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Irs com Publication 559 - Main Content Table of Contents Personal RepresentativeDuties Fees Received by Personal Representatives Final Income Tax Return for Decedent—Form 1040Name, Address, and Signature When and Where To File Filing Requirements Income To Include Exemptions and Deductions Credits, Other Taxes, and Payments Tax Forgiveness for Armed Forces Members, Victims of Terrorism, and Astronauts Filing Reminders Other Tax InformationTax Benefits for Survivors Income in Respect of a Decedent Deductions in Respect of a Decedent Estate Tax Deduction Gifts, Insurance, and Inheritances Other Items of Income Income Tax Return of an Estate— Form 1041Filing Requirements Income To Include Exemption and Deductions Credits, Tax, and Payments Name, Address, and Signature When and Where To File Distributions to BeneficiariesIncome That Must Be Distributed Currently Other Amounts Distributed Discharge of a Legal Obligation Character of Distributions How and When To Report Bequest Termination of Estate Estate and Gift TaxesApplicable Credit Amount Gift Tax Estate Tax Generation-Skipping Transfer Tax Comprehensive ExampleFinal Return for Decedent—Form 1040 Income Tax Return of an Estate—Form 1041 How To Get Tax HelpLow Income Taxpayer Clinics Personal Representative A personal representative of an estate is an executor, administrator, or anyone who is in charge of the decedent's property. Irs com Generally, an executor (or executrix) is named in a decedent's will to administer the estate and distribute properties as the decedent has directed. Irs com An administrator (or administratrix) is usually appointed by the court if no will exists, if no executor was named in the will, or if the named executor cannot or will not serve. Irs com In general, an executor and an administrator perform the same duties and have the same responsibilities. Irs com For estate tax purposes, if there is no executor or administrator appointed, qualified, and acting within the United States, the term “executor” includes anyone in actual or constructive possession of any property of the decedent. Irs com It includes, among others, the decedent's agents and representatives; safe-deposit companies, warehouse companies, and other custodians of property in this country; brokers holding securities of the decedent as collateral; and the debtors of the decedent who are in this country. Irs com Duties The primary duties of a personal representative are to collect all the decedent's assets, pay his or her creditors, and distribute the remaining assets to the heirs or other beneficiaries. Irs com The personal representative also must perform the following duties. Irs com Apply for an employer identification number (EIN) for the estate. Irs com File all tax returns, including income, estate and gift tax returns, when due. Irs com Pay the tax determined up to the date of discharge from duties. Irs com Other duties of the personal representative in federal tax matters are discussed in other sections of this publication. Irs com If any beneficiary is a nonresident alien, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for information on the personal representative's duties as a withholding agent. Irs com Penalty. Irs com   There is a penalty for failure to file a tax return when due unless the failure is due to reasonable cause. Irs com Reliance on an agent (attorney, accountant, etc. Irs com ) is not reasonable cause for late filing. Irs com It is the personal representative's duty to file the returns for the decedent and the estate when due. Irs com Identification number. Irs com   The first action you should take if you are the personal representative for the decedent is to apply for an EIN for the estate. Irs com You should apply for this number as soon as possible because you need to enter it on returns, statements, and other documents you file concerning the estate. Irs com You also must give the number to payers of interest and dividends and other payers who must file a return concerning the estate. Irs com   You can get an EIN by applying online at www. Irs com irs. Irs com gov (click on "Apply for an EIN Online" under the Tools heading). Irs com Generally, if you apply online, you will receive your EIN immediately upon completing the application. Irs com You can also apply using Form SS-4, Application for Employer Identification Number. Irs com Generally, if you apply by mail, it takes about 4 weeks to get your EIN. Irs com See the form instructions for other ways to apply. Irs com   Payers of interest and dividends report amounts on Forms 1099 using the identification number of the person to whom the account is payable. Irs com After a decedent's death, Forms 1099 must reflect the identification number of the estate or beneficiary to whom the amounts are payable. Irs com As the personal representative handling the estate, you must furnish this identification number to the payer. Irs com For example, if interest is payable to the estate, the estate's EIN must be provided to the payer and used to report the interest on Form 1099-INT, Interest Income. Irs com If the interest is payable to a surviving joint owner, the survivor's identification number, such as an SSN or ITIN, must be provided to the payer and used to report the interest. Irs com   If the estate or a survivor may receive interest or dividends after you inform the payer of the decedent's death, the payer should give you (or the survivor) a Form W-9, Request for Taxpayer Identification Number and Certification (or a similar substitute form). Irs com Complete this form to inform the payer of the estate's (or if completed by the survivor, the survivor's) identification number and return it to the payer. Irs com    Do not use the deceased individual's identifying number to file an individual income tax return after the decedent's final tax return. Irs com Also do not use it to make estimated tax payments for a tax year after the year of death. Irs com Penalty. Irs com   If you do not include the EIN or the taxpayer identification number of another person where it is required on a return, statement, or other document, you are liable for a penalty for each failure, unless you can show reasonable cause. Irs com You also are liable for a penalty if you do not give the taxpayer identification number of another person when required on a return, statement, or other document. Irs com Notice of fiduciary relationship. Irs com   The term fiduciary means any person acting for another person. Irs com It applies to persons who have positions of trust on behalf of others. Irs com A personal representative for a decedent's estate is a fiduciary. Irs com Form 56. Irs com   If you are appointed to act in a fiduciary capacity for another, you must file a written notice with the IRS stating this. Irs com Form 56, Notice Concerning Fiduciary Relationship, is used for this purpose. Irs com See the Instructions for Form 56 for filing requirements and other information. Irs com   File Form 56 as soon as all the necessary information (including the EIN) is available. Irs com It notifies the IRS that you, as the fiduciary, are assuming the powers, rights, duties, and privileges of the decedent. Irs com The notice remains in effect until you notify the IRS (by filing another Form 56) that your fiduciary relationship with the estate has terminated. Irs com Termination of fiduciary relationship. Irs com   Form 56 should also be filed to notify the IRS if your fiduciary relationship is terminated or when a successor fiduciary is appointed if the estate has not been terminated. Irs com See Form 56 and its instructions for more information. Irs com   At the time of termination of the fiduciary relationship, you may want to file Form 4810, Request for Prompt Assessment Under Internal Revenue Code Section 6501(d), and Form 5495, Request for Discharge From Personal Liability Under Internal Revenue Code Section 2204 or 6905, to wind up your duties as fiduciary. Irs com See below for a discussion of these forms. Irs com Request for prompt assessment (charge) of tax. Irs com   The IRS ordinarily has 3 years from the date an income tax return is filed, or its due date, whichever is later, to charge any additional tax due. Irs com However, as a personal representative, you may request a prompt assessment of tax after the return has been filed. Irs com This reduces the time for making the assessment to 18 months from the date the written request for prompt assessment was received. Irs com This request can be made for any tax return (except the estate tax return) of the decedent or the decedent's estate. Irs com This may permit a quicker settlement of the tax liability of the estate and an earlier final distribution of the assets to the beneficiaries. Irs com Form 4810. Irs com   Form 4810 can be used for making this request. Irs com It must be filed separately from any other document. Irs com   As the personal representative for the decedent's estate, you are responsible for any additional taxes that may be due. Irs com You can request prompt assessment of any of the decedent's taxes (other than federal estate taxes) for any years for which the statutory period for assessment is open. Irs com This applies even though the returns were filed before the decedent's death. Irs com Failure to report income. Irs com   If you or the decedent failed to report substantial amounts of gross income (more than 25% of the gross income reported on the return) or filed a false or fraudulent return, your request for prompt assessment will not shorten the period during which the IRS may assess the additional tax. Irs com However, such a request may relieve you of personal liability for the tax if you did not have knowledge of the unpaid tax. Irs com Request for discharge from personal liability for tax. Irs com   An executor can make a request for discharge from personal liability for a decedent's income, gift, and estate taxes. Irs com The request must be made after the returns for those taxes are filed. Irs com To make the request, file Form 5495. Irs com For this purpose, an executor is an executor or administrator that is appointed, qualified, and acting within the United States. Irs com   Within 9 months after receipt of the request, the IRS will notify the executor of the amount of taxes due. Irs com If this amount is paid, the executor will be discharged from personal liability for any future deficiencies. Irs com If the IRS has not notified the executor, he or she will be discharged from personal liability at the end of the 9-month period. Irs com    Even if the executor is discharged from personal liability, the IRS will still be able to assess tax deficiencies against the executor to the extent he or she still has any of the decedent's property. Irs com Insolvent estate. Irs com   Generally, if a decedent's estate is insufficient to pay all the decedent's debts, the debts due to the United States must be paid first. Irs com Both the decedent's federal income tax liabilities at the time of death and the estate's income tax liability are debts due to the United States. Irs com The personal representative of an insolvent estate is personally responsible for any tax liability of the decedent or of the estate if he or she had notice of such tax obligations or failed to exercise due care in determining if such obligations existed before distribution of the estate's assets and before being discharged from duties. Irs com The extent of such personal responsibility is the amount of any other payments made before paying the debts due to the United States, except where such other debt paid has priority over the debts due to the United States. Irs com Income tax liabilities need not be formally assessed for the personal representative to be liable if he or she was aware or should have been aware of their existence. Irs com Fees Received by Personal Representatives All personal representatives must include fees paid to them from an estate in their gross income. Irs com If you are not in the trade or business of being an executor (for instance, you are the executor of a friend's or relative's estate), report these fees on your Form 1040, line 21. Irs com If you are in the trade or business of being an executor, report fees received from the estate as self-employment income on Schedule C or Schedule C-EZ of your Form 1040. Irs com If the estate operates a trade or business and you, as executor, actively participate in the trade or business while fulfilling your duties, any fees you receive related to the operation of the trade or business must be reported as self-employment income on Schedule C (or Schedule C-EZ) of your Form 1040. Irs com Final Income Tax Return for Decedent—Form 1040 The personal representative (defined earlier) must file the final income tax return (Form 1040) of the decedent for the year of death and any returns not filed for preceding years. Irs com A surviving spouse, under certain circumstances, may have to file the returns for the decedent. Irs com See Joint Return, later. Irs com Return for preceding year. Irs com   If an individual died after the close of the tax year, but before the return for that year was filed, the return for the year just closed will not be the final return. Irs com The return for that year will be a regular return and the personal representative must file it. Irs com Example. Irs com Samantha Smith died on March 21, 2013, before filing her 2012 tax return. Irs com Her personal representative must file her 2012 return by April 15, 2013. Irs com Her final tax return covering the period from January 1, 2013, to March 20, 2013, is due April 15, 2014. Irs com Name, Address, and Signature Write the word “DECEASED,” the decedent's name, and the date of death across the top of the tax return. Irs com If filing a joint return, write the name and address of the decedent and the surviving spouse in the name and address fields. Irs com If a joint return is not being filed, write the decedent's name in the name field and the personal representative's name and address in the address field. Irs com Third party designee. Irs com   You can check the “Yes” box in the Third Party Designee area on page 2 of the return to authorize the IRS to discuss the return with a friend, family member, or any other person you choose. Irs com This allows the IRS to call the person you identified as the designee to answer any questions that may arise during the processing of the return. Irs com It also allows the designee to perform certain actions. Irs com See the Instructions for Form 1040 for details. Irs com Signature. Irs com   If a personal representative has been appointed, that person must sign the return. Irs com If it is a joint return, the surviving spouse must also sign it. Irs com If no personal representative has been appointed, the surviving spouse (on a joint return) signs the return and writes in the signature area “Filing as surviving spouse. Irs com ” If no personal representative has been appointed and if there is no surviving spouse, the person in charge of the decedent's property must file and sign the return as “personal representative. Irs com ” Paid preparer. Irs com   If you pay someone to prepare, assist in preparing, or review the tax return, that person must sign the return and fill in the other blanks in the Paid Preparer Use Only area of the return. Irs com See the Form 1040 instructions for details. Irs com When and Where To File The final income tax return is due at the same time the decedent's return would have been due had death not occurred. Irs com A final return for a decedent who was a calendar year taxpayer is generally due on April 15 following the year of death, regardless of when during that year death occurred. Irs com However, when the due date falls on a Saturday, Sunday, or legal holiday, the return is filed timely if filed by the next business day. Irs com The tax return must be prepared for the year of death regardless of when during the year death occurred. Irs com Generally, you must file the final income tax return of the decedent with the Internal Revenue Service Center for the place where you live. Irs com A tax return for a decedent can be electronically filed. Irs com A personal representative may also obtain an income tax filing extension on behalf of a decedent. Irs com Filing Requirements The gross income, age, and filing status of a decedent generally determine whether a return must be filed. Irs com Gross income is all income received by an individual from any source in the form of money, goods, property, and services that is not tax-exempt. Irs com It includes gross receipts from self-employment, but if the business involves manufacturing, merchandising, or mining, subtract any cost of goods sold. Irs com In general, filing status depends on whether the decedent was considered single or married at the time of death. Irs com See the income tax return instructions or Publication 501, Exemptions, Standard Deduction, and Filing Information. Irs com Refund A return must be filed to obtain a refund if tax was withheld from salaries, wages, pensions, or annuities, or if estimated tax was paid, even if a return is not otherwise required to be filed. Irs com Also, the decedent may be entitled to other credits that result in a refund. Irs com These advance payments of tax and credits are