 7. Irs 1040ez 2012   Depreciation, Depletion, and Amortization Table of Contents What's New for 2013 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Overview of DepreciationWhat Property Can Be Depreciated? What Property Cannot Be Depreciated? When Does Depreciation Begin and End? Can You Use MACRS To Depreciate Your Property? What Is the Basis of Your Depreciable Property? How Do You Treat Repairs and Improvements? Do You Have To File Form 4562? How Do You Correct Depreciation Deductions? Section 179 Expense DeductionWhat Property Qualifies? What Property Does Not Qualify? How Much Can You Deduct? How Do You Elect the Deduction? When Must You Recapture the Deduction? Claiming the Special Depreciation AllowanceWhat is Qualified Property? How Can You Elect Not To Claim the Allowance? When Must You Recapture an Allowance Figuring Depreciation Under MACRSWhich Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS? What Is the Placed-in-Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies? Which Convention Applies? Which Depreciation Method Applies? How Is the Depreciation Deduction Figured? How Do You Use General Asset Accounts? When Do You Recapture MACRS Depreciation? Additional Rules for Listed PropertyWhat Is Listed Property? What Is the Business-Use Requirement? Do the Passenger Automobile Limits Apply? Depletion Who Can Claim Depletion? Figuring Depletion AmortizationBusiness Start-Up Costs Reforestation Costs Section 197 Intangibles What's New for 2013 Increased section 179 expense deduction dollar limits. Irs 1040ez 2012  The maximum amount you can elect to deduct for most section 179 property you placed in service in 2013 is $500,000. Irs 1040ez 2012 This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. Irs 1040ez 2012 See Dollar Limits under Section 179 Expense Deduction , later. Irs 1040ez 2012 Extension of special depreciation allowance for certain qualified property acquired after December 31, 2007. Irs 1040ez 2012 . Irs 1040ez 2012  You may be able to take a 50% special depreciation allowance for certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Irs 1040ez 2012 See Claiming the Special Depreciation Allowance , later. Irs 1040ez 2012 Expiration of the 3- year recovery period for certain race horses. Irs 1040ez 2012  The 3-year recovery period for race horses two years old or younger will expire for such horses placed in service after December 31, 2013. Irs 1040ez 2012 Introduction If you buy or make improvements to farm property such as machinery, equipment, livestock, or a structure with a useful life of more than a year, you generally cannot deduct its entire cost in one year. Irs 1040ez 2012 Instead, you must spread the cost over the time you use the property and deduct part of it each year. Irs 1040ez 2012 For most types of property, this is called depreciation. Irs 1040ez 2012 This chapter gives information on depreciation methods that generally apply to property placed in service after 1986. Irs 1040ez 2012 For information on depreciating pre-1987 property, see Publication 534, Depreciating Property Placed in Service Before 1987. Irs 1040ez 2012 Topics - This chapter discusses: Overview of depreciation Section 179 expense deduction Special depreciation allowance Modified Accelerated Cost Recovery System (MACRS) Listed property Basic information on cost depletion (including timber depletion) and percentage depletion Amortization of the costs of going into business, reforestation costs, the costs of pollution control facilities, and the costs of section 197 intangibles Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) T (Timber), Forest Activities Schedule 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. Irs 1040ez 2012 It is important to keep good records for property you depreciate. Irs 1040ez 2012 Do not file these records with your return. Irs 1040ez 2012 Instead, you should keep them as part of the permanent records of the depreciated property. Irs 1040ez 2012 They will help you verify the accuracy of the depreciation of assets placed in service in the current and previous tax years. Irs 1040ez 2012 For general information on recordkeeping, see Publication 583, Starting a Business and Keeping Records. Irs 1040ez 2012 For specific information on keeping records for section 179 property and listed property, see Publication 946, How To Depreciate Property. Irs 1040ez 2012 Overview of Depreciation This overview discusses basic information on the following. Irs 1040ez 2012 What property can be depreciated. Irs 1040ez 2012 What property cannot be depreciated. Irs 1040ez 2012 When depreciation begins and ends. Irs 1040ez 2012 Whether MACRS can be used to figure depreciation. Irs 1040ez 2012 What is the basis of your depreciable property. Irs 1040ez 2012 How to treat repairs and improvements. Irs 1040ez 2012 When you must file Form 4562. Irs 1040ez 2012 How you can correct depreciation claimed incorrectly. Irs 1040ez 2012 What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, equipment, vehicles, certain livestock, and furniture. Irs 1040ez 2012 You can also depreciate certain intangible property, such as copyrights, patents, and computer software. Irs 1040ez 2012 To be depreciable, the property must meet all the following requirements. Irs 1040ez 2012 It must be property you own. Irs 1040ez 2012 It must be used in your business or income-producing activity. Irs 1040ez 2012 It must have a determinable useful life. Irs 1040ez 2012 It must have a useful life that extends substantially beyond the year you place it in service. Irs 1040ez 2012 Property You Own To claim depreciation, you usually must be the owner of the property. Irs 1040ez 2012 You are considered as owning property even if it is subject to a debt. Irs 1040ez 2012 Leased property. Irs 1040ez 2012   You can depreciate leased property only if you retain the incidents of ownership in the property. Irs 1040ez 2012 This means you bear the burden of exhaustion of the capital investment in the property. Irs 1040ez 2012 Therefore, if you lease property from someone to use in your trade or business or for the production of income, you generally cannot depreciate its cost because you do not retain the incidents of ownership. Irs 1040ez 2012 You can, however, depreciate any capital improvements you make to the leased property. Irs 1040ez 2012 See Additions and Improvements under Which Recovery Period Applies in chapter 4 of Publication 946. Irs 1040ez 2012   If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. Irs 1040ez 2012 However, you cannot depreciate the cost of the property if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased. Irs 1040ez 2012 Life tenant. Irs 1040ez 2012   Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. Irs 1040ez 2012 See Certain term interests in property , later, for an exception. Irs 1040ez 2012 Property Used in Your Business or Income-Producing Activity To claim depreciation on property, you must use it in your business or income-producing activity. Irs 1040ez 2012 If you use property to produce income (investment use), the income must be taxable. Irs 1040ez 2012 You cannot depreciate property that you use solely for personal activities. Irs 1040ez 2012 However, if you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the percentage of business or investment use. Irs 1040ez 2012 Example 1. Irs 1040ez 2012   If you use your car for farm business, you can deduct depreciation based on its percentage of use in farming. Irs 1040ez 2012 If you also use it for investment purposes, you can depreciate it based on its percentage of investment use. Irs 1040ez 2012 Example 2. Irs 1040ez 2012   If you use part of your home for business, you may be able to deduct depreciation on that part based on its business use. Irs 1040ez 2012 For more information, see Business Use of Your Home in chapter 4. Irs 1040ez 2012 Inventory. Irs 1040ez 2012   You can never depreciate inventory because it is not held for use in your business. Irs 1040ez 2012 Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. Irs 1040ez 2012 Livestock. Irs 1040ez 2012   Livestock purchased for draft, breeding, or dairy purposes can be depreciated only if they are not kept in an inventory account. Irs 1040ez 2012 Livestock you raise usually has no depreciable basis because the costs of raising them are deducted and not added to their basis. Irs 1040ez 2012 However, see Immature livestock under When Does Depreciation Begin and End , later, for a special rule. Irs 1040ez 