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Online 1040ez 13. Online 1040ez   Employment Taxes Table of Contents What's New for 2013 What's New for 2014 Reminders Important Dates for 2014 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Farm Employment Family Employees Crew Leaders Social Security and Medicare TaxesReligious exemption. Online 1040ez Wage limit. Online 1040ez Federal Income Tax WithholdingNew Form W-4 for 2014. Online 1040ez Required Notice to Employees About Earned Income Credit (EIC) Reporting and Paying Social Security, Medicare, and Withheld Federal Income TaxesElectronic deposit requirement. Online 1040ez Federal Unemployment (FUTA) TaxReporting and Paying FUTA Tax What's New for 2013 Social security and Medicare tax for 2013. Online 1040ez  The employee tax rate for social security is 6. Online 1040ez 2%. Online 1040ez Previously, the employee tax rate for social security was 4. Online 1040ez 2%. Online 1040ez The employer tax rate for social security remains unchanged at 6. Online 1040ez 2%. Online 1040ez The social security wage base limit is $113,700. Online 1040ez The Medicare tax rate is 1. Online 1040ez 45% each for the employee and employer, unchanged from 2012. Online 1040ez There is no wage base limit for Medicare tax. Online 1040ez Additional Medicare Tax. Online 1040ez  In addition to withholding Medicare tax at 1. Online 1040ez 45%, you must withhold a 0. Online 1040ez 9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. Online 1040ez You are required to begin withholding Additional Medicare Tax in the pay period in which you pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. Online 1040ez Additional Medicare Tax is only imposed on the employee. Online 1040ez There is no employer share of Additional Medicare Tax. Online 1040ez All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 threshold. Online 1040ez For more information on what wages are subject to Medicare tax, see the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15 (Circular E), Employer's Tax Guide. Online 1040ez For more information on Additional Medicare Tax, visit IRS. Online 1040ez gov and enter “Additional Medicare Tax” in the search box. Online 1040ez Leave-based donation programs to aid victims of Hurricane Sandy. Online 1040ez  Under these programs, employees may donate their vacation, sick, or personal leave in exchange for employer cash payments made before January 1, 2014, to qualified tax-exempt organizations providing relief for the victims of Hurricane Sandy. Online 1040ez The donated leave will not be included in the income or wages of the employee. Online 1040ez The employer may deduct the cash payments as business expenses or charitable contributions. Online 1040ez For more information, see Notice 2012-69, 2012-51 I. Online 1040ez R. Online 1040ez B. Online 1040ez 712, available at www. Online 1040ez irs. Online 1040ez gov/irb/2012-51_IRB/ar09. Online 1040ez html. Online 1040ez Work opportunity tax credit for qualified tax-exempt organizations hiring qualified veterans extended. Online 1040ez  The work opportunity tax credit is now available for eligible unemployed veterans who begin work before January 1, 2014. Online 1040ez Previously, the credit was available for unemployed veterans who began work on or after November 22, 2011, and before January 1, 2013. Online 1040ez Qualified tax-exempt organizations that hire eligible unemployed veterans can claim the work opportunity tax credit against their payroll tax liability using Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans. Online 1040ez For more information, visit IRS. Online 1040ez gov and enter “work opportunity credit” in the search box. Online 1040ez What's New for 2014 Social security and Medicare tax for 2014. Online 1040ez  The employee and employer tax rates for social security and the maximum amount of wages subject to social security tax for 2014 will be discussed in Publication 51 (Circular A), Agricultural Employer's Tax Guide (For use in 2014). Online 1040ez The Medicare tax rate for 2014 will also be discussed in Publication 51 (Circular A) (For use in 2014). Online 1040ez There is no limit on the amount of wages subject to Medicare tax. Online 1040ez Reminders Additional employment tax information for farmers. Online 1040ez  See Publication 51 (Circular A) for more detailed guidance on employment taxes. Online 1040ez For the latest information about employment tax developments impacting farmers, go to www. Online 1040ez irs. Online 1040ez gov/pub51. Online 1040ez Correcting a previously filed Form 943. Online 1040ez  If you discover an error on a previously filed Form 943, Employer's Annual Federal Tax Return for Agricultural Employees, make the correction using Form 943-X, Adjusted Employer's Annual Federal Tax Return for Agricultural Employees or Claim for Refund. Online 1040ez Form 943-X is filed separately from Form 943. Online 1040ez For more information on correcting Form 943, see the Instructions for Form 943-X. Online 1040ez Federal tax deposits must be made by electronic funds transfer. Online 1040ez  You must use electronic funds transfer to make all federal tax deposits. Online 1040ez Generally, electronic funds transfers are made using the Electronic Federal Tax Payment System (EFTPS). Online 1040ez If you do not want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make electronic deposits on your behalf. Online 1040ez Also, you may arrange for your financial institution to initiate a same-day wire payment on your behalf. Online 1040ez EFTPS is a free service provided by the Department of Treasury. Online 1040ez Services provided by your tax professional, financial institution, payroll service, or other third party may have a fee. Online 1040ez For more information on making federal tax deposits, see section 7 of Publication 51 (Circular A). Online 1040ez To get more information about EFTPS or to enroll in EFTPS, visit www. Online 1040ez eftps. Online 1040ez gov or call 1-800-555-4477 or 1-800-733-4829 (TDD). Online 1040ez Additional information about EFTPS is also available in Publication 966, Electronic Federal Tax Payment System: A Guide To Getting Started. Online 1040ez Important Dates for 2014 You should take the action indicated by the dates listed. Online 1040ez See By February 15 and On February 16 for Form W-4, Employee's Withholding Allowance Certificate, information. Online 1040ez Due dates for deposits of withheld federal income taxes, social security taxes, and Medicare taxes are not listed here. Online 1040ez For these dates, see Publication 509, Tax Calendars (For use in 2014). Online 1040ez Note. Online 1040ez  If any date shown below for filing a return, furnishing a form, or depositing taxes falls on a Saturday, Sunday, or legal holiday, the due date is the next business day. Online 1040ez A statewide legal holiday delays a filing or furnishing due date only if the IRS office where you are required to file a return or furnish a form is located in that state. Online 1040ez For any due date, you will meet the “file” or “furnish” date requirement if the envelope containing the tax return or form is properly addressed, contains sufficient postage, and is postmarked by the U. Online 1040ez S. Online 1040ez Postal Service by the due date, or sent by an IRS-designated delivery service by the due date. Online 1040ez See Private delivery services in Publication 51 (Circular A). Online 1040ez Federal tax deposits can only be made by electronic funds transfer and are governed by legal holidays in the District of Columbia. Online 1040ez Statewide holidays no longer apply. Online 1040ez For a list of legal holidays that delay the due date of a federal tax deposit, see section 7 of Publication 51 (Circular A). Online 1040ez Fiscal year taxpayers. Online 1040ez  The due dates listed below apply whether you use a calendar or a fiscal year. Online 1040ez By January 31. Online 1040ez   File Form 943 with the IRS. Online 1040ez If you deposited all Form 943 taxes when due, you have 10 additional days to file. Online 1040ez Furnish each employee with a completed Form W-2, Wage and Tax Statement. Online 1040ez Furnish each recipient to whom you paid $600 or more in nonemployee compensation with a completed Form 1099 (for example, Form 1099-MISC). Online 1040ez File Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, with the IRS. Online 1040ez If you deposited all the FUTA tax when due, you have 10 additional days to file. Online 1040ez File Form 945, Annual Return of Withheld Federal Income Tax, with the IRS to report any nonpayroll income tax withheld during 2013. Online 1040ez If you deposited all Form 945 