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Myfreetaxes org 4. Myfreetaxes org   Interest Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Allocation of InterestOrder of funds spent. Myfreetaxes org Payments from checking accounts. Myfreetaxes org Amounts paid within 30 days. Myfreetaxes org Optional method for determining date of reallocation. Myfreetaxes org Interest on a segregated account. Myfreetaxes org How to report. Myfreetaxes org Interest You Can DeductStatement. Myfreetaxes org Expenses paid to obtain a mortgage. Myfreetaxes org Prepayment penalty. Myfreetaxes org De minimis OID. Myfreetaxes org Constant-yield method. Myfreetaxes org Loan or mortgage ends. Myfreetaxes org Interest You Cannot DeductPenalties. Myfreetaxes org Who is a key person? Exceptions for pre-June 1997 contracts. Myfreetaxes org Interest allocated to unborrowed policy cash value. Myfreetaxes org Capitalization of Interest When To Deduct InterestPrepaid interest. Myfreetaxes org Discounted loan. Myfreetaxes org Refunds of interest. Myfreetaxes org Prepaid interest. Myfreetaxes org Discounted loan. Myfreetaxes org Tax deficiency. Myfreetaxes org Related person. Myfreetaxes org Below-Market LoansLimit on forgone interest for gift loans of $100,000 or less. Myfreetaxes org Introduction This chapter discusses the tax treatment of business interest expense. Myfreetaxes org Business interest expense is an amount charged for the use of money you borrowed for business activities. Myfreetaxes org Topics - This chapter discusses: Allocation of interest Interest you can deduct Interest you cannot deduct Capitalization of interest When to deduct interest Below-market loans Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch E (Form 1040) Supplemental Income and Loss Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Myfreetaxes org Sch K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. Myfreetaxes org 1098 Mortgage Interest Statement 3115 Application for Change in Accounting Method 4952 Investment Interest Expense Deduction 8582 Passive Activity Loss Limitations See chapter 12 for information about getting publications and forms. Myfreetaxes org Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. Myfreetaxes org If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds. Myfreetaxes org Allocate your interest expense to the following categories. Myfreetaxes org Nonpassive trade or business activity interest Passive trade or business activity interest Investment interest Portfolio interest Personal interest In general, you allocate interest on a loan the same way you allocate the loan proceeds. Myfreetaxes org You allocate loan proceeds by tracing disbursements to specific uses. Myfreetaxes org The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Myfreetaxes org Secured loan. Myfreetaxes org   The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. Myfreetaxes org Example. Myfreetaxes org You secure a loan with property used in your business. Myfreetaxes org You use the loan proceeds to buy an automobile for personal use. Myfreetaxes org You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property. Myfreetaxes org    If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Myfreetaxes org The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Myfreetaxes org For more information, see Publication 936. Myfreetaxes org Allocation period. Myfreetaxes org   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. Myfreetaxes org The date the loan is repaid. Myfreetaxes org The date the loan is reallocated to another use. Myfreetaxes org Proceeds not disbursed to borrower. Myfreetaxes org   Even if the lender disburses the loan proceeds to a third party, the allocation of the loan is still based on your use of the funds. Myfreetaxes org This applies whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt. Myfreetaxes org Proceeds deposited in borrower's account. Myfreetaxes org   Treat loan proceeds deposited in an account as property held for investment. Myfreetaxes org It does not matter whether the account pays interest. Myfreetaxes org Any interest you pay on the loan is investment interest expense. Myfreetaxes org If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. Myfreetaxes org Example. Myfreetaxes org Celina, a calendar-year taxpayer, borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. Myfreetaxes org No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. Myfreetaxes org On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. Myfreetaxes org On September 4, Celina uses an additional $40,000 from the account for personal purposes. Myfreetaxes org Under the interest allocation rules, the entire $100,000 loan is treated as property held for investment for the period from January 4 through April 1. Myfreetaxes org From April 2 through September 3, Celina must treat $20,000 of the loan as used in the passive activity and $80,000 of the loan as property held for investment. Myfreetaxes org From September 4 through December 31, she must treat $40,000 of the loan as used for personal purposes, $20,000 as used in the passive activity, and $40,000 as property held for investment. Myfreetaxes org Order of funds spent. Myfreetaxes org   Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. Myfreetaxes org Any unborrowed amounts held in the same account. Myfreetaxes org Any amounts deposited after these loan proceeds. Myfreetaxes org Example. Myfreetaxes org On January 9, Olena opened a checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed funds. Myfreetaxes org The following table shows the transactions in her account during the tax year. Myfreetaxes org Date Transaction January 9 $500 proceeds of Loan A and $1,000 unborrowed funds deposited January 14 $500 proceeds of Loan B  deposited February 19 $800 used for personal purposes February 27 $700 used for passive activity June 19 $1,000 proceeds of Loan C  deposited November 20 $800 used for an investment December 18 $600 used for personal purposes Olena treats the $800 used for personal purposes as made from the $500 proceeds of Loan A and $300 of the proceeds of Loan B. Myfreetaxes org She treats the $700 used for a passive activity as made from the remaining $200 proceeds of Loan B and $500 of unborrowed funds. Myfreetaxes org She treats the $800 used for an investment as made entirely from the proceeds of Loan C. Myfreetaxes org She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. Myfreetaxes org For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. Myfreetaxes org Payments from checking accounts. Myfreetaxes org   Generally, you treat a payment from a checking or similar account as made at the time the check is written if you mail or deliver it to the payee within a reasonable period after you write it. Myfreetaxes org You can treat checks written on the same day as written in any order. Myfreetaxes org Amounts paid within 30 days. Myfreetaxes org   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. Myfreetaxes org This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Myfreetaxes org   If the loan proceeds are deposited in an account, you can apply this rule even if the rules stated earlier under Order of