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Statetaxforms

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Statetaxforms

Statetaxforms 18. Statetaxforms   Alimony Table of Contents IntroductionSpouse or former spouse. Statetaxforms Divorce or separation instrument. Statetaxforms Useful Items - You may want to see: General RulesMortgage payments. Statetaxforms Taxes and insurance. Statetaxforms Other payments to a third party. Statetaxforms Instruments Executed After 1984Payments to a third party. Statetaxforms Exception. Statetaxforms Substitute payments. Statetaxforms Specifically designated as child support. Statetaxforms Contingency relating to your child. Statetaxforms Clearly associated with a contingency. Statetaxforms How To Deduct Alimony Paid How To Report Alimony Received Recapture Rule Introduction This chapter discusses the rules that apply if you pay or receive alimony. Statetaxforms It covers the following topics. Statetaxforms What payments are alimony. Statetaxforms What payments are not alimony, such as child support. Statetaxforms How to deduct alimony you paid. Statetaxforms How to report alimony you received as income. Statetaxforms Whether you must recapture the tax benefits of alimony. Statetaxforms Recapture means adding back in your income all or part of a deduction you took in a prior year. Statetaxforms Alimony is a payment to or for a spouse or former spouse under a divorce or separation instrument. Statetaxforms It does not include voluntary payments that are not made under a divorce or separation instrument. Statetaxforms Alimony is deductible by the payer and must be included in the spouse's or former spouse's income. Statetaxforms Although this chapter is generally written for the payer of the alimony, the recipient can use the information to determine whether an amount received is alimony. Statetaxforms To be alimony, a payment must meet certain requirements. Statetaxforms Different requirements generally apply to payments under instruments executed after 1984 and to payments under instruments executed before 1985. Statetaxforms This chapter discusses the rules for payments under instruments executed after 1984. Statetaxforms If you need the rules for payments under pre-1985 instruments, get and keep a copy of the 2004 version of Publication 504. Statetaxforms That was the last year the information on pre-1985 instruments was included in Publication 504. Statetaxforms Use Table 18-1 in this chapter as a guide to determine whether certain payments are considered alimony. Statetaxforms Definitions. Statetaxforms   The following definitions apply throughout this chapter. Statetaxforms Spouse or former spouse. Statetaxforms   Unless otherwise stated, the term “spouse” includes former spouse. Statetaxforms Divorce or separation instrument. Statetaxforms   The term “divorce or separation instrument” means: A decree of divorce or separate maintenance or a written instrument incident to that decree, A written separation agreement, or A decree or any type of court order requiring a spouse to make payments for the support or maintenance of the other spouse. Statetaxforms This includes a temporary decree, an interlocutory (not final) decree, and a decree of alimony pendente lite (while awaiting action on the final decree or agreement). Statetaxforms Useful Items - You may want to see: Publication 504 Divorced or Separated Individuals General Rules The following rules apply to alimony regardless of when the divorce or separation instrument was executed. Statetaxforms Payments not alimony. Statetaxforms   Not all payments under a divorce or separation instrument are alimony. Statetaxforms Alimony does not include: Child support, Noncash property settlements, Payments that are your spouse's part of community income, as explained under Community Property in Publication 504, Payments to keep up the payer's property, or Use of the payer's property. Statetaxforms Payments to a third party. Statetaxforms   Cash payments, checks, or money orders to a third party on behalf of your spouse under the terms of your divorce or separation instrument can be alimony, if they otherwise qualify. Statetaxforms These include payments for your spouse's medical expenses, housing costs (rent, utilities, etc. Statetaxforms ), taxes, tuition, etc. Statetaxforms The payments are treated as received by your spouse and then paid to the third party. Statetaxforms Life insurance premiums. Statetaxforms   Alimony includes premiums you must pay under your divorce or separation instrument for insurance on your life to the extent your spouse owns the policy. Statetaxforms Payments for jointly-owned home. Statetaxforms   If your divorce or separation instrument states that you must pay expenses for a home owned by you and your spouse, some of your payments may be alimony. Statetaxforms Mortgage payments. Statetaxforms   If you must pay all the mortgage payments (principal and interest) on a jointly-owned home, and they otherwise qualify as alimony, you can deduct one-half of the total payments as alimony. Statetaxforms If you itemize deductions and the home is a qualified home, you can claim one-half of the interest in figuring your deductible