taxes when due, you have 10 additional days to file. Online 1040ez By February 15. Online 1040ez  Ask for a new Form W-4 or Formulario W-4(SP), Certificado de Exención de Retenciones del Empleado, from each employee who claimed exemption from federal income tax withholding last year. Online 1040ez On February 16. Online 1040ez  Any Form W-4 claiming exemption from withholding for the previous year has now expired. Online 1040ez Begin withholding for any employee who previously claimed exemption from withholding but has not given you a new Form W-4 for the current year. Online 1040ez If the employee does not give you a new Form W-4, withhold taxes based on the last valid Form W-4 you have for the employee that does not claim exemption from withholding or, if one does not exist, as if he or she is single with zero withholding allowances. Online 1040ez If the employee furnishes a new Form W-4 claiming exemption from withholding after February 15, you may apply the exemption to future wages, but do not refund taxes withheld while the exempt status was not in place. Online 1040ez By February 28. Online 1040ez   File paper Forms 1099 and 1096. Online 1040ez File Copy A of all paper Forms 1099 with Form 1096, Annual Summary and Transmittal of U. Online 1040ez S. Online 1040ez Information Returns, with the IRS. Online 1040ez For electronically filed returns, see By March 31 below. Online 1040ez File paper Forms W-2 and W-3. Online 1040ez File Copy A of all paper Forms W-2 with Form W-3, Transmittal of Wage and Tax Statements, with the Social Security Administration (SSA). Online 1040ez For electronically filed returns, see By March 31 below. Online 1040ez By March 31. Online 1040ez   File electronic Forms W-2 and 1099. Online 1040ez File electronic Forms W-2 with the SSA and Forms 1099 with the IRS. Online 1040ez For more information on reporting Form W-2 information to the SSA electronically, visit the SSA's Employer W-2 Filing Instructions & Information webpage at www. Online 1040ez socialsecurity. Online 1040ez gov/employer. Online 1040ez For information on filing information returns electronically with the IRS, see Publication 1220, Specifications for Filing Forms 1097, 1098, 1099, 3921, 3922, 5498, 8935, and W-2G Electronically. Online 1040ez By April 30, July 31, October 31, and January 31. Online 1040ez   Deposit FUTA taxes. Online 1040ez Deposit FUTA tax due if it is more than $500. Online 1040ez Before December 1. Online 1040ez  Remind employees to submit a new Form W-4 if their withholding allowances have changed or will change for the next year. Online 1040ez Introduction You are generally required to withhold federal income tax from the wages of your employees. Online 1040ez You may also be subject to social security and Medicare taxes under the Federal Insurance Contributions Act (FICA) and federal unemployment tax under the Federal Unemployment Tax Act (FUTA). Online 1040ez You must also withhold Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. Online 1040ez This chapter includes information about these taxes. Online 1040ez You must also pay self-employment tax on your net earnings from farming. Online 1040ez See chapter 12 for information on self-employment tax. Online 1040ez Topics - This chapter discusses: Farm employment, Family employees, Crew leaders, Social security and Medicare taxes, Additional Medicare Tax withholding, Federal income tax withholding, Reporting and paying social security, Medicare, and withheld federal income taxes, and FUTA tax. Online 1040ez Useful Items - You may want to see: Publication 15 (Circular E), Employer's Tax Guide 15-A Employer's Supplemental Tax Guide 15-B Employer's Tax Guide to Fringe Benefits 51 (Circular A), Agricultural Employer's Tax Guide 926 Household Employer's Tax Guide Form (and Instructions) W-2 Wage and Tax Statement W-4 Employee's Withholding Allowance Certificate W-9 Request for Taxpayer Identification Number and Certification 940 Employer's Annual Federal Unemployment (FUTA) Tax Return 943 Employer's Annual Federal Tax Return for Agricultural Employees 943-X Adjusted Employer's Annual Federal Tax Return for Agricultural Employees or Claim for Refund See chapter 16 for information about getting publications and forms. Online 1040ez Farm Employment In general, you are an employer of farmworkers if your employees do any of the following types of work. Online 1040ez Raising or harvesting agricultural or horticultural products on a farm, including raising and feeding of livestock. Online 1040ez Operating, managing, conserving, improving, or maintaining your farm and its tools and equipment. Online 1040ez Services performed in salvaging timber, or clearing land of brush and other debris, left by a hurricane (also known as hurricane labor). Online 1040ez Handling, processing, or packaging any agricultural or horticultural commodity if you produced more than half of the commodity (for a group of up to 20 unincorporated operators, all of the commodity). Online 1040ez Work related to cotton ginning, turpentine, gum resin products, or the operation and maintenance of irrigation facilities. Online 1040ez For more information, see Publication 51 (Circular A). Online 1040ez Generally, a worker who performs services for you is your employee if you have the right to control what will be done and how it will be done. Online 1040ez This is so even when you give the employee freedom of action. Online 1040ez What matters is that you have the right to control the details of how the services are performed. Online 1040ez You are responsible for withholding and paying employment taxes for your employees. Online 1040ez You are also required to file employment tax returns. Online 1040ez These requirements do not apply to amounts that you pay to independent contractors. Online 1040ez See Publication 15-A for more information on how to determine whether an individual providing services is an independent contractor or an employee. Online 1040ez If you employ a family of workers, each worker subject to your control (not just the head of the family) is an employee. Online 1040ez Special rules apply to crew leaders. Online 1040ez See Crew Leaders , later. Online 1040ez Employer identification number (EIN). Online 1040ez   If you have employees, you must have an EIN. Online 1040ez If you do not have an EIN, you may apply for one online. Online 1040ez Go to IRS. Online 1040ez gov and click on the Apply for an EIN Online link under Tools. Online 1040ez You may also apply for an EIN by calling 1-800-829-4933 or 1-800-829-4059 (TDD/TTY for persons who are deaf, hard of hearing, or have a speech disability). Online 1040ez The hours of operation for both numbers are Monday–Friday form 7:00 a. Online 1040ez m. Online 1040ez –7:00 p. Online 1040ez m. Online 1040ez local time (Alaska and Hawaii follow Pacific time). Online 1040ez You can also fax or mail Form SS-4, Application for Employer Identification Number, to the IRS. Online 1040ez Employee's social security number (SSN). Online 1040ez   An employee who does not have an SSN should submit Form SS-5, Application for a Social Security Card, to the Social Security Administration (SSA). Online 1040ez Form SS-5 is available from any SSA office or by calling 1-800-772-1213 (operates 24 hours per day). Online 1040ez It is also available from the SSA's website at www. Online 1040ez socialsecurity. Online 1040ez gov. Online 1040ez   The employee must furnish evidence of age, identity, and U. Online 1040ez S. Online 1040ez citizenship or lawful immigration status permitting employment with the Form SS-5. Online 1040ez An employee who is age 18 or older must appear in person with this evidence at an SSA office. Online 1040ez Form I-9. Online 1040ez    You must verify that each new employee is legally eligible to work in the United States. Online 1040ez This includes completing the Form I-9, Employment Eligibility Verification. Online 1040ez Form I-9 is available from the U. Online 1040ez S. Online 1040ez Citizenship and Immigration Services (USCIS) offices or by calling the Bureau of Citizenship and Immigration Services Forms Request Line at 1-800-870-3676. Online 1040ez Form I-9 is also available from the USCIS website at www. Online 1040ez uscis. Online 1040ez gov. Online 1040ez You can also contact the USCIS at 1-800-375-5283 for more information. Online 1040ez New hire reporting. Online 1040ez   You are required to report any new employee to a designated state new hire registry. Online 1040ez Many states accept a copy of Form W-4 with employer information added. Online 1040ez Visit the Office of Child Support Enforcement website at www. Online 1040ez acf. Online 