funds spent would otherwise require you to treat the proceeds as used for other purposes. Myfreetaxes org If you apply this rule to any payments, disregard those payments (and the proceeds from which they are made) when applying the rules stated under Order of funds spent. Myfreetaxes org   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. Myfreetaxes org Example. Myfreetaxes org Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. Myfreetaxes org Giovanni deposits $1,500 in an account on August 18 and on August 28 writes a check on the account for a passive activity expense. Myfreetaxes org Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. Myfreetaxes org Regardless of these other transactions, Giovanni can treat $1,000 of the deposit he made on August 18 as being paid on August 4 from the loan proceeds. Myfreetaxes org In addition, Giovanni can treat the passive activity expense he paid on August 28 as made from the $1,000 loan proceeds treated as deposited in the account. Myfreetaxes org Optional method for determining date of reallocation. Myfreetaxes org   You can use the following method to determine the date loan proceeds are reallocated to another use. Myfreetaxes org You can treat all payments from loan proceeds in the account during any month as taking place on the later of the following dates. Myfreetaxes org The first day of that month. Myfreetaxes org The date the loan proceeds are deposited in the account. Myfreetaxes org However, you can use this optional method only if you treat all payments from the account during the same calendar month in the same way. Myfreetaxes org Interest on a segregated account. Myfreetaxes org   If you have an account that contains only loan proceeds and interest earned on the account, you can treat any payment from that account as being made first from the interest. Myfreetaxes org When the interest earned is used up, any remaining payments are from loan proceeds. Myfreetaxes org Example. Myfreetaxes org You borrowed $20,000 and used the proceeds of this loan to open a new savings account. Myfreetaxes org When the account had earned interest of $867, you withdrew $20,000 for personal purposes. Myfreetaxes org You can treat the withdrawal as coming first from the interest earned on the account, $867, and then from the loan proceeds, $19,133 ($20,000 − $867). Myfreetaxes org All the interest charged on the loan from the time it was deposited in the account until the time of the withdrawal is investment interest expense. Myfreetaxes org The interest charged on the part of the proceeds used for personal purposes ($19,133) from the time you withdrew it until you either repay it or reallocate it to another use is personal interest expense. Myfreetaxes org The interest charged on the loan proceeds you left in the account ($867) continues to be investment interest expense until you either repay it or reallocate it to another use. Myfreetaxes org Loan repayment. Myfreetaxes org   When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. Myfreetaxes org Personal use. Myfreetaxes org Investments and passive activities (other than those included in (3)). Myfreetaxes org Passive activities in connection with a rental real estate activity in which you actively participate. Myfreetaxes org Former passive activities. Myfreetaxes org Trade or business use and expenses for certain low-income housing projects. Myfreetaxes org Line of credit (continuous borrowings). Myfreetaxes org   The following rules apply if you have a line of credit or similar arrangement. Myfreetaxes org Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. Myfreetaxes org Treat borrowed funds or parts of borrowed funds on which interest accrues at different fixed or variable rates as different loans. Myfreetaxes org Treat these loans as repaid in the order shown on the loan agreement. Myfreetaxes org Loan refinancing. Myfreetaxes org   Allocate the replacement loan to the same uses to which the repaid loan was allocated. Myfreetaxes org Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. Myfreetaxes org Debt-financed distribution. Myfreetaxes org   A debt-financed distribution occurs when a partnership or S corporation borrows funds and allocates those funds to distributions made to partners or shareholders. Myfreetaxes org The manner in which you report the interest expense associated with the distributed debt proceeds depends on your use of those proceeds. Myfreetaxes org How to report. Myfreetaxes org   If the proceeds were used in a nonpassive trade or business activity, report the interest on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership or S corporation in column (a) and the amount in column (h). Myfreetaxes org If the proceeds were used in a passive activity, follow the Instructions for Form 8582, Passive Activity Loss Limitations, to determine the amount of interest expense that can be reported on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership in column (a) and the amount in column (f). Myfreetaxes org If the proceeds were used in an investment activity, enter the interest on Form 4952. Myfreetaxes org If the proceeds are used for personal purposes, the interest is generally not deductible. Myfreetaxes org Interest You Can Deduct You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. Myfreetaxes org Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. Myfreetaxes org It does not matter what type of property secures the loan. Myfreetaxes org You can deduct interest on a debt only if you meet all the following requirements. Myfreetaxes org You are legally liable for that debt. Myfreetaxes org Both you and the lender intend that the debt be repaid. Myfreetaxes org You and the lender have a true debtor-creditor relationship. Myfreetaxes org Partial liability. Myfreetaxes org   If you are liable for part of a business debt, you can deduct only your share of the total interest paid or accrued. Myfreetaxes org Example. Myfreetaxes org You and your brother borrow money. Myfreetaxes org You are liable for 50% of the note. Myfreetaxes org You use your half of the loan in your business, and you make one-half of the loan payments. Myfreetaxes org You can deduct your half of the total interest payments as a business deduction. Myfreetaxes org Mortgage. Myfreetaxes org   Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. Myfreetaxes org However, rather than deducting the interest currently, you may have to add it to the cost basis of the property as explained later under Capitalization of Interest. Myfreetaxes org Statement. Myfreetaxes org   If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement. Myfreetaxes org You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. Myfreetaxes org A governmental unit is a person for purposes of furnishing the statement. Myfreetaxes org   If you receive a refund of interest you overpaid in an earlier year, this amount will be reported in box 3 of Form 1098. Myfreetaxes org You cannot deduct this amount. Myfreetaxes org For information on how to report this refund, see Refunds of interest, later in this chapter. Myfreetaxes org Expenses paid to obtain a mortgage. Myfreetaxes org   Certain expenses you pay to