2012 Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. Irs 1040ez 2012 This means it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Irs 1040ez 2012 Irrigation systems and water wells. Irs 1040ez 2012   Irrigation systems and wells used in a trade or business can be depreciated if their useful life can be determined. Irs 1040ez 2012 You can depreciate irrigation systems and wells composed of masonry, concrete, tile, metal, or wood. Irs 1040ez 2012 In addition, you can depreciate costs for moving dirt to construct irrigation systems and water wells composed of these materials. Irs 1040ez 2012 However, land preparation costs for center pivot irrigation systems are not depreciable. Irs 1040ez 2012 Dams, ponds, and terraces. Irs 1040ez 2012   In general, you cannot depreciate earthen dams, ponds, and terraces unless the structures have a determinable useful life. Irs 1040ez 2012 What Property Cannot Be Depreciated? Certain property cannot be depreciated, even if the requirements explained earlier are met. Irs 1040ez 2012 This includes the following. Irs 1040ez 2012 Land. Irs 1040ez 2012 You can never depreciate the cost of land because land does not wear out, become obsolete, or get used up. Irs 1040ez 2012 The cost of land generally includes the cost of clearing, grading, planting, and landscaping. Irs 1040ez 2012 Although you cannot depreciate land, you can depreciate certain costs incurred in preparing land for business use. Irs 1040ez 2012 See chapter 1 of Publication 946. Irs 1040ez 2012 Property placed in service and disposed of in the same year. Irs 1040ez 2012 Determining when property is placed in service is explained later. Irs 1040ez 2012 Equipment used to build capital improvements. Irs 1040ez 2012 You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Irs 1040ez 2012 Intangible property such as section 197 intangibles. Irs 1040ez 2012 This property does not have a determinable useful life and generally cannot be depreciated. Irs 1040ez 2012 However, see Amortization , later. Irs 1040ez 2012 Special rules apply to computer software (discussed below). Irs 1040ez 2012 Certain term interests (discussed below). Irs 1040ez 2012 Computer software. Irs 1040ez 2012   Computer software is generally not a section 197 intangible even if acquired in connection with the acquisition of a business, if it meets all of the following tests. Irs 1040ez 2012 It is readily available for purchase by the general public. Irs 1040ez 2012 It is subject to a nonexclusive license. Irs 1040ez 2012 It has not been substantially modified. Irs 1040ez 2012   If the software meets the tests above, it can be depreciated and may qualify for the section 179 expense deduction and the special depreciation allowance (if applicable), discussed later. Irs 1040ez 2012 Certain term interests in property. Irs 1040ez 2012   You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is held, directly or indirectly, by a person related to you. Irs 1040ez 2012 This rule does not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. Irs 1040ez 2012 For more information, see chapter 1 of Publication 946. Irs 1040ez 2012 When Does Depreciation Begin and End? You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. Irs 1040ez 2012 You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first. Irs 1040ez 2012 Placed in Service Property is placed in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. Irs 1040ez 2012 Even if you are not using the property, it is in service when it is ready and available for its specific use. Irs 1040ez 2012 Example. Irs 1040ez 2012 You bought a planter for use in your farm business. Irs 1040ez 2012 The planter was delivered in December 2012 after harvest was over. Irs 1040ez 2012 You begin to depreciate the planter for 2012 because it was ready and available for its specific use in 2012, even though it will not be used until the spring of 2013. Irs 1040ez 2012 If your planter comes unassembled in December 2012 and is put together in February 2013, it is not placed in service until 2013. Irs 1040ez 2012 You begin to depreciate it in 2013. Irs 1040ez 2012 If your planter was delivered and assembled in February 2013 but not used until April 2013, it is placed in service in February 2013, because this is when the planter was ready for its specified use. Irs 1040ez 2012 You begin to depreciate it in 2013. Irs 1040ez 2012 Fruit or nut trees and vines. Irs 1040ez 2012   If you acquire an orchard, grove, or vineyard before the trees or vines have reached the income-producing stage, and they have a preproductive period of more than 2 years, you must capitalize the preproductive-period costs under the uniform capitalization rules (unless you elect not to use these rules). Irs 1040ez 2012 See chapter 6 for information about the uniform capitalization rules. Irs 1040ez 2012 Your depreciation begins when the trees and vines reach the income-producing stage (that is, when they bear fruit, nuts, or grapes in quantities sufficient to commercially warrant harvesting). Irs 1040ez 2012 Immature livestock. Irs 1040ez 2012   Depreciation for livestock begins when the livestock reaches the age of maturity. Irs 1040ez 2012 If you bought immature livestock for drafting purposes, depreciation begins when they can be worked. Irs 1040ez 2012 If you bought immature livestock for dairy purposes, depreciation begins when they can be milked. Irs 1040ez 2012 If you bought immature livestock for breeding purposes, depreciation begins when they can be bred. Irs 1040ez 2012 Your basis for depreciation is your initial cost for the immature livestock. Irs 1040ez 2012 Idle Property Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle. Irs 1040ez 2012 For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine. Irs 1040ez 2012 Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. Irs 1040ez 2012 This happens when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. Irs 1040ez 2012 Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. Irs 1040ez 2012 You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. Irs 1040ez 2012 You sell or exchange the property. Irs 1040ez 2012 You convert the property to personal use. Irs 1040ez 2012 You abandon the property. Irs 1040ez 2012 You transfer the property to a supplies or scrap account. Irs 1040ez 2012 The property is destroyed. Irs 1040ez 2012 For information on abandonment of property, see chapter 8. Irs 1040ez 2012 For information on destroyed property, see chapter 11 and Publication 547, Casualties, Disasters, and Thefts. Irs 1040ez 2012 Can You Use MACRS To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most business and investment property placed in service after 1986. Irs 1040ez 2012 MACRS is explained later under Figuring Depreciation Under MACRS . Irs 1040ez 2012 You cannot use MACRS to depreciate the following property. Irs 1040ez 2012 Property you placed in service before 1987. Irs 1040ez 2012 Use the methods discussed in Publication 534. Irs 1040ez 2012 Certain property owned or used in 1986. Irs 1040ez 2012 See chapter 1 of Publication 946. Irs 1040ez 2012 Intangible property. Irs 1040ez 2012 Films, video tapes, and recordings. Irs 1040ez 2012 Certain corporate or partnership property acquired in a nontaxable transfer. Irs 1040ez 2012 Property you elected to exclude from MACRS. Irs 1040ez 2012 For more information, see chapter 1 of Publication 946. Irs 1040ez 2012 What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. Irs 1040ez 2012 To determine basis, you need to know the cost or other basis of your property. Irs 1040ez 2012 Cost or other basis. Irs 1040ez 2012   The basis of property you buy is usually its cost plus amounts you paid for items such as sales tax, freight charges, and installation and testing fees. Irs 1040ez 2012 The cost includes the amount you pay in cash, debt obligations, other property, or services. Irs 1040ez 2012   There are times when you cannot use cost as basis. Irs 1040ez 2012 In these situations, the fair market value (FMV) or the adjusted basis of the property may be used. Irs 1040ez 2012 Adjusted basis. Irs 1040ez 2012   To find your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service. Irs 1040ez 2012 Basis adjustment for depreciation allowed or allowable. Irs 1040ez 2012   After you place your property in service, you must reduce the basis of the property by the depreciation allowed or allowable, whichever is greater. Irs 1040ez 2012 Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Irs 1040ez 2012 