discussed later under Credits, Other Taxes, and Payments. Irs com Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer. Irs com   Form 1310 does not have to be filed if you are claiming a refund and you are: A surviving spouse filing an original or amended joint return with the decedent, or A court-appointed or certified personal representative filing the decedent’s original return and a copy of the court certificate showing your appointment is attached to the return. Irs com   If the personal representative is filing a claim for refund on Form 1040X, Amended U. Irs com S. Irs com Individual Income Tax Return, or Form 843, Claim for Refund and Request for Abatement, and the court certificate has already been filed with the IRS, attach Form 1310 and write “Certificate Previously Filed” at the bottom of the form. Irs com Example. Irs com Edward Green died before filing his tax return. Irs com You were appointed the personal representative for Edward's estate, and you file his Form 1040 showing a refund due. Irs com You do not need Form 1310 to claim the refund if you attach a copy of the court certificate showing you were appointed the personal representative. Irs com    If you are a surviving spouse and you receive a tax refund check in both your name and your deceased spouse's name, you can have the check reissued in your name alone. Irs com Return the joint-name check marked “VOID” to your local IRS office or the service center where you mailed your return, along with a written request for reissuance of the refund check. Irs com A new check will be issued in your name and mailed to you. Irs com Death certificate. Irs com   When filing the decedent's final income tax return, do not attach the death certificate or other proof of death to the final return. Irs com Instead, keep it for your records and provide it if requested. Irs com Nonresident Alien If the decedent was a nonresident alien who would have had to file Form 1040NR, U. Irs com S. Irs com Nonresident Alien Income Tax Return, you must file that form for the decedent's final tax year. Irs com See the Instructions for Form 1040NR for the filing requirements, due date, and where to file. Irs com Joint Return Generally, the personal representative and the surviving spouse can file a joint return for the decedent and the surviving spouse. Irs com However, the surviving spouse alone can file the joint return if no personal representative has been appointed before the due date for filing the final joint return for the year of death. Irs com This also applies to the return for the preceding year if the decedent died after the close of the preceding tax year and before filing the return for that year. Irs com The income of the decedent that was includible on his or her return for the year up to the date of death (see Income To Include, later) and the income of the surviving spouse for the entire year must be included in the final joint return. Irs com A final joint return with the decedent cannot be filed if the surviving spouse remarried before the end of the year of the decedent's death. Irs com The filing status of the decedent in this instance is married filing a separate return. Irs com For information about tax benefits to which a surviving spouse may be entitled, see Tax Benefits for Survivors, later, under Other Tax Information. Irs com Personal representative may revoke joint return election. Irs com   A court-appointed personal representative may revoke an election to file a joint return previously made by the surviving spouse alone. Irs com This is done by filing a separate return for the decedent within one year from the due date of the return (including any extensions). Irs com The joint return made by the surviving spouse will then be regarded as the separate return of that spouse by excluding the decedent's items and refiguring the tax liability. Irs com Relief from joint liability. Irs com   In some cases, one spouse may be relieved of joint liability for tax, interest, and penalties on a joint return for items of the other spouse that were incorrectly reported on the joint return. Irs com If the decedent qualified for this relief while alive, the personal representative can pursue an existing request, or file a request, for relief from joint liability. Irs com For information on requesting this relief, see Publication 971, Innocent Spouse Relief. Irs com Income To Include The decedent's income includible on the final return is generally determined as if the person were still alive except that the taxable period is usually shorter because it ends on the date of death. Irs com The method of accounting regularly used by the decedent before death also determines the income includible on the final return. Irs com This section explains how some types of income are reported on the final return. Irs com For more information about accounting methods, see Publication 538, Accounting Periods and Methods. Irs com Cash Method If the decedent accounted for income under the cash method, only those items actually or constructively received before death are included on the final return. Irs com Constructive receipt of income. Irs com   Interest from coupons on the decedent's bonds is constructively received by the decedent if the coupons matured in the decedent's final tax year, but had not been cashed. Irs com Include the interest income on the final return. Irs com   Generally, a dividend is considered constructively received if it was available for use by the decedent without restriction. Irs com If the corporation customarily mailed its dividend checks, the dividend was includible when received. Irs com If the individual died between the time the dividend was declared and the time it was received in the mail, the decedent did not constructively receive it before death. Irs com Do not include the dividend in the final return. Irs com Accrual Method Generally, under an accrual method of accounting, income is reported when earned. Irs com If the decedent used an accrual method, only the income items normally accrued before death are included on the final return. Irs com Interest and Dividend Income (Forms 1099) Form(s) 1099 reporting interest and dividends earned by the decedent before death should be received and the amounts included on the decedent's final return. Irs com A separate Form 1099 should show the interest and dividends earned after the date of the decedent's death and paid to the estate or other recipient that must include those amounts on its return. Irs com You can request corrected Forms 1099 if these forms do not properly reflect the right recipient or amounts. Irs com For example, a Form 1099-INT, reporting interest payable to the decedent, may include income that should be reported on the final income tax return of the decedent, as well as income that the estate or other recipient should report, either as income earned after death or as income in respect of the decedent (discussed later). Irs com For income earned after death, you should ask the payer for a Form 1099 that properly identifies the recipient (by name and identification number) and the proper amount. Irs com If that is not possible, or if the form includes an amount that represents income in respect of the decedent, report the interest as shown next under How to report. Irs com See U. Irs com S. Irs com savings bonds acquired from decedent under Income in Respect of a Decedent, later, for information on savings bond interest that may have to be reported on the final return. Irs com How to report. Irs com   If you are preparing the decedent's final return and you have received a Form 1099-INT for the decedent that includes amounts belonging to the decedent and to another recipient (the decedent's estate or another beneficiary), report the total interest shown on Form 1099-INT on Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. Irs com Next, enter a subtotal of the interest shown on Forms 1099, and the interest reportable from other sources for which you did not receive Forms 1099. Irs com Then, show any interest (including any interest you receive as a nominee) belonging to another recipient separately and subtract it from the subtotal. Irs com Identify the amount of this adjustment as “Nominee Distribution” or other appropriate designation. Irs com   Report dividend income for which you received a Form 1099-DIV, Dividends and Distributions, on the appropriate schedule using the same procedure. Irs com    Note. Irs com If the decedent received amounts as a nominee, you must give the actual owner a Form 1099, unless the owner is the decedent's spouse. Irs com See General Instructions for Certain Information Returns (Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G) for more information on filing Forms 1099. Irs com Partnership Income The death of a partner closes the partnership's tax year for that partner. Irs com Generally, it does not close the partnership's tax year for the remaining partners. Irs com The decedent's distributive share of partnership items must be figured as if the partnership's tax year ended on the date the partner died. Irs com To avoid an interim closing of the partnership books, the partners can agree to estimate the decedent's distributive share by prorating the amounts the partner would have included for the entire partnership tax year. Irs com On the decedent's final return, include the decedent's distributive share of partnership items for the following periods. Irs com The partnership's tax year that ended within or with the decedent's final tax year (the year ending on the date of death). Irs com The period, if any, from the end of the partnership's tax year in (1) to the decedent's date of death. Irs com Example. Irs com Mary Smith was a partner in XYZ partnership and reported her income on a tax year ending December 31. Irs com The partnership uses a tax year ending June 30. Irs com Mary died August 31, 2013, and her estate established its tax year through August 31. Irs com The distributive share of partnership items based on the decedent's partnership interest is reported as follows. Irs com Final Return for the Decedent—January 1 through August 31, 2013, includes XYZ partnership items from (a) the partnership tax year ending June 30, 2013, and (b) the partnership tax year beginning July 1, 2013, and ending August 31, 2013 (the date of death). Irs com Income Tax Return of the Estate—September 1, 2013, through August 31, 2014, includes XYZ partnership items for the period September 1, 2013, through June 30, 2014. Irs com S Corporation Income If the decedent was a shareholder in an S corporation, include on the final return the decedent's share of the S corporation's items of income, loss, deduction, and credit for the following periods. Irs com The corporation's tax year that ended within or with the decedent's final tax year (the year ending on the date of death). Irs com The period, if any, from the end of the corporation's tax year in (1) to the decedent's date of death. Irs com Self-Employment Income Include self-employment income actually or constructively received or accrued, depending on the decedent's accounting method. Irs com For self-employment tax purposes only, the decedent's self-employment income will include the decedent's distributive share of a partnership's income or loss through the end of the month in which death occurred. Irs com For this purpose, the partnership's income or loss is considered to be earned ratably over the partnership's tax year. Irs com Community Income If the decedent was married and domiciled in a community property state, half of the income received and half of the expenses paid during the decedent's tax year by either the decedent or spouse may be considered to be the income and expenses of the other. Irs com For more information, see Publication 555, Community Property. Irs com HSA, Archer MSA, or Medicare Advantage MSA The treatment of an HSA (health savings account), an Archer MSA (medical savings account), or a Medicare Advantage MSA at the death of the account holder, depends on who acquires the interest in the account. Irs com If the decedent's estate acquires the interest, the fair market value (FMV) of the assets in the account on the date of death is included in income on the decedent's final return. Irs com The estate tax deduction, discussed later, does not apply to this amount. Irs com If a beneficiary acquires the interest, see the discussion under Income in Respect of a Decedent, later. Irs com For other information on HSAs, Archer MSAs, or Medicare Advantage MSAs, see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. Irs com Coverdell Education Savings Account (ESA) Generally, the balance in a Coverdell ESA must be distributed within 30 days after the individual for whom the account was established reaches age 30, or dies, whichever is earlier. Irs com The treatment of the Coverdell ESA at the death of an individual under age 30 depends on who acquires the interest in the account. Irs com If the decedent's estate acquires the interest, the earnings on the account must be included on the final income tax return of the decedent. Irs com The estate tax deduction, discussed later, does not apply to this amount. Irs com If a beneficiary acquires the interest, see the discussion under Income in Respect of a Decedent, later. Irs com The age 30 limitation does not apply if the individual for whom the account was established or the beneficiary that acquires the account is an individual with special needs. Irs com This includes an individual who, because of a physical, mental, or emotional condition (including a learning disability), requires additional time to complete his or her education. Irs com For more information on Coverdell ESAs, see Publication 970, Tax Benefits for Education. Irs com Accelerated Death Benefits Accelerated death benefits are amounts received under a life insurance contract before the death of the insured individual. Irs com These benefits also include amounts received on the sale or assignment of the contract to a viatical settlement provider. Irs com Generally, if the decedent received accelerated death benefits on the life of a terminally or chronically ill individual, whether on his or her own life or on the life of another person, those benefits are not included in the decedent's income. Irs com For more information, see the discussion under Gifts, Insurance, and Inheritances under Other Tax Information, later. Irs com Exemptions and Deductions Generally, the rules for exemptions and deductions allowed to an individual also apply to the decedent's final income tax return. Irs com Show on the final return deductible items the decedent paid (or accrued, if the decedent reported deductions on an accrual method) before death. Irs com This section contains a detailed discussion of medical expenses because the tax treatment of the decedent's medical expenses can be different. Irs com See Medical Expenses, later. Irs com Exemptions You can claim the decedent's personal exemption on the final income tax return. Irs com If the decedent was another person's dependent (for example, a parent's), you cannot claim the personal exemption on the decedent's final return. Irs com Standard Deduction If you do not itemize deductions on the final return, the full amount of the appropriate standard deduction is allowed regardless of the date of death. Irs com For information on the appropriate standard deduction, see the Form 1040 income tax return instructions or Publication 501. Irs com Medical Expenses Medical expenses paid before death by the decedent are deductible, subject to limits, on the final income tax return if deductions are itemized. Irs com This includes expenses for the decedent, as well as for the decedent's spouse and dependents. Irs com Beginning in 2013, medical expenses exceeding 10% of adjusted gross income (AGI) may be deducted, unless the decedent or their spouse is age 65 or older. Irs com In that case medical expenses exceeding 7. Irs com 5% of AGI may be deducted. Irs com Qualified medical expenses are not deductible if paid with a tax-free distribution from an HSA or an Archer MSA. Irs com Election for decedent's expenses. Irs com   Medical expenses not paid before death are liabilities of the estate and are shown on the federal estate tax return (Form 706). Irs com However, if medical expenses for the decedent are paid out of the estate during the 1-year period beginning with the day after death, you can elect to treat all or part of the expenses as paid by the decedent at the time they were incurred. Irs com   If you make the election, you can claim all or part of the expenses on the decedent's income tax return (if deductions are itemized) rather than on the federal estate tax return (Form 706). Irs com You can deduct expenses incurred in the year of death on the final income tax return. Irs com You should file an amended return (Form 1040X) for medical expenses incurred in an earlier year, unless the statutory period for filing a claim for that year has expired. Irs com   The amount you can deduct on the income tax return is the amount above 10% of adjusted gross income (or 7. Irs com 5% of adjusted gross income if the decedent or the decedent's spouse was born before January 2, 1949). Irs com Amounts not deductible because of this percentage cannot be claimed on the federal estate tax