obtain a mortgage cannot be deducted as interest. Myfreetaxes org These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. Myfreetaxes org If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage. Myfreetaxes org Prepayment penalty. Myfreetaxes org   If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as interest. Myfreetaxes org Interest on employment tax deficiency. Myfreetaxes org   Interest charged on employment taxes assessed on your business is deductible. Myfreetaxes org Original issue discount (OID). Myfreetaxes org   OID is a form of interest. Myfreetaxes org A loan (mortgage or other debt) generally has OID when its proceeds are less than its principal amount. Myfreetaxes org The OID is the difference between the stated redemption price at maturity and the issue price of the loan. Myfreetaxes org   A loan's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on it other than qualified stated interest. Myfreetaxes org Qualified stated interest is stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a single fixed rate. Myfreetaxes org You generally deduct OID over the term of the loan. Myfreetaxes org Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. Myfreetaxes org De minimis OID. Myfreetaxes org   The OID is de minimis if it is less than one-fourth of 1% (. Myfreetaxes org 0025) of the stated redemption price of the loan at maturity multiplied by the number of full years from the date of original issue to maturity (the term of the loan). Myfreetaxes org   If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. Myfreetaxes org On a constant-yield basis over the term of the loan. Myfreetaxes org On a straight-line basis over the term of the loan. Myfreetaxes org In proportion to stated interest payments. Myfreetaxes org In its entirety at maturity of the loan. Myfreetaxes org You make this choice by deducting the OID in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Myfreetaxes org Example. Myfreetaxes org On January 1, 2013, you took out a $100,000 discounted loan and received $98,500 in proceeds. Myfreetaxes org The loan will mature on January 1, 2023 (a 10-year term), and the $100,000 principal is payable on that date. Myfreetaxes org Interest of $10,000 is payable on January 1 of each year, beginning January 1, 2014. Myfreetaxes org The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × . Myfreetaxes org 0025 × 10). Myfreetaxes org You choose to deduct the OID on a straight-line basis over the term of the loan. Myfreetaxes org Beginning in 2013, you can deduct $150 each year for 10 years. Myfreetaxes org Constant-yield method. Myfreetaxes org   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Myfreetaxes org You figure your deduction for the first year using the following steps. Myfreetaxes org Determine the issue price of the loan. Myfreetaxes org Generally, this equals the proceeds of the loan. Myfreetaxes org If you paid points on the loan (as discussed later), the issue price generally is the difference between the proceeds and the points. Myfreetaxes org Multiply the result in (1) by the yield to maturity. Myfreetaxes org Subtract any qualified stated interest payments from the result in (2). Myfreetaxes org This is the OID you can deduct in the first year. Myfreetaxes org   To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). Myfreetaxes org To get the adjusted issue price, add to the issue price any OID previously deducted. Myfreetaxes org Then follow steps (2) and (3) above. Myfreetaxes org   The yield to maturity is generally shown in the literature you receive from your lender. Myfreetaxes org If you do not have this information, consult your lender or tax advisor. Myfreetaxes org In general, the yield to maturity is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Myfreetaxes org Example. Myfreetaxes org The facts are the same as in the previous example, except that you deduct the OID on a constant yield basis over the term of the loan. Myfreetaxes org The yield to maturity on your loan is 10. Myfreetaxes org 2467%, compounded annually. Myfreetaxes org For 2013, you can deduct $93 [($98,500 × . Myfreetaxes org 102467) − $10,000]. Myfreetaxes org For 2014, you can deduct $103 [($98,593 × . Myfreetaxes org 102467) − $10,000]. Myfreetaxes org Loan or mortgage ends. Myfreetaxes org   If your loan or mortgage ends, you may be able to deduct any remaining OID in the tax year in which the loan or mortgage ends. Myfreetaxes org A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Myfreetaxes org If you refinance with the original lender, you generally cannot deduct the remaining OID in the year in which the refinancing occurs, but you may be able to deduct it over the term of the new mortgage or loan. Myfreetaxes org See Interest paid with funds borrowed from original lender under Interest You Cannot Deduct, later. Myfreetaxes org Points. Myfreetaxes org   The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a loan or a mortgage. Myfreetaxes org These charges are also called loan origination fees, maximum loan charges, discount points, or premium charges. Myfreetaxes org If any of these charges (points) are solely for the use of money, they are interest. Myfreetaxes org   Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. Myfreetaxes org However, you can choose to fully deduct points in the year paid if you meet certain tests. Myfreetaxes org For exceptions to the general rule, see Publication 936. Myfreetaxes org The points reduce the issue price of the loan and result in original issue discount (OID), deductible as explained in the preceding discussion. Myfreetaxes org Partial payments on a nontax debt. Myfreetaxes org   If you make partial payments on a debt (other than a debt owed the IRS), the payments are applied, in general, first to interest and any remainder to principal. Myfreetaxes org You can deduct only the interest. Myfreetaxes org This rule does not apply when it can be inferred that the borrower and lender understood that a different allocation of the payments would be made. Myfreetaxes org Installment purchase. Myfreetaxes org   If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. Myfreetaxes org If no interest or a low rate of interest is charged under the contract, a portion of the stated principal amount payable under the contract may be recharacterized as interest (unstated interest). Myfreetaxes org The amount recharacterized as interest reduces your basis in the property and increases your interest expense. Myfreetaxes org For more information on installment sales and unstated interest, see Publication 537. Myfreetaxes org Interest You Cannot Deduct Certain interest payments cannot be deducted. Myfreetaxes org In addition, certain other expenses that may seem to be interest but are not, cannot be deducted as interest. Myfreetaxes org You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. Myfreetaxes org Interest paid with funds borrowed from original lender. Myfreetaxes org   If you use the cash method of accounting, you cannot deduct interest you pay with funds borrowed from the original lender through a second loan, an advance, or any other arrangement similar to a loan. Myfreetaxes org You can deduct