Depreciation allowable is depreciation you are entitled to deduct. Irs 1040ez 2012   If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable. Irs 1040ez 2012   If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed). Irs 1040ez 2012   For more information, see chapter 6. Irs 1040ez 2012 How Do You Treat Repairs and Improvements? You generally deduct the cost of repairing business property in the same way as any other business expense. Irs 1040ez 2012 However, if a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it. Irs 1040ez 2012 Treat improvements as separate depreciable property. Irs 1040ez 2012 See chapter 1 of Publication 946 for more information. Irs 1040ez 2012 Example. Irs 1040ez 2012 You repair a small section on a corner of the roof of a barn that you rent to others. Irs 1040ez 2012 You deduct the cost of the repair as a business expense. Irs 1040ez 2012 However, if you replace the entire roof, the new roof is considered to be an improvement because it increases the value and lengthens the life for the property. Irs 1040ez 2012 You depreciate the cost of the new roof. Irs 1040ez 2012 Improvements to rented property. Irs 1040ez 2012   You can depreciate permanent improvements you make to business property you rent from someone else. Irs 1040ez 2012 Do You Have To File Form 4562? Use Form 4562 to claim your deduction for depreciation and amortization. Irs 1040ez 2012 You must complete and attach Form 4562 to your tax return if you are claiming any of the following. Irs 1040ez 2012 A section 179 expense deduction for the current year or a section 179 carryover from a prior year. Irs 1040ez 2012 Depreciation for property placed in service during the current year. Irs 1040ez 2012 Depreciation on any vehicle or other listed property, regardless of when it was placed in service. Irs 1040ez 2012 Amortization of costs that began in the current year. Irs 1040ez 2012 For more information, see the Instructions for Form 4562. Irs 1040ez 2012 How Do You Correct Depreciation Deductions? If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. Irs 1040ez 2012 You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Irs 1040ez 2012 You claimed the incorrect amount because of a mathematical error made in any year. Irs 1040ez 2012 You claimed the incorrect amount because of a posting error made in any year, for example, omitting an asset from the depreciation schedule. Irs 1040ez 2012 You have not adopted a method of accounting for the property placed in service by you in tax years ending after December 29, 2003. Irs 1040ez 2012 You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Irs 1040ez 2012 Note. Irs 1040ez 2012 You have adopted a method of accounting if you used the same incorrect method of depreciation for two or more consecutively filed returns. Irs 1040ez 2012 If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. Irs 1040ez 2012 See the Instructions for Form 3115. Irs 1040ez 2012 Section 179 Expense Deduction You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. Irs 1040ez 2012 This is the section 179 expense deduction. Irs 1040ez 2012 You can elect the section 179 expense deduction instead of recovering the cost by taking depreciation deductions. Irs 1040ez 2012 This part of the chapter explains the rules for the section 179 expense deduction. Irs 1040ez 2012 It explains what property qualifies for the deduction, what property does not qualify for the deduction, the limits that may apply, how to elect the deduction, and when you may have to recapture the deduction. Irs 1040ez 2012 For more information, see chapter 2 of Publication 946. Irs 1040ez 2012 What Property Qualifies? To qualify for the section 179 expense deduction, your property must meet all the following requirements. Irs 1040ez 2012 It must be eligible property. Irs 1040ez 2012 It must be acquired for business use. Irs 1040ez 2012 It must have been acquired by purchase. Irs 1040ez 2012 Eligible Property To qualify for the section 179 expense deduction, your property must be one of the following types of depreciable property. Irs 1040ez 2012 Tangible personal property. Irs 1040ez 2012 Qualified real property. Irs 1040ez 2012 (Special rules apply to qualified real property that you elect to treat as qualified section 179 real property. Irs 1040ez 2012 For more information, see chapter 2 of Publication 946 and section 179(f) of the Internal Revenue Code. Irs 1040ez 2012 ) Other tangible property (except buildings and their structural components) used as: An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services; A research facility used in connection with any of the activities in (a) above; or A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities. Irs 1040ez 2012 Single purpose agricultural (livestock) or horticultural structures. Irs 1040ez 2012 Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. Irs 1040ez 2012 Off-the-shelf computer software that is readily available for purchase by the general public, is subject to a nonexclusive lease, and has not been substantially modified. Irs 1040ez 2012 Tangible personal property. Irs 1040ez 2012   Tangible personal property is any tangible property that is not real property. Irs 1040ez 2012 It includes the following property. Irs 1040ez 2012 Machinery and equipment. Irs 1040ez 2012 Property contained in or attached to a building (other than structural components), such as milk tanks, automatic feeders, barn cleaners, and office equipment. Irs 1040ez 2012 Gasoline storage tanks and pumps at retail service stations. Irs 1040ez 2012 Livestock, including horses, cattle, hogs, sheep, goats, and mink and other fur-bearing animals. Irs 1040ez 2012 Facility used for the bulk storage of fungible commodities. Irs 1040ez 2012   A facility used for the bulk storage of fungible commodities is qualifying property for purposes of the section 179 expense deduction if it is used in connection with any of the activities listed earlier in item (3)(a). Irs 1040ez 2012 Bulk storage means the storage of a commodity in a large mass before it is used. Irs 1040ez 2012 Grain bins. Irs 1040ez 2012   A grain bin is an example of a storage facility that is qualifying section 179 property. Irs 1040ez 2012 It is a facility used in connection with the production of grain or livestock for the bulk storage of fungible commodities. Irs 1040ez 2012 Single purpose agricultural or horticultural structures. Irs 1040ez 2012   A single purpose agricultural (livestock) or horticultural structure is qualifying property for purposes of the section 179 expense deduction. Irs 1040ez 2012 Agricultural structure. Irs 1040ez 2012   A single purpose agricultural (livestock) structure is any building or enclosure specifically designed, constructed, and used for both the following reasons. Irs 1040ez 2012 To house, raise, and feed a particular type of livestock and its produce. Irs 1040ez 2012 To house the equipment, including any replacements, needed to house, raise, or feed the livestock. Irs 1040ez 2012 For this purpose, livestock includes poultry. Irs 1040ez 2012   Single purpose structures are qualifying property if used, for example, to breed chickens or hogs, produce milk from dairy cattle, or produce feeder cattle or pigs, broiler chickens, or eggs. Irs 1040ez 2012 The facility must include, as an integral part of the structure or enclosure, equipment necessary to house, raise, and feed the livestock. Irs 1040ez 2012 Horticultural structure. Irs 1040ez 2012   A single purpose horticultural structure is either of the following. Irs 1040ez 2012 A greenhouse specifically designed, constructed, and used for the commercial production of plants. Irs 1040ez 2012 A structure specifically designed, constructed, and used for the commercial production of mushrooms. Irs 1040ez 2012 Use of structure. Irs 1040ez 2012   A structure must be used only for the purpose that qualified it. Irs 1040ez 2012 For example, a hog barn will not be qualifying property if you use it to house poultry. Irs 1040ez 2012 Similarly, using part of your greenhouse to sell plants will make the greenhouse nonqualifying property. Irs 1040ez 2012   If a structure includes work space, the work space can be used only for the following activities. Irs 1040ez 2012 Stocking, caring for, or collecting livestock or plants or their produce. Irs 1040ez 2012 Maintaining the enclosure or structure. Irs 1040ez 2012 Maintaining or replacing the equipment or stock enclosed or housed in the structure. Irs 1040ez 2012 Property