return. Irs com Making the election. Irs com   You make the election by attaching a statement, in duplicate, to the decedent's income tax return or amended return. Irs com The statement must state that you have not claimed the amount as an estate tax deduction, and that the estate waives the right to claim the amount as a deduction. Irs com This election applies only to expenses incurred for the decedent, not to expenses incurred to provide medical care for dependents. Irs com Example. Irs com Richard Brown used the cash method of accounting and filed his income tax return on a calendar year basis. Irs com Richard died on June 1, 2013, at the age of 78, after incurring $800 in medical expenses. Irs com Of that amount, $500 was incurred in 2012 and $300 was incurred in 2013. Irs com Richard itemized his deductions when he filed his 2012 income tax return. Irs com The personal representative of the estate paid the entire $800 liability in August 2013. Irs com The personal representative may file an amended return (Form 1040X) for 2012 claiming the $500 medical expense as a deduction, subject to the 7. Irs com 5% limit. Irs com The $300 of expenses incurred in 2013 can be deducted on the final income tax return if deductions are itemized, subject to the 7. Irs com 5% limit. Irs com The personal representative must file a statement in duplicate with each return stating that these amounts have not been claimed on the federal estate tax return (Form 706), and waiving the right to claim such a deduction on Form 706 in the future. Irs com Medical expenses not paid by estate. Irs com   If you paid medical expenses for your deceased spouse or dependent, claim the expenses on your tax return for the year in which you paid them, whether they are paid before or after the decedent's death. Irs com If the decedent was a child of divorced or separated parents, the medical expenses can usually be claimed by both the custodial and noncustodial parent to the extent paid by that parent during the year. Irs com Insurance reimbursements. Irs com   Insurance reimbursements of previously deducted medical expenses due a decedent at the time of death and later received by the decedent's estate are includible in the income tax return of the estate (Form 1041) for the year the reimbursements are received. Irs com The reimbursements are also includible in the decedent's gross estate. Irs com No deduction for funeral expenses can be taken on the final Form 1040 of a decedent. Irs com These expenses may be deductible for estate tax purposes on Form 706. Irs com Deduction for Losses A decedent's net operating loss deduction from a prior year and any capital losses (including capital loss carryovers) can be deducted only on the decedent's final income tax return. Irs com A net operating loss on the decedent's final income tax return can be carried back to prior years. Irs com (See Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts. Irs com ) You cannot deduct any unused net operating loss or capital loss on the estate's income tax return. Irs com At-risk loss limits. Irs com   Special at-risk rules apply to most activities that are engaged in as a trade or business or for the production of income. Irs com   These rules limit the deductible loss to the amount which the individual was considered at-risk in the activity. Irs com An individual generally will be considered at-risk to the extent of the money and the adjusted basis of property that he or she contributed to the activity and certain amounts the individual borrowed for use in the activity. Irs com An individual will be considered at-risk for amounts borrowed only if he or she was personally liable for the repayment or if the amounts borrowed were secured by property other than that used in the activity. Irs com The individual is not considered at-risk for borrowed amounts if the lender has an interest in the activity or if the lender is related to a person who has an interest in the activity. Irs com For more information, see Publication 925, Passive Activity and At-Risk Rules. Irs com Passive activity rules. Irs com   A passive activity is any trade or business activity in which the taxpayer does not materially participate. Irs com To determine material participation, see Publication 925. Irs com Rental activities are passive activities regardless of the taxpayer's participation, unless the taxpayer meets certain eligibility requirements. Irs com   Individuals, estates, and trusts can offset passive activity losses only against passive activity income. Irs com Passive activity losses or credits not allowed in one tax year can be carried forward to the next year. Irs com   If a passive activity interest is transferred because a taxpayer dies, the accumulated unused passive activity losses are allowed as a deduction against the decedent's income in the year of death. Irs com Losses are allowed only to the extent they are greater than the excess of the transferee's (recipient of the interest transferred) basis in the property over the decedent's adjusted basis in the property immediately before death. Irs com The part of the accumulated losses equal to the excess is not allowed as a deduction for any tax year. Irs com   Use Form 8582, Passive Activity Loss Limitations, to summarize losses and income from passive activities and to figure the amounts allowed. Irs com For more information, see Publication 925. Irs com Credits, Other Taxes, and Payments Discussed below are some of the tax credits, types of taxes that may be owed, income tax withheld, and estimated tax payments reported on the final return of a decedent. Irs com Credits On the final income tax return, you can claim any tax credits that applied to the decedent before death. Irs com Some of these credits are discussed next. Irs com Earned income credit. Irs com   If the decedent was an eligible individual, you can claim the earned income credit on the decedent's final return even though the return covers less than 12 months. Irs com If the allowable credit is more than the tax liability for the year, the excess is refunded. Irs com   For more information, see Publication 596, Earned Income Credit (EIC). Irs com Credit for the elderly or the disabled. Irs com   This credit is allowable on a decedent's final income tax return if the decedent met both of the following requirements in the year of death. Irs com The decedent: Was a “qualified individual,” and Had income (adjusted gross income (AGI) and nontaxable social security and pensions) less than certain limits. Irs com   For details on qualifying for or figuring the credit, see Publication 524, Credit for the Elderly or the Disabled. Irs com Child tax credit. Irs com   If the decedent had a qualifying child, you may be able to claim the child tax credit on the decedent's final return even though the return covers less than 12 months. Irs com You may be able to claim the additional child tax credit and get a refund if the credit is more than the decedent's liability. Irs com For more information, see the Instructions for Form 1040. Irs com Adoption credit. Irs com   Depending upon when the adoption was finalized, this credit may be taken on a decedent's final income tax return if the decedent: Adopted an eligible child and paid qualified adoption expenses, or Has a carryforward of an adoption credit from a prior year. Irs com   Also, if the decedent is survived by a spouse who meets the filing status of qualifying widow(er), unused adoption credit may be carried forward and used following the death of the decedent. Irs com See Form 8839, Qualified Adoption Expenses, and its instructions for more details. Irs com General business tax credit. Irs com   The general business credit available to a taxpayer is limited. Irs com Any credit arising in a tax year beginning before 1998 that has not been used up can be carried forward for up to 15 years. Irs com Any unused credit arising in a tax year beginning after 1997 has a 1-year carryback and a 20-year carryforward period. Irs com   After the carryforward period, a deduction may be allowed for any unused business credit. Irs com If the taxpayer dies before the end of the carryforward period, the deduction generally is allowed in the year of death. Irs com   For more information on the general business credit, see Publication 334, Tax Guide for Small Business. Irs com Other Taxes Taxes other than income tax that may be owed on the final return of a decedent include self-employment tax and alternative minimum tax, which are reported on Form 1040. Irs com Self-employment tax. Irs com   Self-employment tax may be owed on the final return if either of the following applied to the decedent in the year of death: Net earnings from self-employment (excluding income described in (2)) were $400 or more; or Wages from services performed as a church employee were $108. Irs com 28 or more. Irs com Alternative minimum tax (AMT). Irs com   The tax laws give special treatment to certain types of income and allow special deductions and credits for certain types of expenses. Irs com The alternative minimum tax (AMT) was enacted so taxpayers who benefit from these laws still pay at least a minimum amount of tax. Irs com In general, the AMT is the excess of the tentative minimum tax over the regular tax shown on the return. Irs com Form 6251. Irs com    Use Form 6251, Alternative Minimum Tax—Individuals, to determine if this tax applies to the decedent. Irs com See the form instructions for information on when you must attach Form 6251 to Form 1040. Irs com Form 8801. Irs com   If the decedent paid AMT in a previous year or had a credit carryforward, the decedent may be eligible for a minimum tax credit. Irs com See Form 8801, Credit for Prior Year Minimum Tax—Individuals, Estates, and Trusts. Irs com Payments of Tax The income tax withheld from the decedent's salary, wages, pensions, or annuities, and the amount paid as estimated tax are credits (advance payments of tax) that must be claimed on the final return. Irs com Tax Forgiveness for Armed Forces Members, Victims of Terrorism, and Astronauts Income tax liability may be forgiven for a decedent who dies due to service in a combat zone, due to military or terrorist actions, as a result of a terrorist attack, or while serving in the line of duty as an astronaut. Irs com Combat Zone If a member of the Armed Forces of the United States dies while in active service in a combat zone or from wounds, disease, or injury incurred in a combat zone, the decedent's income tax liability is abated (forgiven) for the entire year in which death occurred and for any prior tax year ending on or after the first day the person served in a combat zone in active service. Irs com For this purpose, a qualified hazardous duty area is treated as a combat zone. Irs com If the tax (including interest, additions to the tax, and additional amounts) for these years has been assessed, the assessment will be forgiven. Irs com If the tax has been collected (regardless of the date of collection), that tax will be credited or refunded. Irs com Any of the decedent's income tax for tax years before those mentioned above that remains unpaid as of the actual (or presumptive) date of death will not be assessed. Irs com If any unpaid tax (including interest, additions to the tax, and additional amounts) has been assessed, this assessment will be forgiven. Irs com Also, if any tax was collected after the date of death, that amount will be credited or refunded. Irs com The date of death of a member of the Armed Forces reported as missing in action or as a prisoner of war is the date his or her name is removed from missing status for military pay purposes. Irs com This is true even if death actually occurred earlier. Irs com For other tax information for members of the Armed Forces, see Publication 3, Armed Forces' Tax Guide. Irs com Military or Terrorist Actions The decedent's income tax liability is forgiven if, at death, he or she was a military or civilian employee of the United States who died because of wounds or injury incurred: While a U. Irs com S. Irs com employee, and In a military or terrorist action. Irs com The forgiveness applies to the tax year in which death occurred and for any earlier tax year, beginning with the year before the year in which the wounds or injury occurred. Irs com Example. Irs com The income tax liability of a civilian employee of the United States who died in 2013 because of wounds incurred while a U. Irs com S. Irs com employee in a terrorist attack that occurred in 2008 will be forgiven for 2013 and for all prior tax years in the period 2007 through 2012. Irs com Refunds are allowed for the tax years for which the period for filing a claim for refund has not ended, as discussed later. Irs com Military or terrorist action defined. Irs com   A military or terrorist action means the following. Irs com Any terrorist activity that most of the evidence indicates was directed against the United States or any of its allies. Irs com Any military action involving the U. Irs com S. Irs com Armed Forces and resulting from violence or aggression against the United States or any of its allies, or the threat of such violence or aggression. Irs com   Terrorist activity includes criminal offenses intended to coerce, intimidate, or retaliate against the government or civilian population. Irs com Military action does not include training exercises. Irs com Any multinational force in which the United States is participating is treated as an ally of the United States. Irs com Determining if a terrorist activity or military action has occurred. Irs com   You may rely on published guidance from the IRS to determine if a particular event is considered a terrorist activity or military action. Irs com Specified Terrorist Victim The Victims of Terrorism Tax Relief Act of 2001 (the Act) provides tax relief for those injured or killed as a result of terrorist attacks, certain survivors of those killed as a result of terrorist attacks, and others who were affected by terrorist attacks. Irs com Under the Act, the federal income tax liability of those killed in the following attacks (specified terrorist victim) is forgiven for certain tax years. Irs com The April 19, 1995, terrorist attack on the Alfred P. Irs com Murrah Federal Building (Oklahoma City). Irs com The September 11, 2001, terrorist attacks. Irs com The terrorist attacks involving anthrax occurring after September 10, 2001, and before January 1, 2002. Irs com The Act also exempts from federal income tax the following types of income. Irs com Qualified disaster relief payments made after September 10, 2001, to cover personal, family, living, or funeral expenses incurred because of a terrorist attack. Irs com Certain disability payments received in tax years ending after September 10, 2001, for injuries sustained in a terrorist attack. Irs com Certain death benefits paid by an employer to the survivor of an employee because the employee died as a result of a terrorist attack. Irs com Payments from the September 11th Victim Compensation Fund 2001. Irs com The Act also reduces the estate tax of individuals who die as a result of a terrorist attack. Irs com See Publication 3920, Tax Relief for Victims of Terrorist Attacks, for more information. Irs com Astronauts Legislation extended the tax relief available under the Victims of Terrorism Tax Relief Act of 2001 (the Act) to astronauts who died in the line of duty after December 31, 2002. Irs com The decedent's income tax liability is forgiven for the tax year in which death occurs, and for the tax year prior to death. Irs com For information on death benefit payments and the reduction of federal estate taxes, see Publication 3920. Irs com However, the discussions in that publication under Death Benefits and Estate Tax Reduction should be modified for astronauts (for example, by using the date of death of the astronaut instead of September 11, 2001). Irs com For more information on the Act, see Publication 3920. Irs com Claim for Credit or Refund If any of these tax-forgiveness situations applies to a prior year tax, any tax paid for which the period for filing a claim has not ended will be credited or refunded. Irs com If any tax is still due, it will be canceled. Irs com The normal period for filing a claim for credit or refund is 3 years after the return was filed or 2 years after the tax was paid, whichever is later. Irs com If death occurred in a combat zone or from wounds, disease, or injury incurred in a combat zone, the period for filing the claim is extended by: The amount of time served in the combat zone (including any period in which the individual was in missing status), plus The period of continuous qualified hospitalization for injury from service in the combat zone, if any, plus The next 180 days. Irs com Qualified hospitalization means any hospitalization outside the United States and any hospitalization in the United States of not more than 5 years. Irs com This extended period for filing the claim also applies to a member of the Armed Forces who was deployed outside the United States in a designated contingency operation. Irs com Filing a claim. Irs com   Use the following procedures to file a claim. Irs com If a U. Irs com S. Irs com individual income tax return (Form 1040, 1040A, or 1040EZ) has not been filed, you should make a claim for refund of any withheld