the interest expense once you start making payments on the new loan. Myfreetaxes org   When you make a payment on the new loan, you first apply the payment to interest and then to the principal. Myfreetaxes org All amounts you apply to the interest on the first loan are deductible, along with any interest you pay on the second loan, subject to any limits that apply. Myfreetaxes org Capitalized interest. Myfreetaxes org   You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. Myfreetaxes org See Capitalization of Interest, later. Myfreetaxes org In addition, if you buy property and pay interest owed by the seller (for example, by assuming the debt and any interest accrued on the property), you cannot deduct the interest. Myfreetaxes org Add this interest to the basis of the property. Myfreetaxes org Commitment fees or standby charges. Myfreetaxes org   Fees you incur to have business funds available on a standby basis, but not for the actual use of the funds, are not deductible as interest payments. Myfreetaxes org You may be able to deduct them as business expenses. Myfreetaxes org   If the funds are for inventory or certain property used in your business, the fees are indirect costs and you generally must capitalize them under the uniform capitalization rules. Myfreetaxes org See Capitalization of Interest, later. Myfreetaxes org Interest on income tax. Myfreetaxes org   Interest charged on income tax assessed on your individual income tax return is not a business deduction even though the tax due is related to income from your trade or business. Myfreetaxes org Treat this interest as a business deduction only in figuring a net operating loss deduction. Myfreetaxes org Penalties. Myfreetaxes org   Penalties on underpaid deficiencies and underpaid estimated tax are not interest. Myfreetaxes org You cannot deduct them. Myfreetaxes org Generally, you cannot deduct any fines or penalties. Myfreetaxes org Interest on loans with respect to life insurance policies. Myfreetaxes org   You generally cannot deduct interest on a debt incurred with respect to any life insurance, annuity, or endowment contract that covers any individual unless that individual is a key person. Myfreetaxes org   If the policy or contract covers a key person, you can deduct the interest on up to $50,000 of debt for that person. Myfreetaxes org However, the deduction for any month cannot be more than the interest figured using Moody's Composite Yield on Seasoned Corporate Bonds (formerly known as Moody's Corporate Bond Yield Average-Monthly Average Corporates) (Moody's rate) for that month. Myfreetaxes org Who is a key person?   A key person is an officer or 20% owner. Myfreetaxes org However, the number of individuals you can treat as key persons is limited to the greater of the following. Myfreetaxes org Five individuals. Myfreetaxes org The lesser of 5% of the total officers and employees of the company or 20 individuals. Myfreetaxes org Exceptions for pre-June 1997 contracts. Myfreetaxes org   You can generally deduct the interest if the contract was issued before June 9, 1997, and the covered individual is someone other than an employee, officer, or someone financially interested in your business. Myfreetaxes org If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is covered by the contract. Myfreetaxes org Interest allocated to unborrowed policy cash value. Myfreetaxes org   Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. Myfreetaxes org This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. Myfreetaxes org For more information, see section 264(f) of the Internal Revenue Code. Myfreetaxes org Capitalization of Interest Under the uniform capitalization rules, you generally must capitalize interest on debt equal to your expenditures to produce real property or certain tangible personal property. Myfreetaxes org The property must be produced by you for use in your trade or business or for sale to customers. Myfreetaxes org You cannot capitalize interest related to property that you acquire in any other manner. Myfreetaxes org Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. Myfreetaxes org Designated property is any of the following. Myfreetaxes org Real property. Myfreetaxes org Tangible personal property with a class life of 20 years or more. Myfreetaxes org Tangible personal property with an estimated production period of more than 2 years. Myfreetaxes org Tangible personal property with an estimated production period of more than 1 year if the estimated cost of production is more than $1 million. Myfreetaxes org Property you produce. Myfreetaxes org   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. Myfreetaxes org Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. Myfreetaxes org Carrying charges. Myfreetaxes org   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. Myfreetaxes org You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. Myfreetaxes org For more information, see chapter 7. Myfreetaxes org Capitalized interest. Myfreetaxes org   Treat capitalized interest as a cost of the property produced. Myfreetaxes org You recover your interest when you sell or use the property. Myfreetaxes org If the property is inventory, recover capitalized interest through cost of goods sold. Myfreetaxes org If the property is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. Myfreetaxes org Partnerships and S corporations. Myfreetaxes org   The interest capitalization rules are applied first at the partnership or S corporation level. Myfreetaxes org The rules are then applied at the partners' or shareholders' level to the extent the partnership or S corporation has insufficient debt to support the production or construction costs. Myfreetaxes org   If you are a partner or a shareholder, you may have to capitalize interest you incur during the tax year for the production costs of the partnership or S corporation. Myfreetaxes org You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. Myfreetaxes org To properly capitalize interest under these rules, you must be given the required information in an attachment to the Schedule K-1 you receive from the partnership or S corporation. Myfreetaxes org Additional information. Myfreetaxes org   The procedures for applying the uniform capitalization rules are beyond the scope of this publication. Myfreetaxes org For more information, see sections 1. Myfreetaxes org 263A-8 through 1. Myfreetaxes org 263A-15 of the regulations and Notice 88-99. Myfreetaxes org Notice 88-99 is in Cumulative Bulletin 1988-2. Myfreetaxes org When To Deduct Interest If the uniform capitalization rules, discussed under Capitalization of Interest, earlier, do not apply to you, deduct interest as follows. Myfreetaxes org Cash method. Myfreetaxes org   Under the cash method, you can generally deduct only the interest you actually paid during the tax year. Myfreetaxes org You cannot deduct a promissory note you gave as payment because it is a promise to pay and not an actual payment. Myfreetaxes org Prepaid interest. Myfreetaxes org   You generally cannot deduct any interest paid before the year it is due. Myfreetaxes org Interest paid in advance can be deducted only