1040ez hhs. Online 1040ez gov/programs/cse/newhire for more information. Online 1040ez Family Employees Generally, the wages you pay to family members who are your employees are subject to employment taxes. Online 1040ez However, certain exemptions may apply to wages paid to your child, spouse, or parent. Online 1040ez Exemptions for your child. Online 1040ez   Payments for the services of your child under age 18 who works for you in your trade or business (including a farm) are not subject to social security and Medicare taxes. Online 1040ez However, see Nonexempt services of a child or spouse , later. Online 1040ez Payments for the services of your child under age 21 employed by you in other than a trade or business, such as payments for household services in your home, are also not subject to social security or Medicare taxes. Online 1040ez Payments for the services of your child under age 21 employed by you, whether or not in your trade or business, are not subject to FUTA tax. Online 1040ez Although not subject to social security, Medicare, or FUTA tax, the child's wages still may be subject to federal income tax withholding. Online 1040ez Exemptions for your spouse. Online 1040ez   Payments for the services of your spouse who works for you in your trade or business are subject to federal income tax withholding and social security and Medicare taxes, but not FUTA tax. Online 1040ez   Payments for the services of your spouse employed by you in other than a trade or business, such as payments for household services in your home, are not subject to social security, Medicare, or FUTA taxes. Online 1040ez Nonexempt services of a child or spouse. Online 1040ez   Payments for the services of your child or spouse are subject to federal income tax withholding as well as social security, Medicare, and FUTA taxes if he or she works for any of the following entities. Online 1040ez A corporation, even if it is controlled by you. Online 1040ez A partnership, even if you are a partner. Online 1040ez This does not apply to wages paid to your child if each partner is a parent of the child. Online 1040ez An estate or trust, even if it is the estate of a deceased parent. Online 1040ez In these situations, the child or spouse is considered to work for the corporation, partnership, or estate, not you. Online 1040ez Exemptions for your parent. Online 1040ez   Payments for the services of your parent employed by you in your trade or business are subject to federal income tax withholding and social security and Medicare taxes. Online 1040ez Social security and Medicare taxes do not apply to wages paid to your parent for services not in your trade or business, but they do apply to payments for household services in your home if both the following conditions are satisfied. Online 1040ez You have a child living in your home who is under age 18 or has a physical or mental condition that requires care by an adult for at least 4 continuous weeks in a calendar quarter. Online 1040ez You are a widow or widower; or divorced and not remarried; or have a spouse in the home who, because of a physical or mental condition, cannot care for your child for at least 4 continuous weeks in the quarter. Online 1040ez   Wages you pay to your parent are not subject to FUTA tax, regardless of the type of services provided. Online 1040ez Qualified joint venture. Online 1040ez   If spouses elect to be treated as a qualified joint venture instead of a partnership, either spouse may report and pay the employment taxes due on the wages paid to employees using the EIN of that spouse's sole proprietorship. Online 1040ez For more information about qualified joint ventures, see chapter 12. Online 1040ez Crew Leaders If farmworkers are provided by a crew leader, the crew leader may be the employer of the workers. Online 1040ez Social security and Medicare taxes. Online 1040ez   For social security and Medicare tax purposes, the crew leader is the employer of the workers if both of the following requirements are met. Online 1040ez The crew leader pays (either on his or her own behalf or on behalf of the farmer) the workers for their farm labor. Online 1040ez The crew leader has not entered into a written agreement with the farmer under which the crew leader is designated as an employee of the farmer. Online 1040ez Federal income tax withholding. Online 1040ez   If the crew leader is the employer for social security and Medicare tax purposes, the crew leader is the employer for federal income tax withholding purposes. Online 1040ez Federal unemployment (FUTA) tax. Online 1040ez   For FUTA tax purposes, the crew leader is the employer of the workers if, in addition to the earlier requirements, either of the following requirements are met. Online 1040ez The crew leader is registered under the Migrant and Seasonal Agricultural Worker Protection Act. Online 1040ez Substantially all crew members operate or maintain mechanized equipment provided by the crew leader as part of the service to the farmer. Online 1040ez   The farmer is the employer of workers furnished by a crew leader in all other situations. Online 1040ez In addition, the farmer is the employer of workers furnished by a registered crew leader if the workers are the employees of the farmer under the common-law test. Online 1040ez For example, some farmers employ individuals to recruit farmworkers exclusively for them. Online 1040ez Although these individuals may be required to register under the Migrant and Seasonal Agricultural Worker Protection Act, the workers are employed directly by the farmer. Online 1040ez The farmer is the employer in these cases. Online 1040ez For information about common-law employees, see section 1 of Publication 15-A. Online 1040ez For information about crew leaders, see the Department of Labor website at www. Online 1040ez dol. Online 1040ez gov/whd/regs/compliance/whdfs49. Online 1040ez htm. Online 1040ez Social Security and Medicare Taxes All cash wages you pay to an employee during the year for farmwork are subject to social security and Medicare taxes if you meet either of the following tests. Online 1040ez You pay the employee $150 or more in cash wages (count all wages paid on a time, piecework, or other basis) during the year for farmwork (the $150 test). Online 1040ez The $150 test applies separately to each farmworker that you employ. Online 1040ez If you employ a family of workers, each member is treated separately. Online 1040ez Do not count wages paid by other employers. Online 1040ez You pay cash and noncash wages of $2,500 or more during the year to all your employees for farmwork (the $2,500 test). Online 1040ez If the $2,500 test for the group is not met, the $150 test for an employee still applies. Online 1040ez Exceptions. Online 1040ez   Annual cash wages of less than $150 you pay to a seasonal farmworker are not subject to social security and Medicare taxes, even if you pay $2,500 or more to all your farmworkers. Online 1040ez However, these wages count toward the $2,500 test for determining whether other farmworkers' wages are subject to social security and Medicare taxes. Online 1040ez   A seasonal farmworker is a worker who: Works as a hand-harvest laborer, Is paid piece rates in an operation usually paid on this basis in the region of employment, Commutes daily from his or her permanent home to the farm, and Worked in agriculture less than 13 weeks in the preceding calendar year. Online 1040ez   See Family Employees , earlier, for certain exemptions from social security and Medicare taxes that apply to your child, spouse, and parent. Online 1040ez Religious exemption. Online 1040ez   An exemption from social security and Medicare taxes is available to members of a recognized religious group or division opposed to public insurance. Online 1040ez This exemption is available only if both the employee and the employer are members of the group or division. Online 1040ez   For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. Online 1040ez Cash wages. Online 1040ez   Only cash wages paid to farmworkers are subject to social security and Medicare taxes. Online 1040ez Cash wages include checks, money orders, and any kind of money or cash. Online 1040ez   Only cash wages subject to social security and Medicare taxes are credited to your employees for social security benefit purposes. Online 1040ez Payments not subject to these taxes, such as commodity wages, do not contribute to your employees' social security coverage. Online 1040ez For information about social security benefits, contact the SSA at 1-800-772-1213 or online at www. Online 1040ez socialsecurity. Online 1040ez gov. Online 