Acquired by Purchase To qualify for the section 179 expense deduction, your property must have been acquired by purchase. Irs 1040ez 2012 For example, property acquired by gift or inheritance does not qualify. Irs 1040ez 2012 Property acquired from a related person (that is, your spouse, ancestors, or lineal descendants) is not considered acquired by purchase. Irs 1040ez 2012 Example. Irs 1040ez 2012 Ken is a farmer. Irs 1040ez 2012 He purchased two tractors, one from his brother and one from his father. Irs 1040ez 2012 He placed both tractors in service in the same year he bought them. Irs 1040ez 2012 The tractor purchased from his father does not qualify for the section 179 expense deduction because he is a related person (as defined above). Irs 1040ez 2012 The tractor purchased from his brother does qualify for the deduction because Ken is not a related person (as defined above). Irs 1040ez 2012 What Property Does Not Qualify? Land and improvements. Irs 1040ez 2012   Land and land improvements, do not qualify as section 179 property. Irs 1040ez 2012 Land improvements include nonagricultural fences, swimming pools, paved parking areas, wharves, docks, bridges, and fences. Irs 1040ez 2012 However, agricultural fences do qualify as section 179 property. Irs 1040ez 2012 Similarly, field drainage tile also qualifies as section 179 property. Irs 1040ez 2012 Excepted property. Irs 1040ez 2012   Even if the requirements explained in the preceding discussions are met, farmers cannot elect the section 179 expense deduction for the following property. Irs 1040ez 2012 Certain property you lease to others (if you are a noncorporate lessor). Irs 1040ez 2012 Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. Irs 1040ez 2012 Property used by a tax-exempt organization (other than a tax-exempt farmers' cooperative) unless the property is used mainly in a taxable unrelated trade or business. Irs 1040ez 2012 Property used by governmental units or foreign persons or entities (except property used under a lease with a term of less than 6 months). Irs 1040ez 2012 How Much Can You Deduct? Your section 179 expense deduction is generally the cost of the qualifying property. Irs 1040ez 2012 However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. Irs 1040ez 2012 These limits apply to each taxpayer, not to each business. Irs 1040ez 2012 However, see Married individuals under Dollar Limits , later. Irs 1040ez 2012 See also the special rules for applying the limits for partnerships and S corporations under Partnerships and S Corporations , later. Irs 1040ez 2012 If you deduct only part of the cost of qualifying property as a section 179 expense deduction, you can generally depreciate the cost you do not deduct. Irs 1040ez 2012 Use Part I of Form 4562 to figure your section 179 expense deduction. Irs 1040ez 2012 Partial business use. Irs 1040ez 2012   When you use property for business and nonbusiness purposes, you can elect the section 179 expense deduction only if you use it more than 50% for business in the year you place it in service. Irs 1040ez 2012 If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. Irs 1040ez 2012 Use the resulting business cost to figure your section 179 expense deduction. Irs 1040ez 2012 Trade-in of other property. Irs 1040ez 2012   If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 expense deduction includes only the cash you paid. Irs 1040ez 2012 For example, if you buy (for cash and a trade-in) a new tractor for use in your business, your cost for the section 179 expense deduction is the cash you paid. Irs 1040ez 2012 It does not include the adjusted basis of the old tractor you trade for the new tractor. Irs 1040ez 2012 Example. Irs 1040ez 2012 J-Bar Farms traded two cultivators having a total adjusted basis of $6,800 for a new cultivator costing $13,200. Irs 1040ez 2012 They received an $8,000 trade-in allowance for the old cultivators and paid $5,200 cash for the new cultivator. Irs 1040ez 2012 J-Bar also traded a used pickup truck with an adjusted basis of $8,000 for a new pickup truck costing $35,000. Irs 1040ez 2012 They received a $5,000 trade-in allowance and paid $30,000 cash for the new pickup truck. Irs 1040ez 2012 Only the cash paid by J-Bar qualifies for the section 179 expense deduction. Irs 1040ez 2012 J-Bar's business costs that qualify for a section 179 expense deduction are $35,200 ($5,200 + $30,000). Irs 1040ez 2012 Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 is $500,000. Irs 1040ez 2012 If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 expense deduction among the items in any way, as long as the total deduction is not more than $500,000. Irs 1040ez 2012 Qualified real property that you elect to treat as section 179 property is limited to $250,000 of the maximum section 179 deduction of $500,000 for 2013. Irs 1040ez 2012 You do not have to claim the full $500,000. Irs 1040ez 2012 For specific information on the section 179 dollar limits, see chapter 2 of Publication 946. Irs 1040ez 2012 Reduced dollar limit for cost exceeding $2 million. Irs 1040ez 2012   If the cost of your qualifying section 179 property placed in service in 2013 is over $2 million, you must reduce the dollar limit (but not below zero) by the amount of cost over $2 million. Irs 1040ez 2012 If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 expense deduction and you cannot carry over the cost that is more than $2,500,000. Irs 1040ez 2012 Example. Irs 1040ez 2012 This year, James Smith placed in service machinery costing $2,050,000. Irs 1040ez 2012 Because this cost is $50,000 more than $2 million, he must reduce his dollar limit to $450,000 ($500,000 − $50,000). Irs 1040ez 2012 Limits for sport utility vehicles. Irs 1040ez 2012   The total amount you can elect to deduct for certain sport utility vehicles and certain other vehicles placed in service in 2013 is $25,000. Irs 1040ez 2012 This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, and highways that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. Irs 1040ez 2012   For more information, see chapter 2 of Publication 946. Irs 1040ez 2012 Limits for passenger automobiles. Irs 1040ez 2012   For a passenger automobile that is placed in service in 2013, the total section 179 and depreciation deduction is limited. Irs 1040ez 2012 See Do the Passenger Automobile Limits Apply , later. Irs 1040ez 2012 Married individuals. Irs 1040ez 2012   If you are married, how you figure your section 179 expense deduction depends on whether you file jointly or separately. Irs 1040ez 2012 If you file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. Irs 1040ez 2012 If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over $2 million. Irs 1040ez 2012 You must allocate the dollar limit (after any reduction) equally between you, unless you both elect a different allocation. Irs 1040ez 2012 If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. Irs 1040ez 2012 Joint return after separate returns. Irs 1040ez 2012   If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return, the dollar limit on the joint return is the lesser of the following amounts. Irs 1040ez 2012 The dollar limit (after reduction for any cost of section 179 property over $2 million). Irs 1040ez 2012 The total cost of section 179 property you and your spouse elected to expense on your separate returns. Irs 1040ez 2012 Business Income Limit The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. Irs 1040ez 2012 Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business. Irs 1040ez 2012 Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. Irs 1040ez 2012 See Carryover of disallowed deduction , later. Irs 1040ez 2012 Taxable income. Irs 1040ez 2012   In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. Irs 1040ez 2012 In addition to net income or loss from a sole proprietorship, partnership, or S corporation, net income or loss derived from a trade or business also includes the following items. Irs 1040ez 2012 Section 1231 gains (or losses) as discussed in chapter 9. Irs 1040ez 2012 Interest from working capital of your trade or business. Irs 1040ez 2012 Wages, salaries, tips, or other pay earned by you (or your spouse if you file a joint return) as an employee of any employer. Irs 1040ez 2012   In addition, figure taxable income without regard to any of the following. Irs 1040ez 2012 The section 179 expense deduction. Irs 1040ez 2012 The self-employment tax deduction. Irs 1040ez 2012 Any net operating loss