in the tax year in which it is due. Myfreetaxes org Discounted loan. Myfreetaxes org   If interest or a discount is subtracted from your loan proceeds, it is not a payment of interest and you cannot deduct it when you get the loan. Myfreetaxes org For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. Myfreetaxes org Refunds of interest. Myfreetaxes org   If you pay interest and then receive a refund in the same tax year of any part of the interest, reduce your interest deduction by the refund. Myfreetaxes org If you receive the refund in a later tax year, include the refund in your income to the extent the deduction for the interest reduced your tax. Myfreetaxes org Accrual method. Myfreetaxes org   Under an accrual method, you can deduct only interest that has accrued during the tax year. Myfreetaxes org Prepaid interest. Myfreetaxes org   See Prepaid interest, earlier. Myfreetaxes org Discounted loan. Myfreetaxes org   See Discounted loan, earlier. Myfreetaxes org Tax deficiency. Myfreetaxes org   If you contest a federal income tax deficiency, interest does not accrue until the tax year the final determination of liability is made. Myfreetaxes org If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. Myfreetaxes org   However, if you contest but pay the proposed tax deficiency and interest, and you do not designate the payment as a cash bond, then the interest is deductible in the year paid. Myfreetaxes org Related person. Myfreetaxes org   If you use an accrual method, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. Myfreetaxes org The relationship is determined as of the end of the tax year for which the interest would otherwise be deductible. Myfreetaxes org See section 267 of the Internal Revenue Code for more information. Myfreetaxes org Below-Market Loans If you receive a below-market gift or demand loan and use the proceeds in your trade or business, you may be able to deduct the forgone interest. Myfreetaxes org See Treatment of gift and demand loans, later, in this discussion. Myfreetaxes org A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Myfreetaxes org A gift or demand loan that is a below-market loan generally is considered an arm's-length transaction in which you, the borrower, are considered as having received both the following. Myfreetaxes org A loan in exchange for a note that requires the payment of interest at the applicable federal rate. Myfreetaxes org An additional payment in an amount equal to the forgone interest. Myfreetaxes org The additional payment is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. Myfreetaxes org Forgone interest. Myfreetaxes org   For any period, forgone interest is The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Myfreetaxes org Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Myfreetaxes org Internal Revenue Bulletins are available on the IRS web site at www. Myfreetaxes org irs. Myfreetaxes org gov/irb. Myfreetaxes org You can also contact an IRS office to get these rates. Myfreetaxes org Loans subject to the rules. Myfreetaxes org   The rules for below-market loans apply to the following. Myfreetaxes org Gift loans (below-market loans where the forgone interest is in the nature of a gift). Myfreetaxes org Compensation-related loans (below-market loans between an employer and an employee or between an independent contractor and a person for whom the contractor provides services). Myfreetaxes org Corporation-shareholder loans. Myfreetaxes org Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest arrangement). Myfreetaxes org Loans to qualified continuing care facilities under a continuing care contract (made after October 11, 1985). Myfreetaxes org   Except as noted in (5) above, these rules apply to demand loans (loans payable in full at any time upon the lender's demand) outstanding after June 6, 1984, and to term loans (loans that are not demand loans) made after that date. Myfreetaxes org Treatment of gift and demand loans. Myfreetaxes org   If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc. Myfreetaxes org ) equal to the forgone interest on the loan. Myfreetaxes org You are then treated as transferring this amount back to the lender as interest. Myfreetaxes org These transfers are considered to occur annually, generally on December 31. Myfreetaxes org If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. Myfreetaxes org The lender must report it as interest income. Myfreetaxes org Limit on forgone interest for gift loans of $100,000 or less. Myfreetaxes org   For gift loans between individuals, forgone interest treated as transferred back to the lender is limited to the borrower's net investment income for the year. Myfreetaxes org This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. Myfreetaxes org If the borrower's net investment income is $1,000 or less, it is treated as zero. Myfreetaxes org This limit does not apply to a loan if the avoidance of any federal tax is one of the main purposes of the interest arrangement. Myfreetaxes org Treatment of term loans. Myfreetaxes org   If you receive a below-market term loan other than a gift or demand loan, you are treated as receiving an additional cash payment (as a dividend, etc. Myfreetaxes org ) on the date the loan is made. Myfreetaxes org This payment is equal to the loan amount minus the present value, at the applicable federal rate, of all payments due under the loan. Myfreetaxes org The same amount is treated as original issue discount on the loan. Myfreetaxes org See Original issue discount (OID) under Interest You Can Deduct, earlier. Myfreetaxes org Exceptions for loans of $10,000 or less. Myfreetaxes org   The rules for below-market loans do not apply to any day on which the total outstanding loans between the borrower and lender is $10,000 or less. Myfreetaxes org This exception applies only to the following. Myfreetaxes org Gift loans between individuals if the loan is not directly used to buy or carry income-producing assets. Myfreetaxes org Compensation-related loans or corporation-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. Myfreetaxes org This exception does not apply to a term loan described in (2) above that was previously subject to the below-market loan rules. Myfreetaxes org Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Myfreetaxes org Exceptions for loans without significant tax effect. Myfreetaxes org   The following loans are specifically exempted from the rules for below-market loans because their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. Myfreetaxes org Loans made available by lenders to the general public on the same terms and conditions that are consistent with the lender's customary business practices. Myfreetaxes org Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public. Myfreetaxes org Certain employee-relocation loans. Myfreetaxes org Certain loans to or from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Myfreetaxes org S. Myfreetaxes org trade or business and not exempt from U. Myfreetaxes org S. Myfreetaxes org tax under an income tax treaty. Myfreetaxes org Any other loan if the taxpayer can show that the interest arrangement has no significant effect on