income tax or estimated tax payments by filing Form 1040. Irs com Form W-2, Wage and Tax Statement, must accompany all returns. Irs com If a U. Irs com S. Irs com individual income tax return has been filed, you should make a claim for refund by filing Form 1040X. Irs com You must file a separate Form 1040X for each year in question. Irs com   You must file these returns and claims at the following address for regular mail (U. Irs com S. Irs com Postal Service). Irs com    Internal Revenue Service 333 W. Irs com Pershing, P5–6503 Kansas City, MO 64108   Identify all returns and claims for refund by writing “Iraq—KIA,” “Enduring Freedom—KIA,” “Kosovo Operation—KIA,” “Desert Storm—KIA,” or “Former Yugoslavia—KIA” in bold letters on the top of page 1 of the return or claim. Irs com On the applicable return, write the same phrase on the line for total tax. Irs com If the individual was killed in a terrorist or military action, put “KITA” on the front of the return and on the line for total tax. Irs com   Include an attachment showing the computation of the decedent's tax liability and a computation of the amount to be forgiven. Irs com On joint returns, make an allocation of the tax as described below under Joint returns. Irs com If you cannot make a proper allocation, attach a statement of all income and deductions allocable to each spouse and the IRS will make the proper allocation. Irs com   You must attach Form 1310 to all returns and claims for refund. Irs com However, for exceptions to filing Form 1310, see Form 1310. Irs com Statement of Person Claiming Refund Due a Deceased Taxpayer, under Refund, earlier. Irs com   You must also attach proof of death that includes a statement that the individual was a U. Irs com S. Irs com employee on the date of injury and on the date of death and died as the result of a military or terrorist action. Irs com For military and civilian employees of the Department of Defense, attach DD Form 1300, Report of Casualty. Irs com For other U. Irs com S. Irs com civilian employees killed in the United States, attach a death certificate and a certification (letter) from the federal employer. Irs com For other U. Irs com S. Irs com civilian employees killed overseas, attach a certification from the Department of State. Irs com   If you do not have enough tax information to file a timely claim for refund, you can suspend the period for filing a claim by filing Form 1040X. Irs com Attach Form 1310, any required documentation currently available, and a statement that you will file an amended claim as soon as you have the required tax information. Irs com Joint returns. Irs com   If a joint return was filed, only the decedent's part of the income tax liability is eligible for forgiveness. Irs com Determine the decedent's tax liability as follows. Irs com Figure the income tax for which the decedent would have been liable if a separate return had been filed. Irs com Figure the income tax for which the spouse would have been liable if a separate return had been filed. Irs com Multiply the joint tax liability by a fraction. Irs com The numerator of the fraction is the amount in (1), above. Irs com The denominator of the fraction is the total of (1) and (2). Irs com   The resulting amount from (3) above is the decedent's tax liability eligible for forgiveness. Irs com Filing Reminders To minimize the time needed to process the decedent's final return and issue any refund, be sure to follow these procedures. Irs com Write “DECEASED,” the decedent's name, and the date of death across the top of the tax return. Irs com If a personal representative has been appointed, the personal representative must sign the return. Irs com If it is a joint return, the surviving spouse must also sign it. Irs com If you are the decedent's spouse filing a joint return with the decedent and no personal representative has been appointed, write “Filing as surviving spouse” in the area where you sign the return. Irs com If no personal representative has been appointed and if there is no surviving spouse, the person in charge of the decedent's property must file and sign the return as “personal representative. Irs com ” To claim a refund for the decedent, do the following. Irs com If you are the decedent's spouse filing a joint return with the decedent, file only the tax return to claim the refund. Irs com If you are the personal representative and the return is not a joint return filed with the decedent's surviving spouse, file the return and attach a copy of the certificate that shows your appointment by the court. Irs com (A power of attorney or a copy of the decedent's will is not acceptable evidence of your appointment as the personal representative. Irs com ) If you are filing an amended return, attach Form 1310 and a copy of the certificate of appointment (or, if you have already sent the certificate of appointment to IRS, write “Certificate Previously Filed” at the bottom of Form 1310). Irs com If you are not filing a joint return as the surviving spouse and a personal representative has not been appointed, file the return and attach Form 1310. Irs com Other Tax Information Discussed below is information about the effect of an individual's death on the income tax liability of the survivors (including widows and widowers), the beneficiaries, and the estate. Irs com Tax Benefits for Survivors Survivors can qualify for certain benefits when filing their own income tax returns. Irs com Joint return by surviving spouse. Irs com   A surviving spouse can file a joint return for the year of death and may qualify for special tax rates for the following 2 years, as explained under Qualifying widows and widowers, later. Irs com Decedent as your dependent. Irs com   If the decedent qualified as your dependent for a part of the year before death, you can claim the exemption for the dependent on your tax return, regardless of when death occurred during the year. Irs com   If the decedent was your qualifying child, you may be able to claim the child tax credit or the earned income credit. Irs com To determine if you qualify for the child tax credit, see the instructions for Form 1040, line 51; Form 1040A, line 33; or Form 1040NR, line 48. Irs com To determine if you qualify for the earned income credit, see the instructions for Form 1040, lines 64a and 64b or Form 1040A, lines 38a and 38b. Irs com Qualifying widows and widowers. Irs com   If your spouse died within the 2 tax years preceding the year for which your return is being filed, you may be eligible to claim the filing status of qualifying widow(er) with dependent child and qualify to use the married-filing-jointly tax rates. Irs com Requirements. Irs com   Generally, you qualify for this special benefit if you meet all of the following requirements. Irs com You were entitled to file a joint return with your spouse for the year of death—whether or not you actually filed jointly. Irs com You did not remarry before the end of the current tax year. Irs com You have a child, stepchild, or foster child who qualifies as your dependent for the tax year. Irs com You provide more than half the cost of maintaining your home, which is the principal residence of that child for the entire year except for temporary absences. Irs com Example. Irs com William Burns' wife died in 2010. Irs com William has not remarried and continued throughout 2011 and 2012 to maintain a home for himself and his dependent child. Irs com For 2010, he was entitled to file a joint return for himself and his deceased wife. Irs com For 2011 and 2012, he qualifies to file as a qualifying widower with dependent child. Irs com For later years, he may qualify to file as a head of household. Irs com Figuring your tax. Irs com   Check the box on line 5 (Form 1040 or 1040A) under Filing Status on your tax return. Irs com Use the Tax Rate Schedule or the column in the Tax Table for Married filing jointly, which gives you the split-income benefits. Irs com   The last year you can file jointly with, or claim an exemption for, your deceased spouse is the year of death. Irs com Joint return filing rules. Irs com   If you are the surviving spouse and a personal representative is handling the estate for the decedent, you should coordinate filing your return for the year of death with this personal representative. Irs com See Joint Return under Final Income Tax Return for Decedent—Form 1040, earlier. Irs com Income in Respect of a Decedent All income the decedent would have received had death not occurred that was not properly includible on the final return, discussed earlier, is income in respect of a decedent. Irs com If the decedent is a specified terrorist victim (see Specified Terrorist Victim, earlier), income received after the date of death and before the end of the decedent's tax year (determined without regard to death) is excluded from the recipient's gross income. Irs com This exclusion does not apply to certain income. Irs com For more information, see Publication 3920. Irs com How To Report Income in respect of a decedent must be included in the income of one of the following. Irs com The decedent's estate, if the estate receives it. Irs com The beneficiary, if the right to income is passed directly to the beneficiary and the beneficiary receives it. Irs com Any person to whom the estate properly distributes the right to receive it. Irs com If you have to include income in respect of a decedent in your gross income and an estate tax return (Form 706) was filed for the decedent, you may be able to claim a deduction for the estate tax paid on that income. Irs com See Estate Tax Deduction, later. Irs com Example 1. Irs com Frank Johnson owned and operated an apple orchard. Irs com He used the cash method of accounting. Irs com He sold and delivered 1,000 bushels of apples to a canning factory for $2,000, but did not receive payment before his death. Irs com The proceeds from the sale are income in respect of a decedent. Irs com When the estate was settled, payment had not been made and the estate transferred the right to the payment to his widow. Irs com When Frank's widow collects the $2,000, she must include that amount in her return. Irs com It is not reported on the final return of the decedent or on the return of the estate. Irs com Example 2. Irs com Assume the same facts as in Example 1, except that Frank used the accrual method of accounting. Irs com The amount accrued from the sale of the apples would be included on his final return. Irs com Neither the estate nor the widow would realize income in respect of a decedent when the money is later paid. Irs com Example 3. Irs com On February 1, George High, a cash method taxpayer, sold his tractor for $3,000, payable March 1 of the same year. Irs com His adjusted basis in the tractor was $2,000. Irs com George died on February 15, before receiving payment. Irs com The gain to be reported as income in respect of a decedent is the $1,000 difference between the decedent's basis in the property and the sale proceeds. Irs com In other words, the income in respect of a decedent is the gain the decedent would have realized had he lived. Irs com Example 4. Irs com Cathy O'Neil was entitled to a large salary payment at the date of her death. Irs com The amount was to be paid in five annual installments. Irs com The estate, after collecting two installments, distributed the right to the remaining installments to you, the beneficiary. Irs com The payments are income in respect of a decedent. Irs com None of the payments were includible on Cathy's final return. Irs com The estate must include in its income the two installments it received, and you must include in your income each of the three installments as you receive them. Irs com Example 5. Irs com You inherited the right to receive renewal commissions on life insurance sold by your father before his death. Irs com You inherited the right from your mother, who acquired it by bequest from your father. Irs com Your mother died before she received all the commissions she had the right to receive, so you received the rest. Irs com The commissions are income in respect of a decedent. Irs com None of these commissions were includible in your father's final return. Irs com The commissions received by your mother were included in her income. Irs com The commissions you received are not includible in your mother's income, even on her final return. Irs com You must include them in your income. Irs com Character of income. Irs com   The character of the income you receive in respect of a decedent remains the same as it would have been to the decedent if he or she were alive. Irs com If the income would have been a capital gain to the decedent, it will be a capital gain to you. Irs com Transfer of right to income. Irs com   If you transfer your right to income in respect of a decedent, you must include in your income the greater of: The amount you receive for the right, or The fair market value of the right you transfer. Irs com   If you make a gift of such a right, you must include in your income the fair market value of the right at the time of the gift. Irs com   If the right to income from an installment obligation is transferred, the amount you must include in income is reduced by the basis of the obligation. Irs com See Installment obligations, later. Irs com Transfer defined. Irs com   A transfer for this purpose includes a sale, exchange, or other disposition, the satisfaction of an installment obligation at other than face value, or the cancellation of an installment obligation. Irs com Installment obligations. Irs com   If the decedent sold property using the installment method and you are collecting payments on an installment obligation acquired from the decedent, use the same gross profit percentage the decedent used to figure the part of each payment that represents profit. Irs com Include in your income the same profit the decedent would have included had death not occurred. Irs com For more information, see Publication 537, Installment Sales. Irs com   If you dispose of an installment obligation acquired from a decedent (other than by transfer to the obligor), the rules explained in Publication 537 for figuring gain or loss on the disposition apply to you. Irs com Transfer to obligor. Irs com   A transfer of a right to income, discussed earlier, has occurred if the decedent (seller) sold property using the installment method and the installment obligation was transferred to the obligor (buyer or person legally obligated to pay the installments). Irs com A transfer also occurs if the obligation was canceled either at death or by the estate or person receiving the obligation from the decedent. Irs com An obligation that becomes unenforceable is treated as having been canceled. Irs com   If such a transfer occurs, the amount included in the income of the transferor (the estate or beneficiary) is the greater of the amount received or the fair market value of the installment obligation at the time of transfer, reduced by the basis of the obligation. Irs com The basis of the obligation is the decedent's basis, adjusted for all installment payments received after the decedent's death and before the transfer. Irs com   If the decedent and obligor were related persons, the fair market value of the obligation cannot be less than its face value. Irs com Specific Types of Income in Respect of a Decedent This section explains and provides examples of some specific types of income in respect of a decedent. Irs com Wages. Irs com   The entire amount of wages or other employee compensation earned by the decedent but unpaid at the time of death is income in respect of a decedent. Irs com The income is not reduced by any amounts withheld by the employer. Irs com If the income is $600 or more, the employer should report it in box 3 of Form 1099-MISC, Miscellaneous Income, and give the recipient a copy of the form or a similar statement. Irs com   Wages paid as income in respect of a decedent are not subject to federal income tax withholding. Irs com However, if paid during the calendar year of death, they are subject to withholding for social security and Medicare taxes. Irs com These taxes should be included on the decedent's Form W-2 along with the taxes withheld before death. Irs com These wages are not included in box 1 of Form W-2. Irs com   Wages paid as income in respect of a decedent after the year of death generally are not subject to withholding for any federal taxe
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Federal Payment Levy Program

In July 2000, the IRS, in conjunction with the Department of the Treasury, Financial Management Service (FMS), started the Federal Payment Levy Program (FPLP) which is authorized by Internal Revenue Code Section 6331 (h), as prescribed by the Taxpayer Relief Act of 1997 Section 1024. Through this program, we can collect your overdue taxes through a continuous levy on certain federal payments disbursed by FMS. The following is a list of federal payments that can be levied through the FPLP:

  • federal employee retirement annuities,
  • federal payments made to you as a contractor/vendor doing business with the government (including Defense contracts),
  • federal employee travel advances or reimbursements,
  • certain Social Security benefits paid to you,
  • some federal salaries, 
  • Medicare provider and supplier payments.