1040ez Noncash wages. Online 1040ez    Noncash wages include food, lodging, clothing, transportation passes, and other goods and services. Online 1040ez Noncash wages paid to farmworkers, including commodity wages, are not subject to social security and Medicare taxes. Online 1040ez However, they are subject to these taxes if the substance of the transaction is a cash payment. Online 1040ez For information on lodging provided as a condition of employment, see Publication 15-B. Online 1040ez   Report the value of noncash wages in box 1 of Form W-2 together with cash wages. Online 1040ez Do not show noncash wages in box 3 or in box 5, (unless the substance of the transaction is a cash payment). Online 1040ez Tax rates and social security wage limit. Online 1040ez   For 2013, the employer and the employee will pay the following taxes. Online 1040ez The employer and employee each pay 6. Online 1040ez 2% of cash wages for social security tax (old-age, survivors, and disability insurance). Online 1040ez The employer and employee each pay 1. Online 1040ez 45% of cash wages for Medicare tax (hospital insurance). Online 1040ez The employee pays 0. Online 1040ez 9% of cash wages in excess of $200,000 for Additional Medicare Tax. Online 1040ez Wage limit. Online 1040ez   The limit on wages subject to the social security tax for 2013 is $113,700. Online 1040ez There is no limit on wages subject to the Medicare tax. Online 1040ez All covered wages are subject to the Medicare tax. Online 1040ez Additionally, all wages in excess of $200,000 are subject to Additional Medicare Tax withholding. Online 1040ez Paying employee's share. Online 1040ez   If you would rather pay the employee's share of social security and Medicare taxes without deducting it from his or her wages, you may do so. Online 1040ez It is additional income to the employee. Online 1040ez You must include it in box 1 of the employee's Form W-2, but do not count it as social security and Medicare wages (boxes 3 and 5 on Form W-2) or as wages for federal unemployment (FUTA) tax purposes. Online 1040ez Example. Online 1040ez Jane operates a small family fruit farm. Online 1040ez She employs day laborers in the picking season to enable her to timely get her crop to market. Online 1040ez She does not deduct the employees' share of social security and Medicare taxes from their pay; instead, she pays it on their behalf. Online 1040ez When her accountant, Susan, prepares the employees' Forms W-2, she adds each employee's share of social security and Medicare taxes paid by Jane to the employee's wage income (box 1 of Form W-2), but does not include it in box 3 (social security wages) or box 5 (Medicare wages and tips). Online 1040ez For 2013, Jane paid Mary $1,000 during the year. Online 1040ez Susan enters $1,076. Online 1040ez 50 in box 1 of Mary's Form W-2 ($1,000 wages plus $76. Online 1040ez 50 social security and Medicare taxes paid for Mary). Online 1040ez She enters $1,000 in boxes 3 and 5 of Mary's Form W-2. Online 1040ez Additional Medicare Tax. Online 1040ez   In addition to withholding Medicare tax at 1. Online 1040ez 45%, you must withhold a 0. Online 1040ez 9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. Online 1040ez You are required to begin withholding Additional Medicare Tax in the pay period in which you pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. Online 1040ez Additional Medicare Tax is only imposed on the employee. Online 1040ez There is no employer share of Additional Medicare Tax. Online 1040ez All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 threshold. Online 1040ez   For more information on what wages are subject to Medicare tax, see the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15 (Circular E). Online 1040ez For more information on Additional Medicare Tax, visit IRS. Online 1040ez gov and enter “Additional Medicare Tax” in the search box. Online 1040ez Federal Income Tax Withholding If the cash wages you pay to farmworkers are subject to social security and Medicare taxes, they are also subject to federal income tax withholding. Online 1040ez Although noncash wages are subject to federal income tax, withhold income tax only if you and the employee agree to do so. Online 1040ez The amount to withhold is figured on gross wages without taking out social security and Medicare taxes, union dues, insurance, etc. Online 1040ez Form W-4. Online 1040ez   Generally, the amount of federal income tax you withhold is based on the employee's marital status and withholding allowances claimed on the employee's Form W-4. Online 1040ez In general, an employee can claim withholding allowances on Form W-4 equal to the number of exemptions the employee will be entitled to claim on his or her tax return. Online 1040ez An employee may also be able to claim a special withholding allowance and allowances for estimated deductions and credits. Online 1040ez   Do not withhold federal income tax from the wages of an employee who, by filing Form W-4, certifies that he or she had no federal income tax liability last year and anticipates no liability for the current year. Online 1040ez   You should give each new employee a Form W-4 as soon as you hire the employee. Online 1040ez For Spanish-speaking employees, you may use Formulario W-4(SP) which is the Spanish translation of Form W-4. Online 1040ez Have the employee complete and return the form to you before the first payday. Online 1040ez If the employee does not return the completed form, you must withhold federal income tax as if the employee is single and claims no withholding allowances. Online 1040ez New Form W-4 for 2014. Online 1040ez   You should make the 2014 Form W-4 available to your employees and encourage them to check their income tax withholding for 2014. Online 1040ez Those employees who owed a large amount of tax or received a large refund for 2013 may want to submit a new Form W-4. Online 1040ez You cannot accept substitute Forms W-4 developed by employees. Online 1040ez How to figure withholding. Online 1040ez   You can use one of several methods to determine the amount to withhold. Online 1040ez The methods are described in Publication 51 (Circular A), which contains tables showing the correct amount of federal income tax you should withhold. Online 1040ez Publication 51 (Circular A) also contains additional information about federal income tax withholding. Online 1040ez Nonemployee compensation. Online 1040ez   Generally, you do not have to withhold federal income tax on payments for services to individuals who are not your employees. Online 1040ez However, you may be required to report these payments on Form 1099-MISC, Miscellaneous Income, and to withhold under the backup withholding rules. Online 1040ez For more information, see the Instructions for Form 1099-MISC. Online 1040ez Required Notice to Employees About Earned Income Credit (EIC) You must provide notification about EIC to each employee who worked for you at any time during the year and from whom you did not withhold any federal income tax. Online 1040ez However, you do not have to notify employees who claim exemption from federal income tax withholding on Form W-4. Online 1040ez You meet the notification requirement by giving each employee any of the following. Online 1040ez Form W-2, which contains EIC notification on the back of Copy B. Online 1040ez A substitute Form W-2 with the exact EIC wording shown on the back of copy B of Form W-2. Online 1040ez Notice 797, Possible Federal Tax Refund Due to the Earned Income Credit (EIC). Online 1040ez Your own written statement with the exact wording of Notice 797. Online 1040ez For more information, see Publication 51 (Circular A). Online 1040ez Reporting and Paying Social Security, Medicare, and Withheld Federal Income Taxes You must withhold federal income, social security, and Medicare taxes required to be withheld from the salaries and wages of your employees. Online 1040ez You are liable for the payment of these taxes to the federal government whether or not you collect them from your employees. Online 1040ez If, for example, you withhold less than the correct tax from an employee's wages, you are still liable for the full amount. Online 1040ez You must also pay the employer's share of social security and Medicare taxes. Online 1040ez There is no employer share of Additional Medicare Tax. Online 1040ez Form 943. Online 1040ez   Report withheld federal income tax, social security tax, and Medicare tax on Form 943. Online 1040ez Your 2013 Form 943 is due by January 31, 2014 (or February 10, 2014, if you made deposits on time in full payment of the taxes due for the year). Online 