interest. Statetaxforms Your spouse must report one-half of the payments as alimony received. Statetaxforms If your spouse itemizes deductions and the home is a qualified home, he or she can claim one-half of the interest on the mortgage in figuring deductible interest. Statetaxforms Taxes and insurance. Statetaxforms   If you must pay all the real estate taxes or insurance on a home held as tenants in common, you can deduct one-half of these payments as alimony. Statetaxforms Your spouse must report one-half of these payments as alimony received. Statetaxforms If you and your spouse itemize deductions, you can each claim one-half of the real estate taxes and none of the home insurance. Statetaxforms    If your home is held as tenants by the entirety or joint tenants, none of your payments for taxes or insurance are alimony. Statetaxforms But if you itemize deductions, you can claim all of the real estate taxes and none of the home insurance. Statetaxforms Other payments to a third party. Statetaxforms   If you made other third-party payments, see Publication 504 to see whether any part of the payments qualifies as alimony. Statetaxforms Instruments Executed After 1984 The following rules for alimony apply to payments under divorce or separation instruments executed after 1984. Statetaxforms Exception for instruments executed before 1985. Statetaxforms   There are two situations where the rules for instruments executed after 1984 apply to instruments executed before 1985. Statetaxforms A divorce or separation instrument executed before 1985 and then modified after 1984 to specify that the after-1984 rules will apply. Statetaxforms A temporary divorce or separation instrument executed before 1985 and incorporated into, or adopted by, a final decree executed after 1984 that: Changes the amount or period of payment, or Adds or deletes any contingency or condition. Statetaxforms   For the rules for alimony payments under pre-1985 instruments not meeting these exceptions, get the 2004 version of Publication 504 at www. Statetaxforms irs. Statetaxforms gov/pub504. Statetaxforms Example 1. Statetaxforms In November 1984, you and your former spouse executed a written separation agreement. Statetaxforms In February 1985, a decree of divorce was substituted for the written separation agreement. Statetaxforms The decree of divorce did not change the terms for the alimony you pay your former spouse. Statetaxforms The decree of divorce is treated as executed before 1985. Statetaxforms Alimony payments under this decree are not subject to the rules for payments under instruments executed after 1984. Statetaxforms Example 2. Statetaxforms Assume the same facts as in Example 1 except that the decree of divorce changed the amount of the alimony. Statetaxforms In this example, the decree of divorce is not treated as executed before 1985. Statetaxforms The alimony payments are subject to the rules for payments under instruments executed after 1984. Statetaxforms Alimony requirements. Statetaxforms   A payment to or for a spouse under a divorce or separation instrument is alimony if the spouses do not file a joint return with each other and all the following requirements are met. Statetaxforms The payment is in cash. Statetaxforms The instrument does not designate the payment as not alimony. Statetaxforms Spouses legally separated under a decree of divorce or separate maintenance are not members of the same household. Statetaxforms There is no liability to make any payment (in cash or property) after the death of the recipient spouse. Statetaxforms The payment is not treated as child support. Statetaxforms Each of these requirements is discussed below. Statetaxforms Cash payment requirement. Statetaxforms   Only cash payments, including checks and money orders, qualify as alimony. Statetaxforms The following do not qualify as alimony. Statetaxforms Transfers of services or property (including a debt instrument of a third party or an annuity contract). Statetaxforms Execution of a debt instrument by the payer. Statetaxforms The use of the payer's property. Statetaxforms Payments to a third party. Statetaxforms   Cash payments to a third party under the terms of your divorce or separation instrument can qualify as cash payments to your spouse. Statetaxforms See Payments to a third party under General Rules, earlier. Statetaxforms   Also, cash payments made to a third party at the written request of your spouse may qualify as alimony if all the following requirements are met. Statetaxforms The payments are in lieu of payments of alimony directly to your spouse. Statetaxforms The written request states that both spouses intend the payments to be treated as alimony. Statetaxforms You receive the written request from your spouse before you file your return for the year you made the payments. Statetaxforms Payments designated as not alimony. Statetaxforms   You and your spouse can designate that otherwise qualifying payments are not alimony. Statetaxforms You do this by including a provision in your divorce or separation instrument that states the payments are not deductible as alimony by you and are excludable from your spouse's income. Statetaxforms For this purpose, any instrument (written statement) signed by both of you that makes this designation and that refers to a previous written separation agreement is treated as a written separation agreement (and therefore a divorce or separation instrument). Statetaxforms If you are subject to temporary support orders, the designation must be made in the original or a later temporary support order. Statetaxforms   Your spouse can exclude the payments from income only if he or she attaches a copy of the instrument designating them as not alimony to his or her return. Statetaxforms The copy must be attached each year the designation applies. Statetaxforms Spouses cannot be members of the same household. Statetaxforms    Payments to your spouse while you are members of the same household are not alimony if you are legally separated under a decree of divorce or separate maintenance. Statetaxforms A home you formerly shared is considered one household, even if you physically separate yourselves in the home. Statetaxforms   You are not treated as members of the same household if one of you is preparing to leave the household and does leave no later than 1 month after the date of the payment. Statetaxforms Exception. Statetaxforms   If you are not legally separated under a decree of divorce or separate maintenance, a payment under a written separation agreement, support decree, or other court order may qualify as alimony even if you are members of the same household when the payment is made. Statetaxforms Table 18-1. Statetaxforms Alimony Requirements (Instruments Executed After 1984) Payments ARE alimony if all of the following are true: Payments are NOT alimony if any of the following are true: Payments are required by a divorce or separation instrument. Statetaxforms Payments are not required by a divorce or separation instrument. Statetaxforms Payer and recipient spouse do not file a joint return with each other. Statetaxforms Payer and recipient spouse file a joint return with each other. Statetaxforms Payment is in cash (including checks or money orders). Statetaxforms Payment is: Not in cash, A noncash property settlement, Spouse's part of community income, or To keep up the payer's property. Statetaxforms Payment is not designated in the instrument as not alimony. Statetaxforms Payment is designated in the instrument as not alimony. Statetaxforms Spouses legally separated under a decree of divorce or separate maintenance are not members of the same household. Statetaxforms Spouses legally separated under a decree of divorce or separate maintenance are members of the same household. Statetaxforms Payments are not required after death of the recipient spouse. Statetaxforms Payments are required after death of the recipient spouse. Statetaxforms Payment is not treated as child support. Statetaxforms Payment is treated as child support. Statetaxforms These payments are deductible by the payer and includible in income by the recipient. Statetaxforms These payments are neither deductible by the payer nor includible in income by the recipient. Statetaxforms Liability for payments after death of recipient spouse. Statetaxforms   If any part of payments you make must continue to be made for any period after your spouse's death, that part of your payments is not alimony, whether made before or after the death. Statetaxforms If all of the payments would continue, then none of the payments made before or after the death are alimony. Statetaxforms   The divorce or separation instrument does not have to expressly state that the payments cease upon the death of your spouse if, for example, the liability for continued payments would end under state law. Statetaxforms Example. Statetaxforms You must pay your former spouse $10,000 in cash each year for 10 years. Statetaxforms Your divorce decree states that the payments will end upon your former spouse's death. Statetaxforms You must also pay your former spouse or your former spouse's estate $20,000 in cash each year for 10 years. Statetaxforms The death of your spouse would not terminate these payments under state law. Statetaxforms The $10,000 annual payments may qualify as alimony. Statetaxforms The $20,000 annual payments that do not end upon your former spouse's death are not alimony. Statetaxforms Substitute payments. Statetaxforms   If you must make any payments in cash or property after your spouse's death as a substitute for continuing otherwise qualifying payments before the death, the otherwise qualifying payments are not alimony. Statetaxforms To the extent that your payments begin, accelerate, or increase because of the death of your spouse, otherwise qualifying payments you made may be treated as payments that were not alimony. Statetaxforms Whether or not such payments will be treated as not alimony depends on all the facts and circumstances. Statetaxforms Example 1. Statetaxforms Under your divorce decree, you must pay your former spouse $30,000 annually. Statetaxforms The payments will stop at the end of 6 years or upon your former spouse's death, if earlier. Statetaxforms Your former spouse has custody of your minor children. Statetaxforms The decree provides that if any child is still a minor at your spouse's death, you must pay $10,000 annually to a trust until the youngest child reaches the age of majority. Statetaxforms The trust income and corpus (principal) are to be used for your children's benefit. Statetaxforms These facts indicate that the payments to be made after your former spouse's death are a substitute for $10,000 of the $30,000 annual payments. Statetaxforms Of each of the $30,000 annual payments, $10,000 is not alimony. Statetaxforms Example 2. Statetaxforms Under your divorce decree, you must pay your former spouse $30,000 annually. Statetaxforms The payments will stop at the end of 15 years or upon your former spouse's death, if earlier. Statetaxforms The decree provides that if your former spouse dies before the end of the 15-year period, you must pay the estate the difference between $450,000 ($30,000 × 15) and the total amount paid up to that time. Statetaxforms For example, if your spouse dies at the end of the tenth year, you must pay the estate $150,000 ($450,000 − $300,000). Statetaxforms These facts indicate that the lump-sum payment to be made after your former spouse's death is a substitute for the full amount of the $30,000 annual payments. Statetaxforms None of the annual payments are alimony. Statetaxforms The result would be the same if the payment required at death were to be discounted by an appropriate interest factor to account for the prepayment. Statetaxforms Child support. Statetaxforms   A payment that is specifically designated as child support or treated as specifically designated as child support under your divorce or separation instrument is not alimony. Statetaxforms The amount of child support may vary over time. Statetaxforms Child support payments are not deductible by the payer and are not taxable to the recipient. Statetaxforms Specifically designated as child support. Statetaxforms   A payment will be treated as specifically designated as child support to the extent that the payment is reduced either: On the happening of a contingency relating to your child, or At a time that can be clearly associated with the contingency. Statetaxforms A payment may be treated as specifically designated as child support even if other separate payments are specifically designated as child support. Statetaxforms Contingency relating to your child. Statetaxforms   A contingency relates to your child if it depends on any event relating to that child. Statetaxforms It does not matter whether the event is certain or likely to occur. Statetaxforms Events relating to your child include the child's: Becoming employed, Dying, Leaving the household, Leaving school, Marrying, or Reaching a specified age or income level. Statetaxforms Clearly associated with a contingency. Statetaxforms   Payments that would otherwise qualify as alimony are presumed to be reduced at a time clearly associated with the happening of a contingency relating to your child only in the following situations. Statetaxforms The payments are to be reduced not more than 6 months before or after the date the child will reach 18, 21, or local age of majority. Statetaxforms The payments are to be reduced on two or more occasions that occur not more than 1 year before or after a different one of your children reaches a certain age from 18 to 24. Statetaxforms This certain age must be the same for each child, but need not be a whole number of years. Statetaxforms In all other situations, reductions in payments are not treated as clearly associated with the happening of a contingency relating to your child. Statetaxforms   Either you or the IRS can overcome the presumption in the two situations above. Statetaxforms This is done by showing that the time at which the payments are to be reduced was determined independently of any contingencies relating to your children. Statetaxforms For example, if you can show that the period of alimony payments is customary in the local jurisdiction, such as a period equal to one-half of the duration of the marriage, you can overcome the presumption and may be able to treat the amount as alimony. Statetaxforms How To Deduct Alimony Paid You can deduct alimony you paid, whether or not you itemize deductions on your return. Statetaxforms You must file Form 1040. Statetaxforms You cannot use Form 1040A or Form 1040EZ. Statetaxforms Enter the amount of alimony you paid on Form 1040, line 31a. Statetaxforms In the space provided on line 31b, enter your spouse's social security number (SSN) or individual taxpayer identification number (ITIN). Statetaxforms If you paid alimony to more than one person, enter the SSN or ITIN of one of the recipients. Statetaxforms Show the SSN or ITIN and amount paid to each other recipient on an attached statement. Statetaxforms Enter your total payments on line 31a. Statetaxforms You must provide your spouse's SSN or ITIN. Statetaxforms If you do not, you may have to pay a $50 penalty and your deduction may be disallowed. Statetaxforms For more information on SSNs and ITINs, see Social Security Number (SSN) in chapter 1. Statetaxforms How To Report Alimony Received Report alimony you received as income on Form 1040, line 11. Statetaxforms You cannot use Form 1040A or Form 1040EZ. Statetaxforms You must give the person who paid the