the federal tax liability of the lender or the borrower. Myfreetaxes org Whether an interest arrangement has a significant effect on the federal tax liability of the lender or the borrower will be determined by all the facts and circumstances. Myfreetaxes org Consider all the following factors. Myfreetaxes org Whether items of income and deduction generated by the loan offset each other. Myfreetaxes org The amount of the items. Myfreetaxes org The cost of complying with the below-market loan provisions if they were to apply. Myfreetaxes org Any reasons, other than taxes, for structuring the transaction as a below-market loan. Myfreetaxes org Exception for loans to qualified continuing care facilities. Myfreetaxes org   The below-market interest rules do not apply to a loan owed by a qualified continuing care facility under a continuing care contract if the lender or lender's spouse is age 62 or older by the end of the calendar year. Myfreetaxes org A qualified continuing care facility is one or more facilities (excluding nursing homes) meeting the requirements listed below. Myfreetaxes org Designed to provide services under continuing care contracts (defined below). Myfreetaxes org Includes an independent living unit, and either an assisted living or nursing facility, or both. Myfreetaxes org Substantially all of the independent living unit residents are covered by continuing care contracts. Myfreetaxes org A continuing care contract is a written contract between an individual and a qualified continuing care facility that includes all of the following conditions. Myfreetaxes org The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. Myfreetaxes org The individual or individual's spouse will be provided with housing, as appropriate for the health of the individual or individual's spouse in an: independent living unit (which has additional available facilities outside the unit for the provision of meals and other personal care), and assisted living or nursing facility available in the continuing care facility. Myfreetaxes org The individual or individual's spouse will be provided with assisted living or nursing care available in the continuing care facility, as required for the health of the individual or the individual's spouse. Myfreetaxes org For more information, see section 7872(h) of the Internal Revenue Code. Myfreetaxes org Sale or exchange of property. Myfreetaxes org   Different rules generally apply to a loan connected with the sale or exchange of property. Myfreetaxes org If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. Myfreetaxes org However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. Myfreetaxes org See Unstated Interest and Original Issue Discount (OID) in Publication 537. Myfreetaxes org More information. Myfreetaxes org   For more information on below-market loans, see section 7872 of the Internal Revenue Code and section 1. Myfreetaxes org 7872-5 of the regulations. Myfreetaxes org Prev  Up  Next   Home   More Online Publications
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Myfreetaxes org Publication 590 - Introductory Material Table of Contents What's New for 2013 What's New for 2014 Reminders IntroductionOrdering forms and publications. Myfreetaxes org Tax questions. Myfreetaxes org Useful Items - You may want to see: Note. Myfreetaxes org After 2013, Publication 590 will be split into two separate publications as follows. Myfreetaxes org Publication 590-A, will focus on contributions to traditional IRAs as well as Roth IRAs. Myfreetaxes org This publication will include the rules for rollover and conversion contributions. Myfreetaxes org Publication 590-B, will focus on distributions from traditional IRAs as well as Roth IRAs. Myfreetaxes org This publication will include the rules for required minimum distributions and IRA beneficiaries. Myfreetaxes org What's New for 2013 Traditional IRA contribution and deduction limit. Myfreetaxes org  The contribution limit to your traditional IRA for 2013 will be increased to the smaller of the following amounts: $5,500, or Your taxable compensation for the year. Myfreetaxes org If you were age 50 or older before 2014, the most that can be contributed to your traditional IRA for 2013 will be the smaller of the following amounts: $6,500, or Your taxable compensation for the year. Myfreetaxes org For more information, see How Much Can Be Contributed? in chapter 1. Myfreetaxes org Roth IRA contribution limit. Myfreetaxes org  If contributions on your behalf are made only to Roth IRAs, your contribution limit for 2013 will generally be the lesser of: $5,500, or Your taxable compensation for the year. Myfreetaxes org If you were age 50 or older before 2014 and contributions on your behalf were made only to Roth IRAs, your contribution limit for 2013 will generally be the lesser of: $6,500, or Your taxable compensation for the year. Myfreetaxes org However, if your modified adjusted gross income (AGI) is above a certain amount, your contribution limit may be reduced. Myfreetaxes org For more information, see How Much Can Be Contributed? under Can You Contribute to a Roth IRA? in chapter 2. Myfreetaxes org Modified AGI limit for traditional IRA contributions increased. Myfreetaxes org  For 2013, if you were covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is: More than $95,000 but less than $115,000 for a married couple filing a joint return or a qualifying widow(er), More than $59,000 but less than $69,000 for a single individual or head of household, or Less than $10,000 for a married individual filing a separate return. Myfreetaxes org If you either lived with your spouse or file a joint return, and your spouse was covered by a retirement plan at work, but you were not, your deduction is phased out if your modified AGI is more than $178,000 but less than $188,000. Myfreetaxes org If your modified AGI is $188,000 or more, you cannot take a deduction for contributions to a traditional IRA. Myfreetaxes org See How Much Can You Deduct? in chapter 1. Myfreetaxes org Modified AGI limit for Roth IRA contributions increased. Myfreetaxes org  For 2013, your Roth IRA contribution limit is reduced (phased out) in the following situations. Myfreetaxes org Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $178,000. Myfreetaxes org You cannot make a Roth IRA contribution if your modified AGI is $188,000 or more. Myfreetaxes org Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2013 and your modified AGI is at least $112,000. Myfreetaxes org You cannot make a Roth IRA contribution if your modified AGI is $127,000 or more. Myfreetaxes org Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. Myfreetaxes org You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more. Myfreetaxes org See Can You Contribute to a Roth IRA? in chapter 2. Myfreetaxes org Net Investment Income Tax. Myfreetaxes org  For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), 457(b) plans, and IRAs). Myfreetaxes org However, these distributions are taken into account when determining the modified adjusted gross income threshold. Myfreetaxes org Distributions from a nonqualified retirement plan are included in net investment