1040ez Deposits. Online 1040ez   Generally, you must deposit both the employer and employee shares of social security and Medicare taxes and federal income tax withheld during the year. Online 1040ez However, you may make payments with Form 943 instead of depositing them if you accumulate less than a $2,500 tax liability (“Total taxes after adjustments” line on Form 943) during the year and you pay in full with a timely filed return. Online 1040ez   For more information on deposit rules, see Publication 51 (Circular A). Online 1040ez Electronic deposit requirement. Online 1040ez   You must use electronic funds transfer to make all federal tax deposits. Online 1040ez Generally, electronic funds transfers are made using EFTPS. Online 1040ez If you do not want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make electronic deposits on your behalf. Online 1040ez Also, you may arrange for your financial institution to initiate a same-day wire payment on your behalf. Online 1040ez EFTPS is a free service provided by the Department of Treasury. Online 1040ez Services provided by your tax professional, financial institution, payroll service, or other third party may have a fee. Online 1040ez   For more information on making federal tax deposits, see section 7 of Publication 51 (Circular A). Online 1040ez To get more information about EFTPS or to enroll in EFTPS, visit www. Online 1040ez eftps. Online 1040ez gov or call 1-800-555-4477 or 1-800-733-4829 (TDD). Online 1040ez Additional information about EFTPS is also available in Publication 966. Online 1040ez Form W-2. Online 1040ez   By January 31, you must furnish each employee a Form W-2 showing total wages for the previous year and total federal income tax, social security tax, and Medicare tax withheld. Online 1040ez However, if an employee stops working for you and requests the form earlier, you must give it to the employee within 30 days of the later of the following dates. Online 1040ez The date the employee requests the form. Online 1040ez The date you make your final payment of wages to the employee. Online 1040ez Compensation paid to H-2A visa holders. Online 1040ez   Report compensation of $600 or more paid to foreign agricultural workers who entered the country on H-2A visas in box 1 of Form W-2. Online 1040ez Compensation paid to H-2A workers for agricultural labor performed in connection with this visa is not subject to social security and Medicare taxes, and therefore should not be reported as wages subject to social security tax (line 2), Medicare tax (line 4), or Additional Medicare Tax (line 6) on Form 943, and should not be reported as social security wages (box 3) or Medicare wages (box 5) on Form W-2. Online 1040ez   An employer is not required to withhold federal income tax from compensation it pays to an H-2A worker for agricultural labor performed in connection with this visa unless the worker asks for withholding and the employer agrees. Online 1040ez In this case, the worker must give the employer a completed Form W-4. Online 1040ez Federal income tax withheld should be reported on Form 943, line 8, and in box 2 of Form W-2. Online 1040ez   These reporting rules apply when the H-2A worker provides his or her taxpayer identification number (TIN) to the employer. Online 1040ez For the rules relating to backup withholding and reporting when the H-2A worker does not provide a TIN, see the Instructions for Form 1099-MISC and the Instructions for Form 945. Online 1040ez Trust fund recovery penalty. Online 1040ez   If you are responsible for withholding, accounting for, depositing, or paying federal withholding taxes and willfully fail to do so, you can be held liable for a penalty equal to the withheld tax not paid. Online 1040ez A responsible person can be an officer of a corporation, a partner, a sole proprietor, or an employee of any form of business. Online 1040ez A trustee or agent with authority over the funds of the business can also be held responsible for the penalty. Online 1040ez   Willfully means voluntarily, consciously, and intentionally. Online 1040ez Paying other expenses of the business instead of the taxes due is acting willfully. Online 1040ez Consequences of treating an employee as an independent contractor. Online 1040ez   If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker. Online 1040ez See Publication 15-A for more information. Online 1040ez Federal Unemployment (FUTA) Tax You must pay FUTA tax if you meet either of the following tests. Online 1040ez You paid cash wages of $20,000 or more to farmworkers in any calendar quarter during the current or preceding calendar year. Online 1040ez You employed 10 or more farmworkers for some part of at least 1 day during any 20 or more different calendar weeks during the current or preceding calendar year. Online 1040ez These rules do not apply to exempt services of your spouse, your parents, or your children under age 21. Online 1040ez See Family Employees , earlier. Online 1040ez Alien farmworkers. Online 1040ez   Wages paid to aliens admitted on a temporary basis to the United States to perform farmwork (also known as “H-2A visa workers”) are exempt from FUTA tax. Online 1040ez However, include your employment of these workers and the wages you paid them to determine whether you meet either of the above tests. Online 1040ez Commodity wages. Online 1040ez   Payments in kind for farm labor are not cash wages. Online 1040ez Do not count them to figure whether you are subject to FUTA tax or to figure how much tax you owe. Online 1040ez Tax rate and credit. Online 1040ez   The gross FUTA tax rate is 6. Online 1040ez 0% of the first $7,000 cash wages you pay to each employee during the year. Online 1040ez However, you are given a credit of up to 5. Online 1040ez 4% of the first $7,000 cash wages you pay to each employee for the state unemployment tax you pay. Online 1040ez If your state tax rate (experience rate) is less than 5. Online 1040ez 4%, you may still be allowed the full 5. Online 1040ez 4% credit. Online 1040ez   If you do not pay the state tax, you cannot take the credit. Online 1040ez If you are exempt from state unemployment tax for any reason, the full 6. Online 1040ez 0% rate applies. Online 1040ez See the Instructions for Form 940 for additional information. Online 1040ez More information. Online 1040ez   For more information on FUTA tax, see Publication 51 (Circular A). Online 1040ez Reporting and Paying FUTA Tax The FUTA tax is imposed on you as the employer. Online 1040ez It must not be collected or deducted from the wages of your employees. Online 1040ez Form 940. Online 1040ez   Report FUTA tax on Form 940. Online 1040ez The 2013 Form 940 is due January 31, 2014 (or February 10, 2014, if you timely deposited the full amount of your 2013 FUTA tax). Online 1040ez Deposits. Online 1040ez   If at the end of any calendar quarter you owe, but have not yet deposited, more than $500 in FUTA tax for the year, you must make a deposit by the end of the following month. Online 1040ez If the undeposited tax is $500 or less at the end of a quarter, you do not have to deposit it. Online 1040ez You can add it to the tax for the next quarter. Online 1040ez If the total undeposited tax is more than $500 at the end of the next quarter, a deposit will be required. Online 1040ez If the total undeposited tax at the end of the 4th quarter is $500 or less, you can either make a deposit or pay it with your return by the January 31, 2014, due date. Online 1040ez Electronic deposit requirement. Online 1040ez   You must use electronic funds transfer to make all federal tax deposits. Online 1040ez Generally, electronic funds transfers are made using EFTPS. Online 1040ez If you do not want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make electronic deposits on your behalf. Online 1040ez Also, you may arrange for your financial institution to initiate a same-day wire payment on your behalf. Online 1040ez EFTPS is a free service provided by the Department of Treasury. Online 1040ez Services provided by your tax professional, financial institution, payroll service, or other third party may have a fee. Online 1040ez   For more information on making federal tax deposits, see section 7 of Publication 51 (Circular A). Online 1040ez To get more information about EFTPS or to enroll in EFTPS, visit www. Online 1040ez eftps. Online 1040ez gov or call 1-800-555-4477 or 1-800-733-4829 (TDD). Online 1040ez Additional information about EFTPS is also available in Publication 966. Online 1040ez Prev  Up  Next   Home   More Online Publications
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Face-to-face Tax Help