carryback or carryforward. Irs 1040ez 2012 Any unreimbursed employee business expenses. Irs 1040ez 2012 Two different taxable income limits. Irs 1040ez 2012   In addition to the business income limit for your section 179 expense deduction, you may have a taxable income limit for some other deduction (for example, charitable contributions). Irs 1040ez 2012 You may have to figure the limit for this other deduction taking into account the section 179 expense deduction. Irs 1040ez 2012 If so, complete the following steps. Irs 1040ez 2012 Step Action 1 Figure taxable income without the section 179 expense deduction or the other deduction. Irs 1040ez 2012 2 Figure a hypothetical section 179 expense deduction using the taxable income figured in Step 1. Irs 1040ez 2012 3 Subtract the hypothetical section 179 expense deduction figured in Step 2 from the taxable income figured in Step 1. Irs 1040ez 2012 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. Irs 1040ez 2012 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in  Step 1. Irs 1040ez 2012 6 Figure your actual section 179 expense deduction using the taxable income figured in Step 5. Irs 1040ez 2012 7 Subtract your actual section 179 expense deduction figured in Step 6 from the taxable income figured in Step 1. Irs 1040ez 2012 8 Figure your actual other deduction using the taxable income figured in Step 7. Irs 1040ez 2012 Example. Irs 1040ez 2012 On February 1, 2013, the XYZ farm corporation purchased and placed in service qualifying section 179 property that cost $500,000. Irs 1040ez 2012 It elects to expense the entire $500,000 cost under section 179. Irs 1040ez 2012 In June, the corporation gave a charitable contribution of $10,000. Irs 1040ez 2012 A corporation's limit on charitable contributions is figured after subtracting any section 179 expense deduction. Irs 1040ez 2012 The business income limit for the section 179 expense deduction is figured after subtracting any allowable charitable contributions. Irs 1040ez 2012 XYZ's taxable income figured without the section 179 expense deduction or the deduction for charitable contributions is $520,000. Irs 1040ez 2012 XYZ figures its section 179 expense deduction and its deduction for charitable contributions as follows. Irs 1040ez 2012 Step 1. Irs 1040ez 2012 Taxable income figured without either deduction is $520,000. Irs 1040ez 2012 Step 2. Irs 1040ez 2012 Using $520,000 as taxable income, XYZ's hypothetical section 179 expense deduction is $500,000. Irs 1040ez 2012 Step 3. Irs 1040ez 2012 $20,000 ($520,000 − $500,000). Irs 1040ez 2012 Step 4. Irs 1040ez 2012 Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. Irs 1040ez 2012 Step 5. Irs 1040ez 2012 $518,000 ($520,000 − $2,000). Irs 1040ez 2012 Step 6. Irs 1040ez 2012 Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 expense deduction. Irs 1040ez 2012 Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 expense deduction. Irs 1040ez 2012 Step 7. Irs 1040ez 2012 $20,000 ($520,000 − $500,000). Irs 1040ez 2012 Step 8. Irs 1040ez 2012 Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. Irs 1040ez 2012 Carryover of disallowed deduction. Irs 1040ez 2012   You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense but were unable to because of the business income limit. Irs 1040ez 2012   The amount you carry over is used in determining your section 179 expense deduction in the next year. Irs 1040ez 2012 However, it is subject to the limits in that year. Irs 1040ez 2012 If you place more than one property in service in a year, you can select the properties for which all or a part of the cost will be carried forward. Irs 1040ez 2012 Your selections must be shown in your books and records. Irs 1040ez 2012 Example. Irs 1040ez 2012 Last year, Joyce Jones placed in service a machine that cost $8,000 and elected to deduct all $8,000 under section 179. Irs 1040ez 2012 The taxable income from her business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) was $6,000. Irs 1040ez 2012 Her section 179 expense deduction was limited to $6,000. Irs 1040ez 2012 The $2,000 cost that was not allowed as a section 179 expense deduction (because of the business income limit) is carried to this year. Irs 1040ez 2012 This year, Joyce placed another machine in service that cost $9,000. Irs 1040ez 2012 Her taxable income from business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) is $10,000. Irs 1040ez 2012 Joyce can deduct the full cost of the machine ($9,000) but only $1,000 of the carryover from last year because of the business income limit. Irs 1040ez 2012 She can carry over the balance of $1,000 to next year. Irs 1040ez 2012 Partnerships and S Corporations The section 179 expense deduction limits apply both to the partnership or S corporation and to each partner or shareholder. Irs 1040ez 2012 The partnership or S corporation determines its section 179 expense deduction subject to the limits. Irs 1040ez 2012 It then allocates the deduction among its partners or shareholders. Irs 1040ez 2012 If you are a partner in a partnership or shareholder of an S corporation, you add the amount allocated from the partnership or S corporation to any section 179 costs not related to the partnership or S corporation and then apply the dollar limit to this total. Irs 1040ez 2012 To determine any reduction in the dollar limit for costs over $560,000, you do not include any of the cost of section 179 property placed in service by the partnership or S corporation. Irs 1040ez 2012 After you apply the dollar limit, you apply the business income limit to any remaining section 179 costs. Irs 1040ez 2012 For more information, see chapter 2 of Publication 946. Irs 1040ez 2012 Example. Irs 1040ez 2012 In 2013, Partnership P placed in service section 179 property with a total cost of $2,160,000. Irs 1040ez 2012 P must reduce its dollar limit by $160,000 ($2,160,000 − $2,000,000). Irs 1040ez 2012 Its maximum section 179 expense deduction is $340,000 ($500,000 − $160,000), and it elects to expense that amount. Irs 1040ez 2012 Because P's taxable income from the active conduct of all its trades or businesses for the year was $400,000, it can deduct the full $340,000. Irs 1040ez 2012 P allocates $100,000 of its section 179 expense deduction and $110,000 of its taxable income to John, one of its partners. Irs 1040ez 2012 John also conducts a business as a sole proprietor and in 2013, placed in service in that business, section 179 property costing $28,000. Irs 1040ez 2012 John's taxable income from that business was $10,000. Irs 1040ez 2012 In addition to the $100,000 allocated from P, he elects to expense the $28,000 of his sole proprietorship's section 179 costs. Irs 1040ez 2012 However, John's deduction is limited to his business taxable income of $120,000 ($110,000 from P plus $10,000 from his sole proprietorship). Irs 1040ez 2012 He carries over $8,000 ($128,000 − $120,000) of the elected section 179 costs to 2014. Irs 1040ez 2012 How Do You Elect the Deduction? You elect to take the section 179 expense deduction by completing Part I of Form 4562. Irs 1040ez 2012 If you elect the deduction for listed property, complete Part V of  Form 4562 before completing Part I. Irs 1040ez 2012   File Form 4562 with either of the following: Your original tax return (whether or not you filed it timely), or An amended return filed within the time prescribed by law. Irs 1040ez 2012 An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. Irs 1040ez 2012 The amended return must also include any resulting adjustments to taxable income. Irs 1040ez 2012 Revoking an election. Irs 1040ez 2012   An election (or any specification made in the election) to take a section 179 expense deduction for 2013 can be revoked without IRS approval by filing an amended return. Irs 1040ez 2012 The amended return must be filed within the time prescribed by law. Irs 1040ez 2012 The amended return must also include any resulting adjustments to taxable income (for example, allowable depreciation in that tax year for the item of section 179 property for which the election pertains. Irs 1040ez 2012 ) Once made, the revocation is irrevocable. Irs 1040ez 2012 When Must You Recapture the Deduction? You may have to recapture the section 179 expense deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. Irs 1040ez 2012 In the year the business use drops to 50% or less, you include the recapture amount as ordinary income. Irs 1040ez 2012 You also increase the basis of the property by the recapture