  • Railroad Retirement Board benefits paid to you.

In the future, the program will expand to include additional federal employee salaries and other types of federal payments.

Federal payments to a delinquent taxpayer will not be included in the program in certain circumstances. These circumstances include, when you are in bankruptcy, have applied for relief as an innocent or injured spouse, made alternative arrangements to pay, or the IRS has determined you are in a hardship situation.

As part of this program, a file of delinquent accounts is transmitted to FMS to be matched against pending federal payments you are due. When a match is found, we send you a Final Notice - Notice of Intent to Levy and Notice of Your Right to a Hearing, CP 90 or CP 297, if another Final Notice has not already been issued. See Tax Information for Appeals for additional information about your right to a hearing.

If we don't hear from you within 30 days from the date of the Final Notice, we will transmit the levy electronically to FMS. This applies to all federal payments that can be levied except for certain Social Security benefits. See Publication 594, The IRS Collection Process, and Publication 1, Your Rights as a Taxpayer , for additional information.

A levy may be transmitted to FMS without issuing a Final Notice if you previously requested a Collection Due Process (CDP) hearing on employment taxes. The Small Business and Work Opportunity Tax Act of 2007 amended I.R.C. Section 6330(f) and permits such a levy. If you requested a CDP hearing on previous employment taxes NO MORE THAN 2 years prior to the employment taxes being levied, we will send you a Notice of Levy and Notice of Your Right to a Hearing, CP 297A.

A levy may be transmitted to FMS without issuing a Final Notice if you or your predecessor is a Federal contractor.The Small Business Jobs Act of 2010 amended IRC Section 6330(f) and permits the IRS to issue such a levy.  We will send you a post levy notice, Notice of Levy and Notice of Your Right to a Hearing, CP 90C or CP 297C.

From that point on, FMS may reduce any federal payments subject to the levy by 15 percent, or the exact amount of tax owed if it is less than 15 percent of the payment.  Some contract/vendor payments, however, will be reduced by 100 percent, or the exact amount of tax owed. The levy is continuous until your overdue taxes are paid in full, or other arrangements are made to satisfy the debt. Each time your federal payment is levied, FMS will send you a letter of explanation, including information on which federal payment was levied, and advise you to contact us for resolution.

Contact us toll-free at 1-800-829-7650 or 1-800-829-3903 to resolve the issue by paying the tax bill, entering into an installment agreement, or proposing an Offer in Compromise. Please do not contact the FMS, OPM, SSA, or any other federal agency. See Topic 202, What to Do if You Can't Pay Your Tax, and Topic 204, Offers In Compromise, for additional information.

 

Page Last Reviewed or Updated: 07-Jan-2014

The Irs Com

Irs com Publication 925 - Main Content Table of Contents Passive Activity LimitsWho Must Use These Rules? Passive Activity Loss Passive Activity Credit Publicly Traded Partnership Excess Farm Loss Passive Activities Activities That Are Not Passive Activities Passive Activity Income and Deductions Grouping Your Activities Recharacterization of Passive Income Dispositions How To Report Your Passive Activity Loss Comprehensive ExampleGeneral Information At-Risk LimitsWho Is Affected? Activities Covered by the At-Risk Rules At-Risk Amounts Amounts Not At Risk Reductions of Amounts At Risk Recapture Rule How To Get Tax HelpLow Income Taxpayer Clinics Passive Activity Limits Who Must Use These Rules? The passive activity rules apply to: Individuals, Estates, Trusts (other than grantor trusts), Personal service corporations, and Closely held corporations. Irs com Even though the rules do not apply to grantor trusts, partnerships, and S corporations directly, they do apply to the owners of these entities. Irs com For information about personal service corporations and closely held corporations, including definitions and how the passive activity rules apply to these corporations, see Form 8810 and its instructions. Irs com Before applying the passive activity limits, you must first determine the amount of the deductions disallowed under the basis, excess farm loss, or at-risk rules. Irs com See Passive Activity Deductions, later. Irs com Passive Activity Loss Generally, the passive activity loss for the tax year is not allowed. Irs com However, there is a special allowance under which some or all of your passive activity loss may be allowed. Irs com See Special $25,000 allowance , later. Irs com Definition of passive activity loss. Irs com    Generally, your passive activity loss for the tax year is the excess of your passive activity deductions over your passive activity gross income. Irs com See Passive Activity Income and Deductions , later. Irs com   For a closely held corporation, the passive activity loss is the excess of passive activity deductions over the sum of passive activity gross income and net active income. Irs com For details on net active income, see the Instructions for Form 8810. Irs com For the definition of passive activity gross income, see Passive Activity Income , later. Irs com For the definition of passive activity deductions, see Passive Activity Deductions , later. Irs com Identification of Disallowed Passive Activity Deductions If all or a part of your passive activity loss is disallowed for the tax year, you may need to allocate the disallowed passive activity loss among different passive activities and among different deductions within a passive activity. Irs com Allocation of disallowed passive activity loss among activities. Irs com   If all or any part of your passive activity loss is disallowed for the tax year, a ratable portion of the loss (if any) from each of your passive activities is disallowed. Irs com The ratable portion of a loss from an activity is computed by multiplying the passive activity loss that is disallowed for the tax year by the fraction obtained by dividing: The loss from the activity for the tax year; by The sum of the losses for the tax year from all activities having losses for the tax year. Irs com Use Worksheet 5 of Form 8582 to figure the ratable portion of the loss from each activity that is disallowed. Irs com Loss from an activity. Irs com   The term “loss from an activity” means: The amount by which the passive activity deductions (defined later) from the activity for the tax year exceed the passive activity gross income (defined later) from the activity for the tax year; reduced by Any part of such amount that is allowed under the Special $25,000 Allowance , later. Irs com   If your passive activity gross income from significant participation passive activities (defined later) for the tax year is more than your passive activity deductions from those activities for the tax year, those activities shall be treated, solely for purposes of figuring your loss from the activity, as a single activity that does not have a loss for such taxable year. Irs com See Significant Participation Passive Activities , later. Irs com Example. Irs com John Pine holds interests in three passive activities, A, B, and C. Irs com The gross income and deductions from these activities for the taxable year are as follows:   A B C Total Gross income $7,000 $4,000 $12,000 $23,000 Deductions (16,000) (20,000) (8,000) (44,000)           Net income (loss) ($9,000) ($16,000) $4,000 ($21,000)   John Pine’s $21,000 passive activity loss for the taxable year is disallowed. Irs com Therefore, a ratable portion of the losses from activities A and B is disallowed. Irs com He figures the disallowed portion of each loss as follows: A: $21,000 x $9,000/$25,000 $7,560 B: $21,000 x $16,000/$25,000 13,440     Total $21,000 Allocation within loss activities. Irs com   If all or any part of your loss from an activity is disallowed under Allocation of disallowed passive activity loss among activities for the tax year, a ratable portion of each of your passive activity deductions (defined later), other than an excluded deduction (defined below) from such activity is disallowed. Irs com The ratable portion of a passive activity deduction is the amount of the disallowed portion of the loss from the activity for the tax year multiplied by the fraction obtained by dividing: The amount of such deduction; by The sum of all of your passive activity deductions (other than excluded deductions) from that activity from the tax year. Irs com Excluded deductions. Irs com    “Excluded deduction” means any passive activity deduction that is taken into account in computing your net income from an item of property for a taxable year in which an amount of the taxpayer's gross income from such item of property is treated as not from a passive activity. Irs com See Recharacterization of Passive Income , later. Irs com Separately identified deductions. Irs com   In identifying the deductions from an activity that are disallowed, you do not need to account separately for a deduction unless such deduction may, if separately taken into account, result in an income tax liability for any tax year different from that which would result were such deduction not taken into account separately. Irs com   Use Form 8582, Worksheet 7, for any activity if you have passive activity deductions for that activity that must be separately identified. Irs com   Deductions that must be accounted for separately include (but are not limited to) the following deductions. Irs com Deductions that arise in a rental real estate activity in tax years in which you actively participate in such activity. Irs com See Active participation , later. Irs com Deductions that arise in a rental real estate activity in tax years in which you do not actively participate in such activity. Irs com See Active participation , later. Irs com Losses from sales or exchanges of capital assets. Irs com Section 1231 losses. Irs com See Section 1231 Gains and Losses in Publication 544, Sales and Other Disposition of Assets, for more information. Irs com Carryover of Disallowed Deductions In the case of an activity with respect to which any deductions or credits are disallowed for a taxable year (the loss activity), the disallowed deductions are allocated among your activities for the next tax year in a manner that reasonably reflects the extent to which each activity continues the loss activity. Irs com The disallowed deductions or credits allocated to an activity under the preceding sentence are treated as deductions or credits from the activity for the next tax year. Irs com For more information, see Regulations section 1. Irs com 469-1(f)(4). Irs com Passive Activity Credit Generally, the passive activity credit for the tax year is disallowed. Irs com The passive activity credit is the amount by which the sum of all your credits subject to the passive activity rules exceed your regular tax liability allocable to all passive activities for the tax year. Irs com Credits that are included in figuring the general business credit are subject to the passive activity rules. Irs com See the Instructions for Form 8582-CR for more information. Irs com Publicly Traded Partnership You must apply the rules in this part separately to your income or loss from a passive activity held through a publicly traded partnership (PTP). Irs com You also must apply the limit on passive activity credits separately to your credits from a passive activity held through a PTP. Irs com You can offset deductions from passive activities of a PTP only against income or gain from passive activities of the same PTP. Irs com Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. Irs com This separate treatment rule also applies to a regulated investment company holding an interest in a PTP for the items attributable to that interest. Irs com For more information on how to apply the passive activity loss rules to PTPs, and on how to apply the limit on passive activity credits to PTPs, see Publicly Traded Partnerships (PTPs) in the Instructions for Forms 8582 and 8582-CR, respectively. Irs com Excess Farm Loss If you receive an applicable subsidy for any tax year and you have an excess farm loss for the tax year, special rules apply. Irs com These rules do not apply to C corporations. Irs com For information, see the Instructions for Schedule F (Form 1040), Profit or Loss From Farming. Irs com Passive Activities There are two kinds of passive activities. Irs com Trade or business activities in which you do not materially participate during the year. Irs com Rental activities, even if you do materially participate in them, unless you are a real estate professional. Irs com Material participation in a trade or business is discussed later, under Activities That Are Not Passive Activities . Irs com Treatment of former passive activities. Irs com   A former passive activity is an activity that was a passive activity in any earlier tax year, but is not a passive activity in the current tax year. Irs com You can deduct a prior year's unallowed loss from the activity up to the amount of your current year net income from the activity. Irs com Treat any remaining prior year unallowed loss like you treat any other passive loss. Irs com   In addition, any prior year unallowed passive activity credits from a former passive activity offset the allocable part of your current year tax liability. Irs com The allocable part of your current year tax liability is that part of this year's tax liability that is allocable to the current year net income from the former passive activity. Irs com You figure this after you reduce your net income from the activity by any prior year unallowed loss from that activity (but not below zero). Irs com Trade or Business Activities A trade or business activity is an activity that: Involves the conduct of a trade or business (that is, deductions would be allowable under section 162 of the Internal Revenue Code if other limitations, such as the passive activity rules, did not apply), Is conducted in anticipation of starting a trade or business, or Involves research or experimental expenditures that are deductible under Internal Revenue Code section 174 (or that would be deductible if you chose to deduct rather than capitalize them). Irs com A trade or business activity does not include a rental activity or the rental of property that is incidental to an activity of holding the property for investment. Irs com You generally report trade or business activities on Schedule C, C-EZ, F, or in Part II or III of Schedule E. Irs com Rental Activities A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. Irs com See Real Estate Professional under Activities That Are Not Passive Activities, later. Irs com An activity is a rental activity if tangible property (real or personal) is used by customers or held for use by customers, and the gross income (or expected gross income) from the activity represents amounts paid (or to be paid) mainly for the use of the property. Irs com It does not matter whether the use is under a lease, a service contract, or some other arrangement. Irs com Exceptions. Irs com   Your activity is not a rental activity if any of the following apply. Irs com The average period of customer use of the property is 7 days or less. Irs com You figure the average period of customer use by dividing the total number of days in all rental periods by the number of rentals during the tax year. Irs com If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. Irs com The numerator of the fraction is the gross rental income from that class of property and the denominator is the activity's total gross rental income. Irs com The activity's average period of customer use will equal the sum of the amounts for each class. Irs com The average period of customer use of the property, as figured in (1) above, is 30 days or less and you provide significant personal services with the rentals. Irs com Significant personal services include only services performed by individuals. Irs com To determine if personal services are significant, all relevant facts and circumstances are taken into consideration, including the frequency of the services, the type and amount of labor required to perform the services, and the value of the services relative to the amount charged for use of the property. Irs com Significant personal services do not include the following. Irs com Services needed to permit the lawful use of the property, Services to repair or improve property that would extend its useful life for a period substantially longer than the average rental, and Services that are similar to those commonly provided with long-term rentals of real estate, such as cleaning and maintenance of common areas or routine repairs. Irs com You provide extraordinary personal services in making the rental property available for customer use. Irs com Services are extraordinary personal services if they are performed by individuals