alimony your SSN or ITIN. Statetaxforms If you do not, you may have to pay a $50 penalty. Statetaxforms Recapture Rule If your alimony payments decrease or end during the first 3 calendar years, you may be subject to the recapture rule. Statetaxforms If you are subject to this rule, you have to include in income in the third year part of the alimony payments you previously deducted. Statetaxforms Your spouse can deduct in the third year part of the alimony payments he or she previously included in income. Statetaxforms The 3-year period starts with the first calendar year you make a payment qualifying as alimony under a decree of divorce or separate maintenance or a written separation agreement. Statetaxforms Do not include any time in which payments were being made under temporary support orders. Statetaxforms The second and third years are the next 2 calendar years, whether or not payments are made during those years. Statetaxforms The reasons for a reduction or end of alimony payments that can require a recapture include: A change in your divorce or separation instrument, A failure to make timely payments, A reduction in your ability to provide support, or A reduction in your spouse's support needs. Statetaxforms When to apply the recapture rule. Statetaxforms   You are subject to the recapture rule in the third year if the alimony you pay in the third year decreases by more than $15,000 from the second year or the alimony you pay in the second and third years decreases significantly from the alimony you pay in the first year. Statetaxforms   When you figure a decrease in alimony, do not include the following amounts. Statetaxforms Payments made under a temporary support order. Statetaxforms Payments required over a period of at least 3 calendar years that vary because they are a fixed part of your income from a business or property, or from compensation for employment or self-employment. Statetaxforms Payments that decrease because of the death of either spouse or the remarriage of the spouse receiving the payments before the end of the third year. Statetaxforms Figuring the recapture. Statetaxforms   You can use Worksheet 1 in Publication 504 to figure recaptured alimony. Statetaxforms Including the recapture in income. Statetaxforms   If you must include a recapture amount in income, show it on Form 1040, line 11 (“Alimony received”). Statetaxforms Cross out “received” and enter “recapture. Statetaxforms ” On the dotted line next to the amount, enter your spouse's last name and SSN or ITIN. Statetaxforms Deducting the recapture. Statetaxforms   If you can deduct a recapture amount, show it on Form 1040, line 31a (“Alimony paid”). Statetaxforms Cross out “paid” and enter “recapture. Statetaxforms ” In the space provided, enter your spouse's SSN or ITIN. Statetaxforms Prev  Up  Next   Home   More Online Publications
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The Statetaxforms

Statetaxforms 8. Statetaxforms   Qualified Tuition Program (QTP) Table of Contents Introduction What Is a Qualified Tuition ProgramDesignated beneficiary. Statetaxforms Half-time student. Statetaxforms How Much Can You Contribute Are Distributions TaxableFiguring the Taxable Portion of a Distribution Additional Tax on Taxable Distributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Introduction Qualified tuition programs (QTPs) are also called “529 plans. Statetaxforms ” States may establish and maintain programs that allow you to either prepay or contribute to an account for paying a student's qualified education expenses at a postsecondary institution. Statetaxforms Eligible educational institutions may establish and maintain programs that allow you to prepay a student's qualified education expenses. Statetaxforms If you prepay tuition, the student (designated beneficiary) will be entitled to a waiver or a payment of qualified education expenses. Statetaxforms You cannot deduct either payments or contributions to a QTP. Statetaxforms For information on a specific QTP, you will need to contact the state agency or eligible educational institution that established and maintains it. Statetaxforms What is the tax benefit of a QTP. Statetaxforms   No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses. Statetaxforms See Are Distributions Taxable , later, for more information. Statetaxforms    Even if a QTP is used to finance a student's education, the student or the student's parents still may be eligible to claim the American opportunity credit or the lifetime learning credit. Statetaxforms See Coordination With American Opportunity and Lifetime Learning Credits, later. Statetaxforms What Is a Qualified Tuition Program A qualified tuition program is a program set up to allow you to either prepay, or contribute to an account established for paying, a student's qualified education expenses at an eligible educational institution. Statetaxforms QTPs can be established and maintained by states (or agencies or instrumentalities of a state) and eligible educational institutions. Statetaxforms The program must meet certain requirements. Statetaxforms Your state government or the eligible educational institution in which you are interested can tell you whether or not