amount. Irs 1040ez 2012 Recovery periods for property are discussed later. Irs 1040ez 2012 If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. Irs 1040ez 2012 Instead, use the rules for recapturing depreciation explained in  chapter 9 under Section 1245 Property. Irs 1040ez 2012   If the property is listed property, do not figure the recapture amount under the rules explained in this discussion when the percentage of business use drops to 50% or less. Irs 1040ez 2012 Instead, use the rules for recapturing depreciation explained in chapter 5 of Publication 946 under Recapture of Excess Depreciation. Irs 1040ez 2012 Figuring the recapture amount. Irs 1040ez 2012   To figure the amount to recapture, take the following steps. Irs 1040ez 2012 Figure the allowable depreciation for the section 179 expense deduction you claimed. Irs 1040ez 2012 Begin with the year you placed the property in service and include the year of recapture. Irs 1040ez 2012 Subtract the depreciation figured in (1) from the section 179 expense deduction you actually claimed. Irs 1040ez 2012 The result is the amount you must recapture. Irs 1040ez 2012 Example. Irs 1040ez 2012 In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. Irs 1040ez 2012 The property is not listed property. Irs 1040ez 2012 He elected a $5,000 section 179 expense deduction for the property and also elected not to claim a special depreciation allowance. Irs 1040ez 2012 He used the property only for business in 2011 and 2012. Irs 1040ez 2012 During 2013, he used the property 40% for business and 60% for personal use. Irs 1040ez 2012 He figures his recapture amount as follows. Irs 1040ez 2012 Section 179 expense deduction claimed (2011) $5,000 Minus: Allowable depreciation (instead of section 179 expense deduction):   2011 $1,250   2012 1,875   2013 ($1,250 × 40% (business)) 500 3,625 2013 — Recapture amount $1,375     Paul must include $1,375 in income for 2013. Irs 1040ez 2012 Where to report recapture. Irs 1040ez 2012   Report any recapture of the section 179 expense deduction as ordinary income in Part IV of Form 4797 and include it in income on Schedule F (Form 1040). Irs 1040ez 2012 Recapture for qualified section 179 GO Zone property. Irs 1040ez 2012   If any qualified section 179 GO Zone property ceases to be used in the GO Zone in a later year, you must recapture the benefit of the increased section 179 expense deduction as “other income. Irs 1040ez 2012 ” Claiming the Special Depreciation Allowance For qualified property (defined below) placed in service in 2013, you can take an additional 50% special depreciation allowance. Irs 1040ez 2012 The allowance is an additional deduction you can take after any section 179 expense deduction and before you figure regular depreciation under MACRS. Irs 1040ez 2012 Figure the special depreciation allowance by multiplying the depreciable basis of the qualified property by 50%. Irs 1040ez 2012 What is Qualified Property? For farmers, qualified property generally is certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Irs 1040ez 2012 Certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Irs 1040ez 2012   Certain qualified property (defined below) acquired after December 31, 2007, and before January 1, 2014, is eligible for a 50% special depreciation allowance. Irs 1040ez 2012   Qualified property includes the following: Tangible property depreciated under the Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less. Irs 1040ez 2012 Water utility property. Irs 1040ez 2012 Off-the-shelf computer software. Irs 1040ez 2012 Qualified leasehold improvement property. Irs 1040ez 2012   Qualified property must also meet all of the following tests: You must have acquired qualified property by purchase after December 31, 2007. Irs 1040ez 2012 If a binding contract to acquire the property existed before January 1, 2008, the property does not qualify. Irs 1040ez 2012 Qualified property must be placed in service after December 31, 2007 and placed in service before January 1, 2014 (before January 1, 2015 for certain property with a long production period and for certain aircraft). Irs 1040ez 2012 The original use of the property must begin with you after December 31, 2007. Irs 1040ez 2012 For more information, see chapter 3 of Publication 946. Irs 1040ez 2012 How Can You Elect Not To Claim the Allowance? You can elect, for any class of property, not to deduct the special depreciation allowance for all property in such class placed in service during the tax year. Irs 1040ez 2012 To make the election, attach a statement to your return indicating the class of property for which you are making the election. Irs 1040ez 2012 Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. Irs 1040ez 2012 However, if you timely filed your return for the year without making the election, you still can make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). Irs 1040ez 2012 Attach the election statement to the amended return. Irs 1040ez 2012 On the amended return, write “Filed pursuant to section 301. Irs 1040ez 2012 9100-2. Irs 1040ez 2012 ” Once made, the election may not be revoked without IRS consent. Irs 1040ez 2012 If you elect not to have the special depreciation allowance apply, the property may be subject to an alternative minimum tax adjustment for depreciation. Irs 1040ez 2012 When Must You Recapture an Allowance When you dispose of property for which you claimed a special depreciation allowance, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the special depreciation allowance previously allowed or allowable. Irs 1040ez 2012 For more information, see chapter 3 of Publication 946. Irs 1040ez 2012 Figuring Depreciation Under MACRS The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. Irs 1040ez 2012 MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Irs 1040ez 2012 Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. Irs 1040ez 2012 To be sure you can use MACRS to figure depreciation for your property, see Can You Use MACRS To Depreciate Your Property, earlier. Irs 1040ez 2012 This part explains how to determine which MACRS depreciation system applies to your property. Irs 1040ez 2012 It also discusses the following information that you need to know before you can figure depreciation under MACRS. Irs 1040ez 2012 Property's recovery class. Irs 1040ez 2012 Placed-in-service date. Irs 1040ez 2012 Basis for depreciation. Irs 1040ez 2012 Recovery period. Irs 1040ez 2012 Convention. Irs 1040ez 2012 Depreciation method. Irs 1040ez 2012 Finally, this part explains how to use this information to figure your depreciation deduction. Irs 1040ez 2012 Which Depreciation System (GDS or ADS) Applies? Your use of either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to depreciate property under MACRS determines what depreciation method and recovery period you use. Irs 1040ez 2012 You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Irs 1040ez 2012 Required use of ADS. Irs 1040ez 2012   You must use ADS for the following property. Irs 1040ez 2012 All property used predominantly in a farming business and placed in service in any tax year during which an election not to apply the uniform capitalization rules to certain farming costs is in effect. Irs 1040ez 2012 Listed property used 50% or less in a qualified business use. Irs 1040ez 2012 See Additional Rules for Listed Property , later. Irs 1040ez 2012 Any tax-exempt use property. Irs 1040ez 2012 Any tax-exempt bond-financed property. Irs 1040ez 2012 Any property imported from a foreign country for which an Executive Order is in effect because the country maintains trade restrictions or engages in other discriminatory acts. Irs 1040ez 2012 Any tangible property used predominantly outside the United States during the year. Irs 1040ez 2012 If you are required to use ADS to depreciate your property, you cannot claim the special depreciation allowance. Irs 1040ez 2012 Electing ADS. Irs 1040ez 2012   Although your property may qualify for GDS, you can elect to use ADS. Irs 1040ez 2012 The election generally must cover all property in the same property class you placed in service during the year. Irs 1040ez 2012 However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Irs 1040ez 2012 Once you make this election, you can never revoke it. Irs 1040ez 2012   You make the election by completing line 20 in Part III of Form 4562. Irs 1040ez 2012 Which Property Class Applies Under GDS? The following is a list of the nine property classes under