IRS Taxpayer Assistance Centers (TACs) are your source for personal tax help when you believe your tax issue can only be handled face-to-face. No appointment is necessary.

Keep in mind, many questions can be resolved online without waiting in line. Through IRS.gov you can:
• Set up a payment plan.
• Get a transcript of your tax return.
• Make a payment.
• Check on your refund.
• Find answers to many of your tax questions.

We are now referring all requests for tax return preparation services to other available resources. You can take advantage of free tax preparation through Free File, Free File Fillable Forms or through a volunteer site in your community. To find the nearest volunteer site location or to get more information about Free File, go to the top of the page and enter “Free Tax Help” in the Search box.

If you have a tax account issues and feel that it requires talking with someone face-to-face, visit your local TAC.

Caution:  Many of our offices are located in Federal Office Buildings. These buildings may not allow visitors to bring in cell phones with camera capabilities.

Multilingual assistance is available in every office. Hours of operation are subject to change.

Before visiting your local office click on "Services Provided" in the chart below to see what services are available. Services are limited and not all services are available at every TAC office and may vary from site to site. You can get these services on a walk-in basis.

City  Street Address  Days/Hours of Service  Telephone* 
Providence  380 Westminster St.
Providence, RI 02903 

Monday-Friday - 8:30 a.m.-4:30 p.m.

 

Services Provided

(401) 525-4282 
Warwick  60 Quaker Ln.
Warwick, RI 02886 

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 1:00 p.m. - 2:00 p.m.)

 

Services Provided

(401) 826-4797 

* Note: The phone numbers in the chart above are not toll-free for all locations. When you call, you will reach a recorded business message with information about office hours, locations and services provided in that office. If face-to-face assistance is not a priority for you, you may also get help with IRS letters or resolve tax account issues by phone, toll free at 1-800-829-1040 (individuals) or 1-800-829-4933 (businesses). 

For information on where to file your tax return please see Where to File Addresses

The Taxpayer Advocate Service: Call (401) 528-1921 in Providence or 1-877-777-4778 elsewhere, or see  Publication 1546, The Taxpayer Advocate Service of the IRS. For further information, see Tax Topic 104.

Partnerships

IRS and organizations all over the country are partnering to assist taxpayers. Through these partnerships, organizations are also achieving their own goals. These mutually beneficial partnerships are strengthening outreach efforts and bringing education and assistance to millions.

For more information about these program for individuals and families, contact the Stakeholder Partnerships, Education and Communication Office at:

Internal Revenue Service
380 Westminster Street
Providence, RI  02903

For more information about these programs for businesses, your local Stakeholder Liaison office establishes relationships with organizations representing small business and self-employed taxpayers. They provide information about the policies, practices and procedures the IRS uses to ensure compliance with the tax laws. To establish a relationship with us, use this list to find a contact in your state:

Stakeholder Liaison (SL) Phone Numbers for Organizations Representing Small Businesses and Self-employed Taxpayers.