they participate in a QTP. Statetaxforms Qualified education expenses. Statetaxforms   These are expenses related to enrollment or attendance at an Eligible educational institution (defined later). Statetaxforms As shown in the following list, to be qualified, some of the expenses must be required by the institution and some must be incurred by students who are enrolled at least half-time. Statetaxforms See Half-time student , later. Statetaxforms The following expenses must be required for enrollment or attendance of a Designated beneficiary (defined later) at an eligible educational institution. Statetaxforms Tuition and fees. Statetaxforms Books, supplies, and equipment. Statetaxforms Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible educational institution. Statetaxforms Expenses for room and board must be incurred by students who are enrolled at least half-time. Statetaxforms The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Statetaxforms The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Statetaxforms The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. Statetaxforms You will need to contact the eligible educational institution for qualified room and board costs. Statetaxforms    For tax years after 2010, the purchase of computer technology or equipment is only a qualified education expense if the computer technology or equipment is required for enrollment or attendance at an eligible institution. Statetaxforms Designated beneficiary. Statetaxforms   The designated beneficiary is generally the student (or future student) for whom the QTP is intended to provide benefits. Statetaxforms The designated beneficiary can be changed after participation in the QTP begins. Statetaxforms If a state or local government or certain tax-exempt organizations purchase an interest in a QTP as part of a scholarship program, the designated beneficiary is the person who receives the interest as a scholarship. Statetaxforms Half-time student. Statetaxforms   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic workload for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. Statetaxforms Eligible educational institution. Statetaxforms   For purposes of a QTP, this is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Statetaxforms S. Statetaxforms Department of Education. Statetaxforms It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Statetaxforms The educational institution should be able to tell you if it is an eligible educational institution. Statetaxforms   Certain educational institutions located outside the United States also participate in the U. Statetaxforms S. Statetaxforms Department of Education's Federal Student Aid (FSA) programs. Statetaxforms   How Much Can You Contribute Contributions to a QTP on behalf of any beneficiary cannot be more than the amount necessary to provide for the qualified education expenses of the beneficiary. Statetaxforms There are no income restrictions on the individual contributors. Statetaxforms You can contribute to both a QTP and a Coverdell ESA in the same year for the same designated beneficiary. Statetaxforms   Are Distributions Taxable The part of a distribution representing the amount paid or contributed to a QTP does not have to be included in income. Statetaxforms This is a return of the investment in the plan. Statetaxforms The designated beneficiary generally does not have to include in income any earnings distributed from a QTP if the total distribution is less than or equal to adjusted qualified education expenses (defined under Figuring the Taxable Portion of a Distribution , later). Statetaxforms Earnings and return of investment. Statetaxforms    You will receive a Form 1099-Q, from each of the programs from which you received a QTP distribution in 2013. Statetaxforms The amount of your gross distribution (box 1) shown on each form will be divided between your earnings (box 2) and your basis, or return of investment (box 3). Statetaxforms Form 1099-Q should be sent to you by January 31, 2014. Statetaxforms Figuring the Taxable Portion of a Distribution To determine if total distributions for the year are more or less than the amount of qualified education expenses, you must compare the total of all QTP distributions for the tax year to the adjusted qualified education expenses. Statetaxforms Adjusted qualified education expenses. Statetaxforms   This amount is the total qualified education expenses reduced by any tax-free educational assistance. Statetaxforms Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Statetaxforms Taxable earnings. Statetaxforms   Use the following steps to figure the taxable part. Statetaxforms Multiply the total distributed earnings shown in box 2 of Form 1099-Q by a fraction. Statetaxforms The numerator is the adjusted qualified education expenses paid during the year and the denominator is the total amount distributed during the year. Statetaxforms Subtract the amount figured in (1) from the total distributed earnings. Statetaxforms The result is the amount the beneficiary must include in income. Statetaxforms Report it on Form 1040 or Form 1040NR, line 21. Statetaxforms Example 1. Statetaxforms In 2007, Sara Clarke's parents opened a savings