GDS. Irs 1040ez 2012 3-year property. Irs 1040ez 2012 5-year property. Irs 1040ez 2012 7-year property. Irs 1040ez 2012 10-year property. Irs 1040ez 2012 15-year property. Irs 1040ez 2012 20-year property. Irs 1040ez 2012 25-year property. Irs 1040ez 2012 Residential rental property. Irs 1040ez 2012 Nonresidential real property. Irs 1040ez 2012 See Which Property Class Applies Under GDS in chapter 4 of Publication 946 for examples of the types of property included in each class. Irs 1040ez 2012 What Is the Placed-in-Service Date? You begin to claim depreciation when your property is placed in service for use either in a trade or business or for the production of income. Irs 1040ez 2012 The placed-in-service date for your property is the date the property is ready and available for a specific use. Irs 1040ez 2012 It is therefore not necessarily the date it is first used. Irs 1040ez 2012 If you converted property held for personal use to use in a trade or business or for the production of income, treat the property as being placed in service on the conversion date. Irs 1040ez 2012 See Placed in Service under When Does Depreciation Begin and End , earlier, for examples illustrating when property is placed in service. Irs 1040ez 2012 What Is the Basis for Depreciation? The basis for depreciation of MACRS property is the property's cost or other basis multiplied by the percentage of business/investment use. Irs 1040ez 2012 Reduce that amount by any credits and deductions allocable to the property. Irs 1040ez 2012 The following are examples of some of the credits and deductions that reduce basis. Irs 1040ez 2012 Any deduction for section 179 property. Irs 1040ez 2012 Any deduction for removal of barriers to the disabled and the elderly. Irs 1040ez 2012 Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. Irs 1040ez 2012 Any special depreciation allowance. Irs 1040ez 2012 Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. Irs 1040ez 2012 For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property , earlier. Irs 1040ez 2012 Also, see chapter 6. Irs 1040ez 2012 For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. Irs 1040ez 2012 Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. Irs 1040ez 2012 It is determined based on the depreciation system (GDS or ADS) used. Irs 1040ez 2012 See Table 7-1 for recovery periods under both GDS and ADS for some commonly used assets. Irs 1040ez 2012 For a complete list of recovery periods, see the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. Irs 1040ez 2012 House trailers for farm laborers. Irs 1040ez 2012   To depreciate a house trailer you supply as housing for those who work on your farm, use one of the following recovery periods if the house trailer is mobile (it has wheels and a history of movement). Irs 1040ez 2012 A 7-year recovery period under GDS. Irs 1040ez 2012 A 10-year recovery period under ADS. Irs 1040ez 2012   However, if the house trailer is not mobile (its wheels have been removed and permanent utilities and pipes attached to it), use one of the following recovery periods. Irs 1040ez 2012 A 20-year recovery period under GDS. Irs 1040ez 2012 A 25-year recovery period under ADS. Irs 1040ez 2012 Water wells. Irs 1040ez 2012   Water wells used to provide water for raising poultry and livestock are land improvements. Irs 1040ez 2012 If they are depreciable, use one of the following recovery periods. Irs 1040ez 2012 A 15-year recovery period under GDS. Irs 1040ez 2012 A 20-year recovery period under ADS. Irs 1040ez 2012   The types of water wells that can be depreciated were discussed earlier in Irrigation systems and water wells under Property Having a Determinable Useful Life . Irs 1040ez 2012 Table 7-1. Irs 1040ez 2012 Farm Property Recovery Periods   Recovery Period in Years Assets GDS ADS Agricultural structures (single purpose) 10 15 Automobiles 5 5 Calculators and copiers 5 6 Cattle (dairy or breeding) 5 7 Communication equipment1 7 10 Computer and peripheral equipment 5 5 Drainage facilities 15 20 Farm buildings2 20 25 Farm machinery and equipment 7 10 Fences (agricultural) 7 10 Goats and sheep (breeding) 5 5 Grain bin 7 10 Hogs (breeding) 3 3 Horses (age when placed in service)     Breeding and working (12 years or less) 7 10 Breeding and working (more than 12 years) 3 10 Racing horses 3 12 Horticultural structures (single purpose) 10 15 Logging machinery and equipment3 5 6 Nonresidential real property 394 40 Office furniture, fixtures, and equipment (not calculators, copiers, or typewriters) 7 10 Paved lots 15 20 Residential rental property 27. Irs 1040ez 2012 5 40 Tractor units (over-the-road) 3 4 Trees or vines bearing fruit or nuts 10 20 Truck (heavy duty, unloaded weight 13,000 lbs. Irs 1040ez 2012 or more) 5 6 Truck (actual weight less than 13,000 lbs) 5 5 Water wells 15 20 1 Not including communication equipment listed in other classes. Irs 1040ez 2012 2 Not including single purpose agricultural or horticultural structures. Irs 1040ez 2012 3 Used by logging and sawmill operators for cutting of timber. Irs 1040ez 2012 4 For property placed in service after May 12, 1993; for property placed in service before May 13, 1993,  the recovery period is 31. Irs 1040ez 2012 5 years. Irs 1040ez 2012 Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. Irs 1040ez 2012 The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property. Irs 1040ez 2012 Use one of the following conventions. Irs 1040ez 2012 The half-year convention. Irs 1040ez 2012 The mid-month convention. Irs 1040ez 2012 The mid-quarter convention. Irs 1040ez 2012 For a detailed explanation of each convention, see Which Convention Applies in chapter 4 of Publication 946. Irs 1040ez 2012 Also, see the Instructions for Form 4562. Irs 1040ez 2012 Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. Irs 1040ez 2012 The 200% declining balance method over a GDS recovery period. Irs 1040ez 2012 The 150% declining balance method over a GDS recovery period. Irs 1040ez 2012 The straight line method over a GDS recovery period. Irs 1040ez 2012 The straight line method over an ADS recovery period. Irs 1040ez 2012 Depreciation Table. Irs 1040ez 2012   The following table lists the types of property you can depreciate under each method. Irs 1040ez 2012 The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. Irs 1040ez 2012 Depreciation Table System/Method   Type of Property GDS using  150% DB • All property used in a farming business (except real property)   • All 15- and 20-year property   • Nonfarm 3-, 5-, 7-, and 10-year property1 GDS using SL • Nonresidential real property   • Residential rental property   • Trees or vines bearing fruit or nuts   • All 3-, 5-, 7-, 10-, 15-, and 20-year property1 ADS using SL • Property used predomi- nantly outside the United States   • Farm property used when an election not to apply the uniform capitalization rules is in effect   • Tax-exempt property   • Tax-exempt bond-financed property   • Imported property2   • Any property for which you elect to use this method1 GDS using  200% DB • Nonfarm 3-, 5-, 7-, and 10-year property 1Elective method 2See section 168(g)(6) of the Internal Revenue  Code Property used in farming business. Irs 1040ez 2012   For personal property placed in service after 1988 in a farming business, you must use the 150% declining balance method over a GDS recovery period or you can elect one of the following methods. Irs 1040ez 2012 The straight line method over a GDS recovery period. Irs 1040ez 2012 The straight line method over an ADS recovery period. Irs 1040ez 2012 For property placed in service before 1999, you could have elected to use the 150% declining balance method using the ADS recovery periods for certain property classes. Irs 1040ez 2012 If you made this election, continue to use the same method and recovery period for that property. Irs 1040ez 2012 Real property. Irs 1040ez 2012   You can depreciate real property using the straight line method under either GDS or ADS. Irs 1040ez 2012 Switching to straight line. Irs 1040ez 2012   If you use a declining balance method, you switch to the straight line method in the year it provides an equal or greater deduction. Irs 1040ez 2012 If you use the MACRS percentage tables, discussed later under How Is the Depreciation Deduction Figured , you do not need to determine in which year your deduction is greater using the straight line method. Irs 1040ez 2012 The tables have the switch to the straight line method built into their rates. Irs 