Page Last Reviewed or Updated: 28-Mar-2014

The Online 1040ez

Online 1040ez 4. Online 1040ez   Interest Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Allocation of InterestOrder of funds spent. Online 1040ez Payments from checking accounts. Online 1040ez Amounts paid within 30 days. Online 1040ez Optional method for determining date of reallocation. Online 1040ez Interest on a segregated account. Online 1040ez How to report. Online 1040ez Interest You Can DeductStatement. Online 1040ez Expenses paid to obtain a mortgage. Online 1040ez Prepayment penalty. Online 1040ez De minimis OID. Online 1040ez Constant-yield method. Online 1040ez Loan or mortgage ends. Online 1040ez Interest You Cannot DeductPenalties. Online 1040ez Who is a key person? Exceptions for pre-June 1997 contracts. Online 1040ez Interest allocated to unborrowed policy cash value. Online 1040ez Capitalization of Interest When To Deduct InterestPrepaid interest. Online 1040ez Discounted loan. Online 1040ez Refunds of interest. Online 1040ez Prepaid interest. Online 1040ez Discounted loan. Online 1040ez Tax deficiency. Online 1040ez Related person. Online 1040ez Below-Market LoansLimit on forgone interest for gift loans of $100,000 or less. Online 1040ez Introduction This chapter discusses the tax treatment of business interest expense. Online 1040ez Business interest expense is an amount charged for the use of money you borrowed for business activities. Online 1040ez 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. Online 1040ez Sch K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. Online 1040ez 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. Online 1040ez Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. Online 1040ez 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. Online 1040ez Allocate your interest expense to the following categories. Online 1040ez 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. Online 1040ez You allocate loan proceeds by tracing disbursements to specific uses. Online 1040ez The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Online 1040ez Secured loan. Online 1040ez   The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. Online 1040ez Example. Online 1040ez You secure a loan with property used in your business. Online 1040ez You use the loan proceeds to buy an automobile for personal use. Online 1040ez You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property. Online 1040ez    If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Online 1040ez The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Online 1040ez For more information, see Publication 936. Online 1040ez Allocation period. Online 1040ez   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. Online 1040ez The date the loan is repaid. Online 1040ez The date the loan is reallocated to another use. Online 1040ez Proceeds not disbursed to borrower. Online 1040ez   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. Online 1040ez This applies whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt. Online 1040ez Proceeds deposited in borrower's account. Online 1040ez   Treat loan proceeds deposited in an account as property held for investment. Online 1040ez It does not matter whether the account pays interest. Online 1040ez Any interest you pay on the loan is investment interest expense. Online 1040ez If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. Online 1040ez Example. Online 1040ez Celina, a calendar-year taxpayer, borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. Online 1040ez No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. Online 1040ez On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. Online 1040ez On September 4, Celina uses an additional $40,000 from the account for personal purposes. Online 1040ez 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. Online 1040ez 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. Online 1040ez 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. Online 1040ez Order of funds spent. Online 1040ez   Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. Online 1040ez Any unborrowed amounts held in the same account. Online 1040ez Any amounts deposited after these loan proceeds. Online 1040ez Example. Online 1040ez On January 9, Olena opened a checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed funds. Online 1040ez The following table shows the transactions in her account during the tax year. Online 1040ez 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. Online 1040ez She treats the $700 used for a passive activity as made from the remaining $200 proceeds of Loan B and $500 of unborrowed funds. Online 1040ez She treats the $800 used for an investment as made entirely from the proceeds of Loan C. Online 1040ez She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. Online 1040ez For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. Online 1040ez Payments from checking accounts. Online 1040ez   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. Online 1040ez You can treat checks written on the same day as written in any order. Online 1040ez Amounts paid within 30 days. Online 1040ez   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. Online 1040ez This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Online 1040ez   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. Online 1040ez 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. Online 1040ez   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. Online 1040ez Example. Online 1040ez Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. Online 1040ez 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. Online 1040ez Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. Online 1040ez 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. Online 1040ez 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. Online 1040ez Optional method for determining date of reallocation. Online 1040ez   You can use the following method to determine the date loan proceeds are reallocated to another use. Online 1040ez You can treat all payments from loan proceeds in the account during any month as taking place on the later of the following dates. Online 1040ez The first day of that month. Online 1040ez The date the loan proceeds are deposited in the account. Online 1040ez 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. Online 1040ez Interest on a segregated account. Online 1040ez   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. Online 1040ez When the interest earned is used up, any remaining payments are from loan proceeds. Online 1040ez Example. Online 1040ez You borrowed $20,000 and used the proceeds of this loan to open a new savings account. Online 1040ez When the account had earned interest of $867, you withdrew $20,000 for personal purposes. Online 1040ez 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). Online 1040ez 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. Online 1040ez 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. Online 1040ez 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. Online 1040ez Loan repayment. Online 1040ez   When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. Online 1040ez Personal use. Online 1040ez Investments and passive activities (other than those included in (3)). Online 1040ez Passive activities in connection with a rental real estate activity in which you actively participate. Online 1040ez Former passive activities. Online 1040ez Trade or business use and expenses for certain low-income housing projects. Online 1040ez Line of credit (continuous borrowings). Online 1040ez   The following rules apply if you have a line of credit or similar arrangement. Online 1040ez Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. Online 1040ez Treat borrowed funds or parts of borrowed funds on which interest accrues at different fixed or variable rates as different loans. Online 1040ez Treat these loans as repaid in the order shown on the loan agreement. Online 1040ez Loan refinancing. Online 1040ez   Allocate the replacement loan to the same uses to which the repaid loan was allocated. Online 1040ez Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. Online 1040ez Debt-financed distribution. Online 1040ez   A debt-financed distribution occurs when a partnership or S corporation borrows funds and allocates those funds to distributions made to partners or shareholders. Online 1040ez The manner in which you report the interest expense associated with the distributed debt proceeds depends on your use of those proceeds. Online 1040ez How to report. Online 1040ez   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). Online 1040ez 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). Online 1040ez If the proceeds were used in an investment activity, enter the interest on Form 4952. Online 1040ez If the proceeds are used for personal purposes, the interest is generally not deductible. Online 1040ez 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. Online 1040ez Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. Online 1040ez It does not matter what type of property secures the loan. Online 1040ez You can deduct interest on a debt only if you meet all the following requirements. Online 1040ez You are legally liable for that debt. Online 1040ez Both you and the lender intend that the debt be repaid. Online 1040ez You and the lender have a true debtor-creditor relationship. Online 1040ez Partial liability. Online 1040ez   If you are liable for part of a business debt, you can deduct only your share of the total interest paid or accrued. Online 1040ez Example. Online 1040ez You and your brother borrow money. Online 1040ez You are liable for 50% of the note. Online 1040ez You use your half of the loan in your business, and you make one-half of the loan payments. Online 1040ez You can deduct your half of the total interest payments as a business deduction. Online 1040ez Mortgage. Online 1040ez   Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. Online 1040ez 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. Online 1040ez Statement. Online 1040ez   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. Online 1040ez 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. Online 1040ez A governmental unit is a person for purposes of furnishing the statement. Online 1040ez   If you receive a refund of interest you overpaid in an earlier year, this amount will be reported in box 3 of Form 1098. Online 1040ez You cannot deduct this amount. Online 1040ez For information on how to report this refund, see Refunds of interest, later in this chapter. Online 1040ez Expenses paid to obtain a mortgage. Online 1040ez   Certain expenses you pay to obtain a mortgage cannot be deducted as interest. Online 1040ez These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. Online 1040ez If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage. Online 1040ez Prepayment penalty. Online 1040ez   If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as interest. Online 1040ez Interest on employment tax deficiency. Online 1040ez   Interest charged on employment taxes assessed on your business is deductible. Online 1040ez Original issue discount (OID). Online 1040ez   OID is a form of interest. Online 1040ez A loan (mortgage or other debt) generally has OID when its proceeds are less than its principal amount. Online 1040ez The OID is the difference between the stated redemption price at maturity and the issue price of the loan. Online 1040ez   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. Online 1040ez 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. Online 1040ez You generally deduct OID over the term of the loan. Online 1040ez Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. Online 1040ez De minimis OID. Online 1040ez   The OID is de minimis if it is less than one-fourth of 1% (. Online 1040ez 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). Online 1040ez   If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. Online 1040ez On a constant-yield basis over the term of the loan. Online 1040ez On a straight-line basis over the term of the loan. Online 1040ez In proportion to stated interest payments. Online 1040ez In its entirety at maturity of the loan. Online 1040ez 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. Online 1040ez Example. Online 1040ez On January 1, 2013, you took out a $100,000 discounted loan and received $98,500 in proceeds. Online 1040ez The loan will mature on January 1, 2023 (a 10-year term), and the $100,000 principal is payable on that date. Online 1040ez Interest of $10,000 is payable on January 1 of each year, beginning January 1, 2014. Online 1040ez The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × . Online 1040ez 0025 × 10). Online 1040ez You choose to deduct the OID on a straight-line basis over the term of the loan. Online 1040ez Beginning in 2013, you can deduct $150 each year for 10 years. Online 1040ez Constant-yield method. Online 1040ez   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Online 1040ez You figure your deduction for the first year using the following steps. Online 1040ez Determine the issue price of the loan. Online 1040ez Generally, this equals the proceeds of the loan. Online 1040ez If you paid points on the loan (as discussed later), the issue price generally is the difference between the proceeds and the points. Online 1040ez Multiply the result in (1) by the yield to maturity. Online 1040ez Subtract any qualified stated interest payments from the result in (2). Online 1040ez This is the OID you can deduct in the first year. Online 1040ez   To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). Online 1040ez To get the adjusted issue price, add to the issue price any OID previously deducted. Online 1040ez Then follow steps (2) and (3) above. Online 1040ez   The yield to maturity is generally shown in the literature you receive from your lender. Online 1040ez If you do not have this information, consult your lender or tax advisor. Online 1040ez 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. Online 1040ez Example. Online 1040ez 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. Online 1040ez The yield to maturity on your loan is 10. Online 1040ez 2467%, compounded annually. Online 1040ez For 2013, you can deduct $93 [($98,500 × . Online 1040ez 102467) − $10,000]. Online 1040ez For 2014, you can deduct $103 [($98,593 × . Online 1040ez 102467) − $10,000]. Online 1040ez Loan or mortgage ends. Online 1040ez   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. Online 1040ez A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Online 1040ez 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. Online 1040ez See Interest paid with funds borrowed from original lender under Interest You Cannot Deduct, later. Online 