income. Myfreetaxes org See Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts, and its instructions for more information. Myfreetaxes org Kay Bailey Hutchison Spousal IRA. Myfreetaxes org . Myfreetaxes org  In 2013, spousal IRAs were renamed to Kay Bailey Hutchison Spousal IRAs. Myfreetaxes org There are no changes to the rules regarding these IRAs. Myfreetaxes org See Kay Bailey Hutchison Spousal IRA Limit in chapter 1 for more information. Myfreetaxes org What's New for 2014 Modified AGI limit for traditional IRA contributions increased. Myfreetaxes org  For 2014, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is: More than $96,000 but less than $116,000 for a married couple filing a joint return or a qualifying widow(er), More than $60,000 but less than $70,000 for a single individual or head of household, or Less than $10,000 for a married individual filing a separate return. Myfreetaxes org If you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work, but you are not, your deduction is phased out if your modified AGI is more than $181,000 but less than $191,000. Myfreetaxes org If your modified AGI is $191,000 or more, you cannot take a deduction for contributions to a traditional IRA. Myfreetaxes org Modified AGI limit for Roth IRA contributions increased. Myfreetaxes org  For 2014, your Roth IRA contribution limit is reduced (phased out) in the following situations. Myfreetaxes org Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $181,000. Myfreetaxes org You cannot make a Roth IRA contribution if your modified AGI is $191,000 or more. Myfreetaxes org Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2014 and your modified AGI is at least $114,000. Myfreetaxes org You cannot make a Roth IRA contribution if your modified AGI is $129,000 or more. Myfreetaxes org Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. Myfreetaxes org You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more. Myfreetaxes org Reminders Future developments. Myfreetaxes org  For the latest information about developments related to Publication 590, such as legislation enacted after it was published, go to www. Myfreetaxes org irs. Myfreetaxes org gov/pub590. Myfreetaxes org Simplified employee pension (SEP). Myfreetaxes org  SEP IRAs are not covered in this publication. Myfreetaxes org They are covered in Publication 560, Retirement Plans for Small Business. Myfreetaxes org Deemed IRAs. Myfreetaxes org  A qualified employer plan (retirement plan) can maintain a separate account or annuity under the plan (a deemed IRA) to receive voluntary employee contributions. Myfreetaxes org If the separate account or annuity otherwise meets the requirements of an IRA, it will be subject only to IRA rules. Myfreetaxes org An employee's account can be treated as a traditional IRA or a Roth IRA. Myfreetaxes org For this purpose, a “qualified employer plan” includes: A qualified pension, profit-sharing, or stock bonus plan (section 401(a) plan), A qualified employee annuity plan (section 403(a) plan), A tax-sheltered annuity plan (section 403(b) plan), and A deferred compensation plan (section 457 plan) maintained by a state, a political subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state. Myfreetaxes org Contributions to both traditional and Roth IRAs. Myfreetaxes org  For information on your combined contribution limit if you contribute to both traditional and Roth IRAs, see Roth IRAs and traditional IRAs under How Much Can Be Contributed? in chapter 2. Myfreetaxes org Statement of required minimum distribution (RMD). Myfreetaxes org  If an RMD is required from your IRA, the trustee, custodian, or issuer that held the IRA at the end of the preceding year must either report the amount of the RMD to you, or offer to calculate it for you. Myfreetaxes org The report or offer must include the date by which the amount must be distributed. Myfreetaxes org The report is due January 31 of the year in which the minimum distribution is required. Myfreetaxes org It can be provided with the year-end fair market value statement that you normally get each year. Myfreetaxes org No report is required for section 403(b) contracts (generally tax-sheltered annuities) or for IRAs of owners who have died. Myfreetaxes org IRA interest. Myfreetaxes org  Although interest earned from your IRA is generally not taxed in the year earned, it is not tax-exempt interest. Myfreetaxes org Tax on your traditional IRA is generally deferred until you take a distribution. Myfreetaxes org Do not report this interest on your return as tax-exempt interest. Myfreetaxes org For more information on tax-exempt interest, see the instructions for your tax return. Myfreetaxes org Photographs of missing children. Myfreetaxes org  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Myfreetaxes org Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Myfreetaxes org You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Myfreetaxes org Introduction This publication discusses individual retirement arrangements (IRAs). Myfreetaxes org An IRA is a personal savings plan that gives you tax advantages for setting aside money for retirement. Myfreetaxes org What are some tax advantages of an IRA?   Two tax advantages of an IRA are that: Contributions you make to an IRA may be fully or partially deductible, depending on which type of IRA you have and on your circumstances, and Generally, amounts in your IRA (including earnings and gains) are not taxed until distributed. Myfreetaxes org In some cases, amounts are not taxed at all if distributed according to the rules. Myfreetaxes org What's in this publication?   This publication discusses traditional, Roth, and SIMPLE IRAs. Myfreetaxes org It explains the rules for: Setting up an IRA, Contributing to an IRA, Transferring money or property to and from an IRA, Handling an inherited IRA, Receiving distributions (making withdrawals) from an IRA, and Taking a credit for contributions to an IRA. Myfreetaxes org   It also explains the penalties and additional taxes that apply when the rules are not followed. Myfreetaxes org To assist you in complying with the tax rules for IRAs, this publication contains worksheets, sample forms, and tables, which can be found throughout the publication and in the appendices at the back of the publication. Myfreetaxes org How to use this publication. Myfreetaxes org   The rules that you must follow depend on which type of IRA you have. Myfreetaxes org Use Table I-1 to help you determine which parts of this publication to read. Myfreetaxes org Also use Table I-1 if you were referred to this publication from instructions to a form. Myfreetaxes org Comments and suggestions. Myfreetaxes org   We welcome your comments about this publication and your suggestions for future editions. Myfreetaxes org   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Myfreetaxes org NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Myfreetaxes org Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Myfreetaxes org   You can send your comments from www. Myfreetaxes org irs. Myfreetaxes org gov/formspubs/. Myfreetaxes org Click on “More Information” and then on “Comment on Tax Forms and