1040ez 2012 Fruit or nut trees and vines. Irs 1040ez 2012   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a 10-year recovery period. Irs 1040ez 2012 ADS required for some farmers. Irs 1040ez 2012   If you elect not to apply the uniform capitalization rules to any plant shown in Table 6-1 of chapter 6 and produced in your farming business, you must use ADS for all property you place in service in any year the election is in effect. Irs 1040ez 2012 See chapter 6 for a discussion of the application of the uniform capitalization rules to farm property. Irs 1040ez 2012 Electing a different method. Irs 1040ez 2012   As shown in the Depreciation Table , you can elect a different method for depreciation for certain types of property. Irs 1040ez 2012 You must make the election by the due date of the return (including extensions) for the year you placed the property in service. Irs 1040ez 2012 However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). Irs 1040ez 2012 Attach the election to the amended return and write “Filed pursuant to section 301. Irs 1040ez 2012 9100-2” on the election statement. Irs 1040ez 2012 File the amended return at the same address you filed the original return. Irs 1040ez 2012 Once you make the election, you cannot change it. Irs 1040ez 2012    If you elect to use a different method for one item in a property class, you must apply the same method to all property in that class placed in service during the year of the election. Irs 1040ez 2012 However, you can make the election on a property-by-property basis for residential rental and nonresidential real property. Irs 1040ez 2012 Straight line election. Irs 1040ez 2012   Instead of using the declining balance method, you can elect to use the straight line method over the GDS recovery period. Irs 1040ez 2012 Make the election by entering “S/L” under column (f) in Part III of Form 4562. Irs 1040ez 2012 ADS election. Irs 1040ez 2012   As explained earlier under Which Depreciation System (GDS or ADS) Applies , you can elect to use ADS even though your property may come under GDS. Irs 1040ez 2012 ADS uses the straight line method of depreciation over the ADS recovery periods, which are generally longer than the GDS recovery periods. Irs 1040ez 2012 The ADS recovery periods for many assets used in the business of farming are listed in Table 7–1. Irs 1040ez 2012 Additional ADS recovery periods for other classes of property may be found in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. Irs 1040ez 2012 How Is the Depreciation Deduction Figured? To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed-in-service date, basis amount, recovery period, convention, and depreciation method that applies to your property. Irs 1040ez 2012 Then you are ready to figure your depreciation deduction. Irs 1040ez 2012 You can figure it in one of two ways. Irs 1040ez 2012 You can use the percentage tables provided by the IRS. Irs 1040ez 2012 You can figure your own deduction without using the tables. Irs 1040ez 2012 Figuring your own MACRS deduction will generally result in a slightly different amount than using the tables. Irs 1040ez 2012 Using the MACRS Percentage Tables To help you figure your deduction under MACRS, the IRS has established percentage tables that incorporate the applicable convention and depreciation method. Irs 1040ez 2012 These percentage tables are in Appendix A of Publication 946. Irs 1040ez 2012 Rules for using the tables. Irs 1040ez 2012   The following rules cover the use of the percentage tables. Irs 1040ez 2012 You must apply the rates in the percentage tables to your property's unadjusted basis. Irs 1040ez 2012 Unadjusted basis is the same basis amount you would use to figure gain on a sale but figured without reducing your original basis by any MACRS depreciation taken in earlier years. Irs 1040ez 2012 You cannot use the percentage tables for a short tax year. Irs 1040ez 2012 See chapter 4 of Publication 946 for information on how to figure the deduction for a short tax year. Irs 1040ez 2012 You generally must continue to use them for the entire recovery period of the property. Irs 1040ez 2012 You must stop using the tables if you adjust the basis of the property for any reason other than— Depreciation allowed or allowable, or An addition or improvement to the property, which is depreciated as a separate property. Irs 1040ez 2012 Basis adjustment due to casualty loss. Irs 1040ez 2012   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. Irs 1040ez 2012 For the year of the adjustment and the remaining recovery period, you must figure the depreciation yourself using the property's adjusted basis at the end of the year. Irs 1040ez 2012 See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946. Irs 1040ez 2012 Figuring depreciation using the 150% DB method and half-year convention. Irs 1040ez 2012    Table 7-2 has the percentages for 3-, 5-, 7-, and 20-year property. Irs 1040ez 2012 The percentages are based on the 150% declining balance method with a change to the straight line method. Irs 1040ez 2012 This table covers only the half-year convention and the first 8 years for 20-year property. Irs 1040ez 2012 See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. Irs 1040ez 2012   The following examples show how to figure depreciation under MACRS using the percentages in Table 7-2 . Irs 1040ez 2012 Example 1. Irs 1040ez 2012 During the year, you bought an item of 7-year property for $10,000 and placed it in service. Irs 1040ez 2012 You do not elect a section 179 expense deduction for this property. Irs 1040ez 2012 In addition, the property is not qualified property for purposes of the special depreciation allowance. Irs 1040ez 2012 The unadjusted basis of the property is $10,000. Irs 1040ez 2012 You use the percentages in Table 7-2 to figure your deduction. Irs 1040ez 2012 Since this is 7-year property, you multiply $10,000 by 10. Irs 1040ez 2012 71% to get this year's depreciation of $1,071. Irs 1040ez 2012 For next year, your depreciation will be $1,913 ($10,000 × 19. Irs 1040ez 2012 13%). Irs 1040ez 2012 Example 2. Irs 1040ez 2012 You had a barn constructed on your farm at a cost of $20,000. Irs 1040ez 2012 You placed the barn in service this year. Irs 1040ez 2012 You elect not to claim the special depreciation allowance. Irs 1040ez 2012 The barn is 20-year property and you use the table percentages to figure your deduction. Irs 1040ez 2012 You figure this year's depreciation by multiplying $20,000 (unadjusted basis) by 3. Irs 1040ez 2012 75% to get $750. Irs 1040ez 2012 For next year, your depreciation will be $1,443. Irs 1040ez 2012 80 ($20,000 × 7. Irs 1040ez 2012 219%). Irs 1040ez 2012 Table 7-2. Irs 1040ez 2012 150% Declining Balance Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 25. Irs 1040ez 2012 0 % 15. Irs 1040ez 2012 00 % 10. Irs 1040ez 2012 71 % 3. Irs 1040ez 2012 750 % 2 37. Irs 1040ez 2012 5   25. Irs 1040ez 2012 50   19. Irs 1040ez 2012 13   7. Irs 1040ez 2012 219   3 25. Irs 1040ez 2012 0   17. Irs 1040ez 2012 85   15. Irs 1040ez 2012 03   6. Irs 1040ez 2012 677   4 12. Irs 1040ez 2012 5   16. Irs 1040ez 2012 66   12. Irs 1040ez 2012 25   6. Irs 1040ez 2012 177   5     16. Irs 1040ez 2012 66   12. Irs 1040ez 2012 25   5. Irs 1040ez 2012 713   6     8. Irs 1040ez 2012 33   12. Irs 1040ez 2012 25   5. Irs 1040ez 2012 285   7         12. Irs 1040ez 2012 25   4. Irs 1040ez 2012 888   8         6. Irs 1040ez 2012 13   4. Irs 1040ez 2012 522   Figuring depreciation using the straight line method and half-year convention. Irs 1040ez 2012   The following table has the straight line percentages for 3-, 5-, 7-, and 20-year property using the half-year convention. Irs 1040ez 2012 The table covers only the first 8 years for 20-year property. Irs 1040ez 2012 See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. Irs 1040ez 2012 Table 7-3. Irs 1040ez 2012 Straight Line Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 16. Irs 1040ez 2012 67 % 10 % 7. Irs 1040ez 2012 14 % 2. Irs 1040ez 2012 5 % 2 33. Irs 1040ez 2012 33   20   14. Irs 1040ez 2012 29   5. Irs 1040ez 2012 0   3 33. Irs 1040ez 2012 33   20   14. Irs 1040ez 2012 29   5. Irs 1040ez 2012 0   4 16. Irs 1040ez 2012 67   20   14. Irs 1040ez 2012 28   5. Irs 1040ez 2012 0   5     20   14. Irs 1040ez 2012 29   5. Irs 1040ez 2012 0   6     10   14. Irs 1040ez 2012 28   5. Irs 1040ez 2012 0   7         14. Irs 1040ez 2012 29   5. Irs 1040ez 2012 0   8         7. Irs 1040ez 2012 14   5. Irs 1040ez 2012 0