and the customers' use of the property is incidental to their receipt of the services. Irs com The rental is incidental to a nonrental activity. Irs com The rental of property is incidental to an activity of holding property for investment if the main purpose of holding the property is to realize a gain from its appreciation and the gross rental income from the property is less than 2% of the smaller of the property's unadjusted basis or fair market value. Irs com The unadjusted basis of property is its cost not reduced by depreciation or any other basis adjustment. Irs com The rental of property is incidental to a trade or business activity if all of the following apply. Irs com You own an interest in the trade or business activity during the year. Irs com The rental property was used mainly in that trade or business activity during the current year, or during at least 2 of the 5 preceding tax years. Irs com Your gross rental income from the property is less than 2% of the smaller of its unadjusted basis or fair market value. Irs com Lodging provided to an employee or the employee's spouse or dependents is incidental to the activity or activities in which the employee performs services if the lodging is furnished for the employer's convenience. Irs com You customarily make the rental property available during defined business hours for nonexclusive use by various customers. Irs com You provide the property for use in a nonrental activity in your capacity as an owner of an interest in the partnership, S corporation, or joint venture conducting that activity. Irs com    If you meet any of the exceptions listed above, see the instructions for Form 8582 for information about how to report any income or loss from the activity. Irs com Special $25,000 allowance. Irs com   If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that is disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income. Irs com This special allowance is an exception to the general rule disallowing the passive activity loss. Irs com Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. Irs com   If you are married, filing a separate return, and lived apart from your spouse for the entire tax year, your special allowance cannot be more than $12,500. Irs com If you lived with your spouse at any time during the year and are filing a separate return, you cannot use the special allowance to reduce your nonpassive income or tax on nonpassive income. Irs com   The maximum special allowance is reduced if your modified adjusted gross income exceeds certain amounts. Irs com See Phaseout rule , later. Irs com Example. Irs com Kate, a single taxpayer, has $70,000 in wages, $15,000 income from a limited partnership, a $26,000 loss from rental real estate activities in which she actively participated, and is not subject to the modified adjusted gross income phaseout rule. Irs com She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. Irs com She actively participated in her rental real estate activities, so she can use the remaining $11,000 rental real estate loss to offset $11,000 of her nonpassive income (wages). Irs com Commercial revitalization deduction (CRD). Irs com   The special allowance must first be applied to losses from rental real estate activities figured without the CRD. Irs com Any remaining part of the special allowance is available for the CRD from the rental real estate activities and is not subject to the active participation rules or the phaseout based on modified adjusted gross income. Irs com You cannot claim a CRD for a building placed in service after December 31, 2009. Irs com Active participation. Irs com   Active participation is not the same as material participation (defined later). Irs com Active participation is a less stringent standard than material participation. Irs com For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. Irs com Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. Irs com   Only individuals can actively participate in rental real estate activities. Irs com However, a decedent's estate is treated as actively participating for its tax years ending less than 2 years after the decedent's death, if the decedent would have satisfied the active participation requirement for the activity for the tax year the decedent died. Irs com   A decedent's qualified revocable trust can also be treated as actively participating if both the trustee and the executor (if any) of the estate choose to treat the trust as part of the estate. Irs com The choice applies to tax years ending after the decedent's death and before: 2 years after the decedent's death if no estate tax return is required, or 6 months after the estate tax liability is finally determined if an estate tax return is required. Irs com   The choice is irrevocable and cannot be made later than the due date for the estate's first income tax return (including any extensions). Irs com   Limited partners are not treated as actively participating in a partnership's rental real estate activities. Irs com   You are not treated as actively participating in a rental real estate activity unless your interest in the activity (including your spouse's interest) was at least 10% (by value) of all interests in the activity throughout the year. Irs com   Active participation is not required to take the low-income housing credit, the rehabilitation investment credit, or CRD from rental real estate activities. Irs com Example. Irs com Mike, a single taxpayer, had the following income and loss during the tax year: Salary $42,300 Dividends 300 Interest 1,400 Rental loss (4,000) The rental loss came from a house Mike owned. Irs com He advertised and rented the house to the current tenant himself. Irs com He also collected the rents and did the repairs or hired someone to do them. Irs com Even though the rental loss is a loss from a passive activity, Mike can use the entire $4,000 loss to offset his other income because he actively participated. Irs com Phaseout rule. Irs com   The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that is more than $100,000 ($50,000 if you are married filing separately). Irs com If your modified adjusted gross income is $150,000 or more ($75,000 or more if you are married filing separately), you generally cannot use the special allowance. Irs com    Modified adjusted gross income for this purpose is your adjusted gross income figured without the following. Irs com Taxable social security and tier 1 railroad retirement benefits. Irs com Deductible contributions to individual retirement accounts (IRAs) and section 501(c)(18) pension plans. Irs com The exclusion from income of interest from qualified U. Irs com S. Irs com savings bonds used to pay qualified higher education expenses. Irs com The exclusion from income of amounts received from an employer's adoption assistance program. Irs com Passive activity income or loss included on Form 8582. Irs com Any rental real estate loss allowed because you materially participated in the rental activity as a Real Estate Professional (as discussed later, under Activities That Are Not Passive Activities). Irs com Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the instructions for Form 8582). Irs com The deduction for the employer-equivalent portion of self-employment tax. Irs com The deduction for domestic production activities. Irs com The deduction allowed for interest on student loans. Irs com The deduction for qualified tuition and related expenses. Irs com Example. Irs com During 2013, John was unmarried and was not a real estate professional. Irs com For 2013, he had $120,000 in salary and a $31,000 loss from his rental real estate activities in which he actively participated. Irs com His modified adjusted gross income is $120,000. Irs com When he files his 2013 return, he can deduct only $15,000 of his passive activity loss. Irs com He must carry over the remaining $16,000 passive activity loss to 2014. Irs com He figures his deduction and carryover as follows: Adjusted gross income, modified as required $120,000       Minus amount not subject to phaseout 100,000 Amount subject to phaseout rule $20,000 Multiply by 50% × 50% Required reduction to special allowance $10,000 Maximum special allowance $25,000 Minus required reduction (see above) 10,000 Adjusted special allowance $15,000 Passive loss from rental real estate $31,000 Deduction allowable/Adjusted  special allowance (see above) 15,000       Amount that must be carried forward $16,000 Exceptions to the phaseout rules. Irs com   A higher phaseout range applies to rehabilitation investment credits from rental real estate activities. Irs com For those credits, the phaseout of the $25,000 special allowance starts when your modified adjusted gross income exceeds $200,000 ($100,000 if you are a married individual filing a separate return and living apart at all times during the year). Irs com   There is no phaseout of the $25,000 special allowance for low-income housing credits or for the CRD. Irs com Ordering rules. Irs com   If you have more than one of the exceptions to the phaseout rules in the same tax year, you must apply the $25,000 phaseout against your passive activity losses and credits in the following order. Irs com The portion of passive activity losses not attributable to the CRD. Irs com The portion of passive activity losses attributable to the CRD. Irs com The portion of passive activity credits attributable to credits other than the rehabilitation and low-income housing credits. Irs com The portion of passive activity credits attributable to the rehabilitation credit. Irs com The portion of passive activity credits attributable to the low-income housing credit. Irs com Activities That Are Not Passive Activities The following are not passive activities. Irs com Trade or business activities in which you materially participated for the tax year. Irs com A working interest in an oil or gas well which you hold directly or through an entity that does not limit your liability (such as a general partner interest in a partnership). Irs com It does not matter whether you materially participated in the activity for the tax year. Irs com However, if your liability was limited for part of the year (for example, you converted your general partner interest to a limited partner interest during the year) and you had a net loss from the well for the year, some of your income and deductions from the working interest may be treated as passive activity gross income and passive activity deductions. Irs com  See Temporary Regulations section 1. Irs com 469-1T(e)(4)(ii). Irs com The rental of a dwelling unit that you also used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental. Irs com An activity of trading personal property for the account of those who own interests in the activity. Irs com See Temporary Regulations section 1. Irs com 469-1T(e)(6). Irs com Rental real estate activities in which you materially participated as a real estate professional. Irs com See Real Estate Professional , later. Irs com You should not enter income and losses from these activities on Form 8582. Irs com Instead, enter them on the forms or schedules you would normally use. Irs com Material Participation A trade or business activity is not a passive activity if you materially participated in the activity. Irs com Material participation tests. Irs com    You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests. Irs com You participated in the activity for more than 500 hours. Irs com Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own any interest in the activity. Irs com You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who did not own any interest in the activity) for the year. Irs com The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. Irs com A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you did not materially participate under any of the material participation tests, other than this test. Irs com See Significant Participation Passive Activities , under Recharacterization of Passive Income, later. Irs com You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years. Irs com The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. Irs com An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor. Irs com Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year. Irs com   You did not materially participate in the activity under test (7) if you participated in the activity for 100 hours or less during the year. Irs com Your participation in managing the activity does not count in determining whether you materially participated under this test if: Any person other than you received compensation for managing the activity, or Any individual spent more hours during the tax year managing the activity than you did (regardless of whether the individual was compensated for the management services). Irs com Participation. Irs com   In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity. Irs com Work not usually performed by owners. Irs com   You do not treat the work you do in connection with an activity as participation in the activity if both of the following are true. Irs com The work is not work that is customarily done by the owner of that type of activity. Irs com One of your main reasons for doing the work is to avoid the disallowance of any loss or credit from the activity under the passive activity rules. Irs com Participation as an investor. Irs com   You do not treat the work you do in your capacity as an investor in an activity as participation unless you are directly involved in the day-to-day management or operations of the activity. Irs com Work you do as an investor includes: Studying and reviewing financial statements or reports on operations of the activity, Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and Monitoring the finances or operations of the activity in a nonmanagerial capacity. Irs com Spouse's participation. Irs com   Your participation in an activity includes your spouse's participation. Irs com This applies even if your spouse did not own any interest in the activity and you and your spouse do not file a joint return for the year. Irs com Proof of participation. Irs com You can use any reasonable method to prove your participation in an activity for the year. Irs com You do not have to keep contemporaneous daily time reports, logs, or similar documents if you can establish your participation in some other way. Irs com For example, you can show the services you performed and the approximate number of hours spent by using an appointment book, calendar, or narrative summary. Irs com Limited partners. Irs com   If you owned an activity as a limited partner, you generally are not treated as materially participating in the activity. Irs com However, you are treated as materially participating in the activity if you met test (1), (5), or (6) under Material participation tests , discussed earlier, for the tax year. Irs com   You are not treated as a limited partner, however, if you also were a general partner in the partnership at all times during the partnership's tax year ending with or within your tax year (or, if shorter, during that part of the partnership's tax year in which you directly or indirectly owned your limited partner interest). Irs com Retired or disabled farmer and surviving spouse of a farmer. Irs com   If you are a retired or disabled farmer, you are treated as materially participating in a farming activity if you materially participated for 5 or more of the 8 years before your retirement or disability. Irs com Similarly, if you are a surviving spouse of a farmer, you are treated as materially participating in a farming activity if the real property used in the activity meets the estate tax rules for special valuation of farm property passed from a qualifying decedent, and you actively manage the farm. Irs com Corporations. Irs com   A closely held corporation or a personal service corporation is treated as materially participating in an activity only if one or more shareholders holding more than 50% by value of the outstanding stock of the corporation materially participate in the activity. Irs com   A closely held corporation can also satisfy the material participation standard by meeting the first two requirements for the qualifying business exception from the at-risk limits. Irs com See Special exception for qualified corporations under Activities Covered by the At-Risk Rules, later. Irs com Real Estate Professional Generally, rental activities are passive activities even if you materially participated in them. Irs com However, if you qualified as a real estate professional, rental real estate activities in which you materially participated are not passive activities. Irs com For this purpose, each interest you have in a rental real estate activity is a separate activity, unless you choose to treat all interests in rental real estate activities as one activity. Irs com See the Instructions for Schedule E (Form 1040), Supplemental Income and Loss, for information about making this choice. Irs com If you qualified as a real estate professional for 2013, report income or losses