Publications”. Myfreetaxes org   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Myfreetaxes org Ordering forms and publications. Myfreetaxes org   Visit www. Myfreetaxes org irs. Myfreetaxes org gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Myfreetaxes org Internal Revenue Service 1201 N. Myfreetaxes org Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Myfreetaxes org   If you have a tax question, check the information available on IRS. Myfreetaxes org gov or call 1-800-829-1040. Myfreetaxes org We cannot answer tax questions sent to either of the above addresses. Myfreetaxes org Useful Items - You may want to see: Publications 560 Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) 571 Tax-Sheltered Annuity Plans (403(b) Plans) 575 Pension and Annuity Income 939 General Rule for Pensions and Annuities Forms (and instructions) W-4P Withholding Certificate for Pension or Annuity Payments 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Myfreetaxes org 5304-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)–Not for Use With a Designated Financial Institution 5305-S SIMPLE Individual Retirement Trust Account 5305-SA SIMPLE Individual Retirement Custodial Account 5305-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)–for Use With a Designated Financial Institution 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts 5498 IRA Contribution Information 8606 Nondeductible IRAs 8815 Exclusion of Interest From Series EE and I U. Myfreetaxes org S. Myfreetaxes org Savings Bonds Issued After 1989 8839 Qualified Adoption Expenses 8880 Credit for Qualified Retirement Savings Contributions See chapter 5 for information about getting these publications and forms. Myfreetaxes org Table I-1. Myfreetaxes org Using This Publication IF you need information on . Myfreetaxes org . Myfreetaxes org . Myfreetaxes org THEN see . Myfreetaxes org . Myfreetaxes org . Myfreetaxes org traditional IRAs chapter 1. Myfreetaxes org Roth IRAs chapter 2, and parts of  chapter 1. Myfreetaxes org SIMPLE IRAs chapter 3. Myfreetaxes org the credit for qualified retirement savings contributions (the saver's credit) chapter 4. Myfreetaxes org how to keep a record of your contributions to, and distributions from, your traditional IRA(s) appendix A. Myfreetaxes org SEP IRAs and 401(k) plans Publication 560. Myfreetaxes org Coverdell education savings accounts (formerly called education IRAs) Publication 970. Myfreetaxes org IF for 2013, you received social security benefits, had taxable compensation, contributed to a traditional IRA, and you or your spouse was covered by an employer retirement plan, and you want to. Myfreetaxes org . Myfreetaxes org . Myfreetaxes org THEN see . Myfreetaxes org . Myfreetaxes org . Myfreetaxes org first figure your modified adjusted gross income (AGI) appendix B, worksheet 1. Myfreetaxes org then figure how much of your traditional IRA contribution you can deduct appendix B, worksheet 2. Myfreetaxes org and finally figure how much of your social security is taxable appendix B, worksheet 3. Myfreetaxes org Table I-2. Myfreetaxes org How Are a Traditional IRA and a Roth IRA Different? This table shows the differences between traditional and Roth IRAs. Myfreetaxes org Answers in the middle column apply to traditional IRAs. Myfreetaxes org Answers in the right column apply to Roth IRAs. Myfreetaxes org Question Answer   Traditional IRA? Roth IRA? Is there an age limit on when I can open and contribute to a Yes. Myfreetaxes org You must not have reached age  70½ by the end of the year. Myfreetaxes org See Who Can Open a Traditional IRA? in chapter 1. Myfreetaxes org No. Myfreetaxes org You can be any age. Myfreetaxes org See Can You Contribute to a Roth IRA? in chapter 2. Myfreetaxes org If I earned more than $5,500 in 2013 ($6,500 if I was 50 or older by the end of 2013), is there a limit on how much I can contribute to a Yes. Myfreetaxes org For 2013, you can contribute to a traditional IRA up to: $5,500, or $6,500 if you were age 50 or older by the end of 2013. Myfreetaxes org  There is no upper limit on how much you can earn and still contribute. Myfreetaxes org See How Much Can Be Contributed? in chapter 1. Myfreetaxes org Yes. Myfreetaxes org For 2013, you may be able to contribute to a Roth IRA up to: $5,500, or $6,500 if you were age 50 or older by the end of 2013,  but the amount you can contribute may be less than that depending on your income, filing status, and if you contribute to another IRA. Myfreetaxes org See How Much Can Be Contributed? and Table 2-1 in chapter 2. Myfreetaxes org Can I deduct contributions to a Yes. Myfreetaxes org You may be able to deduct your contributions to a traditional IRA depending on your income, filing status, whether you are covered by a retirement plan at work, and whether you receive social security benefits. Myfreetaxes org See How Much Can You Deduct? in chapter 1. Myfreetaxes org No. Myfreetaxes org You can never deduct contributions to a Roth IRA. Myfreetaxes org See What Is a Roth IRA? in chapter 2. Myfreetaxes org Do I have to file a form just because I contribute to a Not unless you make nondeductible contributions to your traditional IRA. Myfreetaxes org In that case, you must file Form 8606. Myfreetaxes org See Nondeductible Contributions in chapter 1. Myfreetaxes org No. Myfreetaxes org You do not have to file a form if you contribute to a Roth IRA. Myfreetaxes org See Contributions not reported in chapter 2. Myfreetaxes org Do I have to start taking distributions when I reach a certain age from a Yes. Myfreetaxes org You must begin receiving required minimum distributions by April 1 of the year following the year you reach age 70½. Myfreetaxes org See When Must You Withdraw Assets? (Required Minimum Distributions) in chapter 1. Myfreetaxes org No. Myfreetaxes org If you are the original owner of a Roth IRA, you do not have to take distributions regardless of your age. Myfreetaxes org See Are Distributions Taxable? in chapter 2. Myfreetaxes org However, if you are the beneficiary of a Roth IRA, you may have to take distributions. Myfreetaxes org See Distributions After Owner's Death in chapter 2. Myfreetaxes org How are distributions taxed from a Distributions from a traditional IRA are taxed as ordinary income, but if you made nondeductible contributions, not all of the distribution is taxable. Myfreetaxes org See Are Distributions Taxable? in chapter 1. Myfreetaxes org Distributions from a Roth IRA are not taxed as long as you meet certain criteria. Myfreetaxes org See Are Distributions Taxable? in chapter 2. Myfreetaxes org Do I have to file a form just because I receive distributions from a Not unless you have ever made a nondeductible contribution to a traditional IRA. Myfreetaxes org If you have, file Form 8606. Myfreetaxes org See Nondeductible Contributions in chapter 1. Myfreetaxes org Yes. Myfreetaxes org File Form 8606 if you received distributions from a Roth IRA (other than a rollover, qualified charitable distribution, one-time distribution to fund an HSA, recharacterization, certain qualified distributions, or a return of certain contributions). Myfreetaxes org Prev  Up  Next   Home   More Online Publications