1040ez Points. Online 1040ez   The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a loan or a mortgage. Online 1040ez These charges are also called loan origination fees, maximum loan charges, discount points, or premium charges. Online 1040ez If any of these charges (points) are solely for the use of money, they are interest. Online 1040ez   Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. Online 1040ez However, you can choose to fully deduct points in the year paid if you meet certain tests. Online 1040ez For exceptions to the general rule, see Publication 936. Online 1040ez The points reduce the issue price of the loan and result in original issue discount (OID), deductible as explained in the preceding discussion. Online 1040ez Partial payments on a nontax debt. Online 1040ez   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. Online 1040ez You can deduct only the interest. Online 1040ez 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. Online 1040ez Installment purchase. Online 1040ez   If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. Online 1040ez 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). Online 1040ez The amount recharacterized as interest reduces your basis in the property and increases your interest expense. Online 1040ez For more information on installment sales and unstated interest, see Publication 537. Online 1040ez Interest You Cannot Deduct Certain interest payments cannot be deducted. Online 1040ez In addition, certain other expenses that may seem to be interest but are not, cannot be deducted as interest. Online 1040ez You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. Online 1040ez Interest paid with funds borrowed from original lender. Online 1040ez   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. Online 1040ez You can deduct the interest expense once you start making payments on the new loan. Online 1040ez   When you make a payment on the new loan, you first apply the payment to interest and then to the principal. Online 1040ez 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. Online 1040ez Capitalized interest. Online 1040ez   You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. Online 1040ez See Capitalization of Interest, later. Online 1040ez 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. Online 1040ez Add this interest to the basis of the property. Online 1040ez Commitment fees or standby charges. Online 1040ez   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. Online 1040ez You may be able to deduct them as business expenses. Online 1040ez   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. Online 1040ez See Capitalization of Interest, later. Online 1040ez Interest on income tax. Online 1040ez   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. Online 1040ez Treat this interest as a business deduction only in figuring a net operating loss deduction. Online 1040ez Penalties. Online 1040ez   Penalties on underpaid deficiencies and underpaid estimated tax are not interest. Online 1040ez You cannot deduct them. Online 1040ez Generally, you cannot deduct any fines or penalties. Online 1040ez Interest on loans with respect to life insurance policies. Online 1040ez   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. Online 1040ez   If the policy or contract covers a key person, you can deduct the interest on up to $50,000 of debt for that person. Online 1040ez 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. Online 1040ez Who is a key person?   A key person is an officer or 20% owner. Online 1040ez However, the number of individuals you can treat as key persons is limited to the greater of the following. Online 1040ez Five individuals. Online 1040ez The lesser of 5% of the total officers and employees of the company or 20 individuals. Online 1040ez Exceptions for pre-June 1997 contracts. Online 1040ez   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. Online 1040ez If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is covered by the contract. Online 1040ez Interest allocated to unborrowed policy cash value. Online 1040ez   Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. Online 1040ez This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. Online 1040ez For more information, see section 264(f) of the Internal Revenue Code. Online 1040ez 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. Online 1040ez The property must be produced by you for use in your trade or business or for sale to customers. Online 1040ez You cannot capitalize interest related to property that you acquire in any other manner. Online 1040ez Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. Online 1040ez Designated property is any of the following. Online 1040ez Real property. Online 1040ez Tangible personal property with a class life of 20 years or more. Online 1040ez Tangible personal property with an estimated production period of more than 2 years. Online 1040ez Tangible personal property with an estimated production period of more than 1 year if the estimated cost of production is more than $1 million. Online 1040ez Property you produce. Online 1040ez   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. Online 1040ez Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. Online 1040ez Carrying charges. Online 1040ez   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. Online 1040ez You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. Online 1040ez For more information, see chapter 7. Online 1040ez Capitalized interest. Online 1040ez   Treat capitalized interest as a cost of the property produced. Online 1040ez You recover your interest when you sell or use the property. Online 1040ez If the property is inventory, recover capitalized interest through cost of goods sold. Online 1040ez If the property is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. Online 1040ez Partnerships and S corporations. Online 1040ez   The interest capitalization rules are applied first at the partnership or S corporation level. Online 1040ez 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. Online 1040ez   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. Online 1040ez You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. Online 1040ez 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. Online 1040ez Additional information. Online 1040ez   The procedures for applying the uniform capitalization rules are beyond the scope of this publication. Online 1040ez For more information, see sections 1. Online 1040ez 263A-8 through 1. Online 1040ez 263A-15 of the regulations and Notice 88-99. Online 1040ez Notice 88-99 is in Cumulative Bulletin 1988-2. Online 1040ez When To Deduct Interest If the uniform capitalization rules, discussed under Capitalization of Interest, earlier, do not apply to you, deduct interest as follows. Online 1040ez Cash method. Online 1040ez   Under the cash method, you can generally deduct only the interest you actually paid during the tax year. Online 1040ez You cannot deduct a promissory note you gave as payment because it is a promise to pay and not an actual payment. Online 1040ez Prepaid interest. Online 1040ez   You generally cannot deduct any interest paid before the year it is due. Online 1040ez Interest paid in advance can be deducted only in the tax year in which it is due. Online 1040ez Discounted loan. Online 1040ez   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. Online 1040ez For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. Online 1040ez Refunds of interest. Online 1040ez   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. Online 1040ez 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. Online 1040ez Accrual method. Online 1040ez   Under an accrual method, you can deduct only interest that has accrued during the tax year. Online 1040ez Prepaid interest. Online 1040ez   See Prepaid interest, earlier. Online 1040ez Discounted loan. Online 1040ez   See Discounted loan, earlier. Online 1040ez Tax deficiency. Online 1040ez   If you contest a federal income tax deficiency, interest does not accrue until the tax year the final determination of liability is made. Online 1040ez If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. Online 1040ez   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. Online 1040ez Related person. Online 1040ez   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. Online 1040ez The relationship is determined as of the end of the tax year for which the interest would otherwise be deductible. Online 1040ez See section 267 of the Internal Revenue Code for more information. Online 1040ez 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. Online 1040ez See Treatment of gift and demand loans, later, in this discussion. Online 1040ez 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. Online 1040ez 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. Online 1040ez A loan in exchange for a note that requires the payment of interest at the applicable federal rate. Online 1040ez An additional payment in an amount equal to the forgone interest. Online 1040ez 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. Online 1040ez Forgone interest. Online 1040ez   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. Online 1040ez Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Online 1040ez Internal Revenue Bulletins are available on the IRS web site at www. Online 1040ez irs. Online 1040ez gov/irb. Online 1040ez You can also contact an IRS office to get these rates. Online 1040ez Loans subject to the rules. Online 1040ez   The rules for below-market loans apply to the following. Online 1040ez Gift loans (below-market loans where the forgone interest is in the nature of a gift). Online 1040ez 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). Online 1040ez Corporation-shareholder loans. Online 1040ez Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest arrangement). Online 1040ez Loans to qualified continuing care facilities under a continuing care contract (made after October 11, 1985). Online 1040ez   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. Online 1040ez Treatment of gift and demand loans. Online 1040ez   If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc. Online 1040ez ) equal to the forgone interest on the loan. Online 1040ez You are then treated as transferring this amount back to the lender as interest. Online 1040ez These transfers are considered to occur annually, generally on December 31. Online 1040ez If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. Online 1040ez The lender must report it as interest income. Online 1040ez Limit on forgone interest for gift loans of $100,000 or less. Online 1040ez   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. Online 1040ez This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. Online 1040ez If the borrower's net investment income is $1,000 or less, it is treated as zero. Online 1040ez 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. Online 1040ez Treatment of term loans. Online 1040ez   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. Online 1040ez ) on the date the loan is made. Online 1040ez This payment is equal to the loan amount minus the present value, at the applicable federal rate, of all payments due under the loan. Online 1040ez The same amount is treated as original issue discount on the loan. Online 1040ez See Original issue discount (OID) under Interest You Can Deduct, earlier. Online 1040ez Exceptions for loans of $10,000 or less. Online 1040ez   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. Online 1040ez This exception applies only to the following. Online 1040ez Gift loans between individuals if the loan is not directly used to buy or carry income-producing assets. Online 1040ez Compensation-related loans or corporation-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. Online 1040ez This exception does not apply to a term loan described in (2) above that was previously subject to the below-market loan rules. Online 1040ez Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Online 1040ez Exceptions for loans without significant tax effect. Online 1040ez   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. Online 1040ez 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. Online 1040ez Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public. Online 1040ez Certain employee-relocation loans. Online 1040ez Certain loans to or from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Online 1040ez S. Online 1040ez trade or business and not exempt from U. Online 1040ez S. Online 1040ez tax under an income tax treaty. Online 1040ez 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. Online 1040ez 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. Online 1040ez Consider all the following factors. Online 1040ez Whether items of income and deduction generated by the loan offset each other. Online 1040ez The amount of the items. Online 1040ez The cost of complying with the below-market loan provisions if they were to apply. Online 1040ez Any reasons, other than taxes, for structuring the transaction as a below-market loan. Online 1040ez Exception for loans to qualified continuing care facilities. Online 1040ez   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. Online 1040ez A qualified continuing care facility is one or more facilities (excluding nursing homes) meeting the requirements listed below. Online 1040ez Designed to provide services under continuing care contracts (defined below). Online 1040ez Includes an independent living unit, and either an assisted living or nursing facility, or both. Online 1040ez Substantially all of the independent living unit residents are covered by continuing care contracts. Online 1040ez A continuing care contract is a written contract between an individual and a qualified continuing care facility that includes all of the following conditions. Online 1040ez The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. Online 1040ez 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. Online 1040ez 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. Online 1040ez For more information, see section 7872(h) of the Internal Revenue Code. Online 1040ez Sale or exchange of property. Online 1040ez   Different rules generally apply to a loan connected with the sale or exchange of property. Online 1040ez If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. Online 1040ez However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. Online 1040ez See Unstated Interest and Original Issue Discount (OID) in Publication 537. Online 1040ez More information. Online 1040ez   For more information on below-market loans, see section 7872 of the Internal Revenue Code and section 1. Online 1040ez 7872-5 of the regulations. 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