from rental real estate activities in which you materially participated as nonpassive income or losses, and complete line 43 of Schedule E (Form 1040). Irs com If you also have an unallowed loss from these activities from an earlier year when you did not qualify, see Treatment of former passive activities under Passive Activities, earlier. Irs com Qualifications. Irs com   You qualified as a real estate professional for the year if you met both of the following requirements. Irs com More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated. Irs com You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated. Irs com   Do not count personal services you performed as an employee in real property trades or businesses unless you were a 5% owner of your employer. Irs com You were a 5% owner if you owned (or are considered to have owned) more than 5% of your employer's outstanding stock, outstanding voting stock, or capital or profits interest. Irs com   If you file a joint return, do not count your spouse's personal services to determine whether you met the preceding requirements. Irs com However, you can count your spouse's participation in an activity in determining if you materially participated. Irs com Real property trades or businesses. Irs com   A real property trade or business is a trade or business that does any of the following with real property. Irs com Develops or redevelops it. Irs com Constructs or reconstructs it. Irs com Acquires it. Irs com Converts it. Irs com Rents or leases it. Irs com Operates or manages it. Irs com Brokers it. Irs com Closely held corporations. Irs com   A closely held corporation can qualify as a real estate professional if more than 50% of the gross receipts for its tax year came from real property trades or businesses in which it materially participated. Irs com Passive Activity Income and Deductions In figuring your net income or loss from a passive activity, take into account only passive activity income and passive activity deductions. Irs com Self-charged interest. Irs com   Certain self-charged interest income or deductions may be treated as passive activity gross income or passive activity deductions if the loan proceeds are used in a passive activity. Irs com   Generally, self-charged interest income and deductions result from loans between you and a partnership or S corporation in which you had a direct or indirect ownership interest. Irs com This includes both loans you made to the partnership or S corporation and loans the partnership or S corporation made to you. Irs com   It also includes loans from one partnership or S corporation to another partnership or S corporation if each owner in the borrowing entity has the same proportional ownership interest in the lending entity. Irs com    Exception. Irs com The self-charged interest rules do not apply to your interest in a partnership or S corporation if the entity made an election under Regulations section 1. Irs com 469-7(g) to avoid the application of these rules. Irs com For more details on the self-charged interest rules, see Regulations section 1. Irs com 469-7. Irs com Passive Activity Income Passive activity income includes all income from passive activities and generally includes gain from disposition of an interest in a passive activity or property used in a passive activity. Irs com Passive activity income does not include the following items. Irs com Income from an activity that is not a passive activity. Irs com These activities are discussed under Activities That Are Not Passive Activities , earlier. Irs com Portfolio income. Irs com This includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. Irs com It includes gain or loss from the disposition of property that produces these types of income or that is held for investment. Irs com The exclusion for portfolio income does not apply to self-charged interest treated as passive activity income. Irs com For more information on self-charged interest, see Self-charged interest , earlier. Irs com Personal service income. Irs com This includes salaries, wages, commissions, self-employment income from trade or business activities in which you materially participated, deferred compensation, taxable social security and other retirement benefits, and payments from partnerships to partners for personal services. Irs com Income from positive section 481 adjustments allocated to activities other than passive activities. Irs com (Section 481 adjustments are adjustments that must be made due to changes in your accounting method. Irs com ) Income or gain from investments of working capital. Irs com Income from an oil or gas property if you treated any loss from a working interest in the property for any tax year beginning after 1986 as a nonpassive loss, as discussed in item (2) under Activities That Are Not Passive Activities , earlier. Irs com This also applies to income from other oil and gas property the basis of which is determined wholly or partly by the basis of the property in the preceding sentence. Irs com Any income from intangible property, such as a patent, copyright, or literary, musical, or artistic composition, if your personal efforts significantly contributed to the creation of the property. Irs com Any other income that must be treated as nonpassive income. Irs com See Recharacterization of Passive Income , later. Irs com Overall gain from any interest in a publicly traded partnership. Irs com See Publicly Traded Partnerships (PTPs) in the instructions for Form 8582. Irs com State, local, and foreign income tax refunds. Irs com Income from a covenant not to compete. Irs com Reimbursement of a casualty or theft loss included in gross income to recover all or part of a prior year loss deduction, if the loss deduction was not a passive activity deduction. Irs com Alaska Permanent Fund dividends. Irs com Cancellation of debt income, if at the time the debt is discharged the debt is not allocated to passive activities under the interest expense allocation rules. Irs com See chapter 4 of Publication 535, Business Expenses, for information about the rules for allocating interest. Irs com Disposition of property interests. Irs com   Gain on the disposition of an interest in property generally is passive activity income if, at the time of the disposition, the property was used in an activity that was a passive activity in the year of disposition. Irs com The gain generally is not passive activity income if, at the time of disposition, the property was used in an activity that was not a passive activity in the year of disposition. Irs com An exception to this general rule may apply if you previously used the property in a different activity. Irs com Exception for more than one use in the preceding 12 months. Irs com   If you used the property in more than one activity during the 12-month period before its disposition, you must allocate the gain between the activities on a basis that reasonably reflects the property's use during that period. Irs com Any gain allocated to a passive activity is passive activity income. Irs com   For this purpose, an allocation of the gain solely to the activity in which the property was mainly used during that period reasonably reflects the property's use if the fair market value of your interest in the property is not more than the lesser of: $10,000, or 10% of the total of the fair market value of your interest in the property and the fair market value of all other property used in that activity immediately before the disposition. Irs com Exception for substantially appreciated property. Irs com   The gain is passive activity income if the fair market value of the property at disposition was more than 120% of its adjusted basis and either of the following conditions applies. Irs com You used the property in a passive activity for 20% of the time you held your interest in the property. Irs com You used the property in a passive activity for the entire 24-month period before its disposition. Irs com If neither condition applies, the gain is not passive activity income. Irs com However, it is treated as portfolio income only if you held the property for investment for more than half of the time you held it in nonpassive activities. Irs com   For this purpose, treat property you held through a corporation (other than an S corporation) or other entity whose owners receive only portfolio income as property held in a nonpassive activity and as property held for investment. Irs com Also, treat the date you agree to transfer your interest for a fixed or determinable amount as the disposition date. Irs com   If you used the property in more than one activity during the 12-month period before its disposition, this exception applies only to the part of the gain allocated to a passive activity under the rules described in the preceding discussion. Irs com Disposition of property converted to inventory. Irs com   If you disposed of property that you had converted to inventory from its use in another activity (for example, you sold condominium units you previously held for use in a rental activity), a special rule may apply. Irs com Under this rule, you disregard the property's use as inventory and treat it as if it were still used in that other activity at the time of disposition. Irs com This rule applies only if you meet all of the following conditions. Irs com At the time of disposition, you held your interest in the property in a dealing activity (an activity that involves holding the property or similar property mainly for sale to customers in the ordinary course of a trade or business). Irs com Your other activities included a nondealing activity (an activity that does not involve holding similar property for sale to customers in the ordinary course of a trade or business) in which you used the property for more than 80% of the period you held it. Irs com You did not acquire or hold your interest in the property for the main purpose of selling it to customers in the ordinary course of a trade or business. Irs com Passive Activity Deductions Generally, a deduction is a passive activity deduction for a taxable year if and only if such deduction either: Arises in connection with the conduct of an activity that is a passive activity for the tax year; or Is treated as a deduction from an activity for the tax year because it was disallowed by the passive activity rules in the preceding year and carried forward to the tax year. Irs com For purposes of item (1), above, an item of deduction arises in the taxable year in which the item would be allowable as a deduction under the taxpayer's method of accounting if taxable income for all taxable years were determined without regard to the passive activity rules and without regard to the basis, excess farm loss, and at-risk limits. Irs com See Coordination with other limitations on deductions that apply before the passive activity rules , later. Irs com Passive activity deductions generally include losses from dispositions of property used in a passive activity at the time of the disposition and losses from a disposition of less than your entire interest in a passive activity. Irs com Exceptions. Irs com   Passive activity deductions do not include the following items. Irs com Deductions for expenses (other than interest expense) that are clearly and directly allocable to portfolio income. Irs com Qualified home mortgage interest, capitalized interest expenses, and other interest expenses (other than self-charged interest) properly allocable to passive activities. Irs com For more information on self-charged interest, see Self-charged interest under Passive Activity Income and Deductions, earlier. Irs com Losses from dispositions of property that produce portfolio income or property held for investment. Irs com State, local, and foreign income taxes. Irs com Miscellaneous itemized deductions that may be disallowed because of the 2%-of-adjusted-gross-income limit. Irs com Charitable contribution deductions. Irs com Net operating loss deductions. Irs com Percentage depletion carryovers for oil and gas wells. Irs com Capital loss carrybacks and carryovers. Irs com Items of deduction from a passive activity that are disallowed under the limits on deductions that apply before the passive activity rules. Irs com See Coordination with other limitations on deductions that apply before the passive activity rules , later. Irs com Deductions and losses that would have been allowed for tax years beginning before 1987 but for basis or at-risk limits. Irs com Net negative section 481 adjustments allocated to activities other than passive activities. Irs com (Section 481 adjustments are adjustments required due to changes in accounting methods. Irs com ) Casualty and theft losses, unless losses similar in cause and severity recur regularly in the activity. Irs com The deduction for the employer-equivalent portion of self-employment tax. Irs com Coordination with other limitations on deductions that apply before the passive activity rules. Irs com   An item of deduction from a passive activity that is disallowed for a tax year under the basis or at-risk limitations is not a passive activity deduction for the tax year. Irs com The following sections provide rules for figuring the extent to which items of deduction from a passive activity are disallowed for a tax year under the basis or at-risk limitations. Irs com Proration of deductions disallowed under basis limitations. Irs com   If any amount of your distributive share of a partnership's loss for the tax year is disallowed under the basis limitation, a ratable portion of your distributive share of each item of deduction or loss of the partnership is disallowed for the tax year. Irs com For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your distributive share of partnership loss that is disallowed for the taxable year; by The sum of your distributive shares of all items of deduction and loss of the partnership for the tax year. Irs com   If any amount of your pro rata share of an S corporation's loss for the tax year is disallowed under the basis limitation, a ratable portion of your pro rata share of each item of deduction or loss of the S corporation is disallowed for the tax year. Irs com For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your share of S corporation loss that is disallowed for the tax year; by The sum of your pro rata shares of all items of deduction and loss of the corporation for the tax year. Irs com Proration of deductions disallowed under at-risk limitation. Irs com   If any amount of your loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) is disallowed under the at-risk rules for the tax year, a ratable portion of each item of deduction or loss from the activity is disallowed for the tax year. Irs com For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of the loss from the activity that is disallowed for the tax year; by The sum of all deductions from the activity for the taxable year. Irs com Coordination of basis and at-risk limitations. Irs com   The portion of any item of deduction or loss that is disallowed for the tax year under the basis limitations is not taken into account for the taxable year in determining the loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) for purposes of applying the at-risk rules. Irs com Separately identified items of deduction and loss. Irs com   In identifying the items of deduction and loss from an activity that are not disallowed under the basis and at-risk limitations (and that therefore may be treated as passive activity deductions), you need not account separately for any item of deduction or loss unless such item may, if separately taken into account, result in an income tax liability different from that which would result were such item of deduction or loss taken into account separately. Irs com   Items of deduction or loss that must be accounted for separately include (but are not limited to) items of deduction or loss that: Are attributable to separate activities. Irs com See Grouping Your Activities , later. Irs com Arise in a rental real estate activity in tax years in which you actively participate in such activity; Arise in a rental real estate activity in taxable years in which you do not actively participate in such activity; Arose in a taxable year beginning before 1987 and were not allowed for such taxable year under the basis or at-risk limitations; Are taken into account under section 613A(d) (relating to limitations on certain depletion deductions); Are taken into account under section 1211 (relating to the limitation on capital losses); Are taken into account under section 1231 (relating to property used in a trade or business and involuntary conversions). Irs com See Section 1231 Gains and Losses in Publication 544 for more information. Irs com Are attributable to pre-enactment interests in activities. Irs com See Regulations section 1. Irs com 469-11T(c). Irs com Grouping Your Activities You can treat one or more trade or business activities, or rental activities, as a single activity if those activities form an appropriate economic unit for measuring gain or loss under the passive activity rules. Irs com Grouping is important for a number of reasons. Irs com If you group two activities into one larger activity, you need only show material participation in the activity as a whole. Irs com But if the two activities are separate, you must show material participation in each one. Irs com On the other hand, if you group two activities into one larger activity and you dispose of one of the two, then you have disposed of only part of your entire interest in the activity. Irs com But if the two activities are separate and you dispose of one of them, then you have disposed of your entire interest in that activity. Irs com Grouping can also be important in determining whether you meet the 10% ownership requirement for actively participating in a rental real estate activity. Irs com Appropriate Economic Units Generally, to determine if activities form an appropriate economic unit, you must consider all the relevant facts and circumstances. Irs com You can use any reasonable method of applying the relevant facts and circumstances in grouping activities. Irs com The following factors have the greatest weight in determining whether activities form an appropriate economic unit. Irs com All of the factors do not have to apply to treat more than one activity as a single activity. Irs com The factors that you should consider are: The similarities and differences in the types of trades or businesses, The extent of common control, The extent of common ownership, The geographical location, and The interdependencies between or among activities, which may include the extent to which the activities: Buy or sell goods between or among themselves, Involve products or services that are generally provided together, Have the same customers, Have the same employees, or Use a single set of books and records to account for the activities. Irs com Example 1. Irs com John Jackson owns a bakery and a movie theater at a shopping mall in Baltimore and a bakery and movie theater in Philadelphia. Irs com Based on all the relevant facts and circumstances, there may be more than one reasonable method for grouping John's activities. Irs com For example, John may be able to group the movie theaters and the bakeries into: One activity, A movie theater activity and a bakery activity, A Baltimore activity and a Philadelphia activity, or Four separate activities. Irs com Example 2. Irs com Betty is a partner in ABC partnership, which sells nonfood items to grocery stores. Irs com Betty is also a partner in DEF (a trucking business). Irs com ABC and DEF are under common control. Irs com The main part of DEF's business is transporting goods for ABC. Irs com DEF is the only trucking business in which Betty is involved. Irs com Based on the rules of this section, Betty treats ABC's wholesale activity and DEF's trucking activity as a single activity. Irs com Consistency and disclosure requirement. Irs com   Generally, when you group activities into appropriate economic units, you may not regroup those activities in a later tax year. Irs com You must meet any disclosure requirements of the IRS when you first group your activities and when you add or dispose of any activities in your groupings. Irs com   However, if the original grouping is clearly inappropriate or there is a material change in the facts and circumstances that makes the original grouping clearly inappropriate, you must regroup the activities and comply with any disclosure requirements of the IRS. Irs com   See Disclosure Requirement , later. Irs com Regrouping by the IRS. Irs com   If any of the activities resulting from your grouping is not an appropriate economic unit and one of the primary purposes of your grouping (or failure to regroup) is to avoid the passive activity rules, the IRS may regroup your activities. Irs com Rental activities. Irs com   In general, you cannot group a rental activity with a trade or business activity. Irs com However, you can group them together if the activities form an appropriate economic unit and: The rental activity is insubstantial in relation to the trade or business activity, The trade or business activity is insubstantial in relation to the rental activity, or Each owner of the trade or business activity has the same ownership interest in the rental activity, in which case the part of the rental activity that involves the rental of items of property for use in the trade or business activity may be grouped with the trade or business activity. Irs com Example. Irs com Herbert and Wilma are married and file a joint return. Irs com Healthy Food, an S corporation, is a grocery store business. Irs com Herbert is Healthy Food's only shareholder. Irs com Plum Tower, an S corporation, owns and rents out the building. Irs com Wilma is Plum Tower's only shareholder. Irs com Plum Tower rents part of its building to Healthy Food. Irs com Plum Tower's grocery store rental business and Healthy Food's grocery business are not insubstantial in relation to each other. Irs com Herbert and Wilma file a joint return, so they are treated as one taxpayer for purposes of the passive activity rules. Irs com The same owner (Herbert and Wilma) owns both Healthy Food and Plum Tower with the same ownership interest (100% in each). Irs com If the grouping forms an appropriate economic unit, as discussed earlier, Herbert and Wilma can group Plum Tower's grocery store rental and Healthy Food's grocery business into a single trade or business activity. Irs com Grouping of real and personal property rentals. Irs com   In general, you cannot treat an activity involving the rental of real property and an activity involving the rental of personal property as a single activity. Irs com However, you can treat them as a single activity if you provide the personal property in connection with the real property or the real property in connection with the personal property. Irs com Certain activities may not be grouped. Irs com   In general, if you own an interest as a limited partner or a limited entrepreneur in one of the following activities, you may not group that activity with any other activity in another type of business. Irs com Holding, producing, or distributing motion picture films or video tapes. Irs com Farming. Irs com Leasing any section 1245 property (as defined in section 1245(a)(3) of the Internal Revenue Code). Irs com For a list of section 1245 property, see Section 1245 property under Activities Covered by the At-Risk Rules , later. Irs com Exploring for, or exploiting, oil and gas resources. Irs com Exploring for, or exploiting, geothermal deposits. Irs com   If you own an interest as a limited partner or a limited entrepreneur in an activity described in the list above, you may group that activity with another activity in the same type of business if the grouping forms an appropriate economic unit as discussed earlier. Irs com Limited entrepreneur. Irs com   A limited entrepreneur is a person who: Has an interest in an enterprise other than as a limited partner, and Does not actively participate in the management of the enterprise. Irs com Activities conducted through another entity. Irs com   A personal service corporation, closely held corporation, partnership, or S corporation must group its activities using the rules discussed in this section. Irs com Once the entity groups its activities, you, as the partner or shareholder of the entity, may group those activities (following the rules of this section): With each other, With activities conducted directly by you, or With activities conducted through other entities. Irs com    You may not treat activities grouped together by the entity as separate activities. Irs com Personal service and closely held corporations. Irs com   You may group an activity conducted through a personal service or closely held corporation with your other activities only to determine whether you materially or significantly participated in those other activities. Irs com See Material Participation , earlier, and Significant Participation Passive Activities , later. Irs com Publicly traded partnership (PTP). Irs com   You may not group activities conducted through a PTP with any other activity, including an activity conducted through another PTP. Irs com Partial dispositions. Irs com   If you dispose of substantially all of an activity during your tax year, you may treat the part disposed of as a separate activity. Irs com However, you can do this only if you can show with reasonable certainty: The amount of deductions and credits disallowed in prior years under the passive activity rules that is allocable to the part of the activity disposed of, and The amount of gross income and any other deductions and credits for the current tax year that is allocable to the part of the activity disposed of. Irs com Disclosure Requirement For tax years beginning after January 24, 2010, the following disclosure requirements for groupings apply. Irs com You are required to report certain changes to your groupings that occur during the tax year to the IRS. Irs com If you fail to report these changes, each trade or business activity or rental activity will be treated as a separate activity. Irs com You will be considered to have made a timely disclosure if you filed all affected income tax returns consistent with the claimed grouping and make the required disclosure on the income tax return for the year in which you first discovered the failure to disclose. Irs com If the IRS discovered the failure to disclose, you must have reasonable cause for not making the required disclosure. Irs com New grouping. Irs com   You must file a written statement with your original income tax return for the first tax year in which two or more activities are originally grouped into a single activity. Irs com The statement must provide the names, addresses, and employer identification numbers (EINs), if applicable, for the activities being grouped as a single activity. Irs com In addition, the statement must contain a declaration that the grouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. Irs com Addition to an existing grouping. Irs com   You must file a written statement with your original income tax return for the tax year in which you add a new activity to an existing group. Irs com The statement must provide the name, address, and EIN, if applicable, for the activity that is being added and for the activities in the existing group. Irs com In addition, the statement must contain a declaration that the activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. Irs com Regrouping. Irs com   You must file a written statement with your original income tax return for the tax year in which you regroup the activities. Irs com The statement must provide the names, addresses, and EINs, if applicable, for the activities that are being regrouped. Irs com If two or more activities are being regrouped into a single activity, the statement must contain a declaration that the regrouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. Irs com In addition, the statement must contain an explanation of the material change in the facts and circumstances that made the original grouping clearly inappropriate. Irs com Groupings by partnerships and S corporations. Irs com   Partnerships and S corporations are not subject to the rules for new grouping, addition to an existing grouping, or regrouping. Irs com Instead, they must comply with the disclosure instructions for grouping activities provided in their Form 1065, U. Irs com S. Irs com Return of Partnership Income, or Form 1120S, U. Irs com S. Irs com Income Tax Return for an S Corporation, whichever is applicable. Irs com   The partner or shareholder is not required to make a separate disclosure of the groupings disclosed by the entity unless the partner or shareholder: Groups together any of the activities that the entity does not group together, Groups the entity's activities with activities conducted directly by the partner or shareholder, or Groups an entity's activities with activities conducted through another entity. Irs com   A partner or shareholder may not treat activities grouped together by the entity as separate activities. Irs com Recharacterization of Passive Income Net income from the following passive activities may have to be recharacterized and excluded from passive activity income. Irs com Significant participation passive activities, Rental of property when less than 30% of the unadjusted basis of the property is subject to depreciation, Equity-financed lending activities, Rental of property incidental to development activities, Rental of property to nonpassive activities, and Licensing of intangible property by  pass-through entities. Irs com If you are engaged in or have an interest in one of these activities during the tax year (either directly or through a partnership or an S corporation), combine the income and losses from the activity to determine if you have a net loss or net income from that activity. Irs com If the result is a net loss, treat the income and losses the same as any other income or losses from that type of passive activity (trade or business activity or rental activity). Irs com If the result is net income, do not enter any of the income or losses from the activity or property on Form 8582 or its worksheets. Irs com Instead, enter income or losses on the form and schedules you normally use. Irs com However, see Significant Participation Passive Activities , later, if the activity is a significant participation passive activity and you also have a net loss from a different significant participation passive activity. Irs com Limit on recharacterized passive income. Irs com   The total amount that you treat as nonpassive income under the rules described later in this discussion for significant participation passive activities, rental of nondepreciable property, and equity-financed lending activities cannot exceed the greatest amount that you treat as nonpassive income under any one of these rules. Irs com Investment income and investment expense. Irs com   To figure your investment interest expense limitation on Form 4952, treat as investment income any net passive income recharacterized as nonpassive income from rental of nondepreciable property, equity-financed lending activity, or licensing of intangible property by a pass-through entity. Irs com Significant Participation Passive Activities A significant participation passive activity is any trade or business activity in which you participated for more than 100 hours during the tax year but did not materially participate. Irs com If your gross income from all significant participation passive activities is more than your deductions from those activities, a part of your net income from each significant participation passive activity is treated as nonpassive income. Irs com Corporations. Irs com   An activity of a personal service corporation or closely held corporation is a significant participation passive activity if both of the following statements are true. Irs com The corporation is not treated as materially participating in the activity for the year. Irs com One or more individuals, each of whom is treated as significantly participating in the activity, directly or indirectly hold (in total) more than 50% (by value) of the corporation's outstanding stock. Irs com Worksheet A. Irs com   Complete Worksheet A. Irs com Significant Participation Passive Activities , below, if you have income or losses from any significant participation activity. Irs com Begin by entering the name of each activity in the left column. Irs com Column (a). Irs com   Enter the number of hours you participated in each activity and total the column. Irs com   If the total is more than 500, do not complete Worksheet A or B. Irs com None of the activities are passive activities because you satisfy test 4 for material participation. Irs com (See Material participation tests , earlier. Irs com ) Report all the income and losses from these activities on the forms and schedules you normally use. Irs com Do not include the income and losses on Form 8582. Irs com Column (b). Irs com   Enter the net loss, if any, from the activity. Irs com Net loss from an activity means either: The activity's current year net loss (if any) plus prior year unallowed losses (if any), or The excess of prior year unallowed losses over the current year net income (if any). Irs com Enter -0- here if the prior year unallowed loss is the same as the current year net income. Irs com Column (c). Irs com   Enter net income (if any) from the activity. Irs com Net income means the excess of the current year's net income from the activity over any prior year unallowed losses from the activity. Irs com Column (d). Irs com   Combine amounts in the Totals row for columns (b) and (c) and enter the total net income or net loss in the Totals row of column (d). Irs com If column (d) is a net loss, skip Worksheet B, Significant Participation Activities With Net Income. Irs com Include the income and losses in Worksheet 3 of Form 8582 (or Worksheet 2 in the Form 88