account for her with a QTP maintained by their state government. Statetaxforms Over the years they contributed $18,000 to the account. Statetaxforms The total balance in the account was $27,000 on the date the distribution was made. Statetaxforms In the summer of 2013, Sara enrolled in college and had $8,300 of qualified education expenses for the rest of the year. Statetaxforms She paid her college expenses from the following sources. Statetaxforms   Gift from parents $1,600     Partial tuition scholarship (tax-free) 3,100     QTP distribution 5,300           Before Sara can determine the taxable part of her QTP distribution, she must reduce her total qualified education expenses by any tax-free educational assistance. Statetaxforms   Total qualified education expenses $8,300     Minus: Tax-free educational assistance −3,100     Equals: Adjusted qualified  education expenses (AQEE) $5,200   Since the remaining expenses ($5,200) are less than the QTP distribution, part of the earnings will be taxable. Statetaxforms Sara's Form 1099-Q shows that $950 of the QTP distribution is earnings. Statetaxforms Sara figures the taxable part of the distributed earnings as follows. Statetaxforms   1. Statetaxforms $950 (earnings) × $5,200 AQEE  $5,300 distribution           =$932 (tax-free earnings)     2. Statetaxforms $950 (earnings)−$932 (tax-free earnings)     =$18 (taxable earnings)  Sara must include $18 in income (Form 1040, line 21) as distributed QTP earnings not used for adjusted qualified education expenses. Statetaxforms Coordination With American Opportunity and Lifetime Learning Credits An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. Statetaxforms This means that after the beneficiary reduces qualified education expenses by tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit. Statetaxforms Example 2. Statetaxforms Assume the same facts as in Example 1 , except that Sara's parents claimed an American opportunity credit of $2,500 (based on $4,000 expenses). Statetaxforms   Total qualified education expenses $8,300     Minus: Tax-free educational assistance −3,100     Minus: Expenses taken into account  in figuring American opportunity credit −4,000     Equals: Adjusted qualified  education expenses (AQEE) $1,200           The taxable part of the distribution is figured as follows. Statetaxforms   1. Statetaxforms $950 (earnings) × $1,200 AQEE  $5,300 distribution           =$215 (tax-free earnings)     2. Statetaxforms $950 (earnings)−$215 (tax-free earnings)     =$735 (taxable earnings)       Sara must include $735 in income (Form 1040, line 21). Statetaxforms This represents distributed earnings not used for adjusted qualified education expenses. Statetaxforms Coordination With Coverdell ESA Distributions If a designated beneficiary receives distributions from both a QTP and a Coverdell ESA in the same year, and the total of these distributions is more than the beneficiary's adjusted qualified higher education expenses, the expenses must be allocated between the distributions. Statetaxforms For purposes of this allocation, disregard any qualified elementary and secondary education expenses. Statetaxforms Example 3. Statetaxforms Assume the same facts as in Example 2 , except that instead of receiving a $5,300 distribution from her QTP, Sara received $4,600 from that account and $700 from her Coverdell ESA. Statetaxforms In this case, Sara must allocate her $1,200 of adjusted qualified higher education expenses (AQHEE) between the two distributions. Statetaxforms   $1,200 AQHEE × $700 ESA distribution  $5,300 total distribution = $158 AQHEE (ESA)     $1,200 AQHEE × $4,600 QTP distribution  $5,300 total distribution = $1,042 AQHEE (QTP)   Sara then figures the taxable portion of her Coverdell ESA distribution based on qualified higher education expenses of $158, and the taxable portion of her QTP distribution based on the other $1,042. Statetaxforms Note. Statetaxforms If you are required to allocate your expenses between Coverdell ESA and QTP distributions, and you have adjusted qualified elementary and secondary education expenses, see the examples in chapter 7, Coverdell Education Savings Account under Coordination With Qualified Tuition Program (QTP) Distributions . Statetaxforms Coordination With Tuition and Fees Deduction. Statetaxforms   A tuition and fees deduction can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. Statetaxforms Losses on QTP Investments If you have a loss on your investment in a QTP account, you may be able to take the loss on your income tax return. Statetaxforms You can take the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Statetaxforms Your basis is the total amount of contributions to that QTP account. Statetaxforms You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. Statetaxforms If you have distributions from more than one QTP account during a year, you must combine the information (amount of distribution, basis, etc. Statetaxforms ) from all such accounts in order to determine your taxable earnings for the year. Statetaxforms By doing this, the loss from one QTP account reduces the distributed earnings (if any) from any other QTP accounts. Statetaxforms Example 1. Statetaxforms In 2013, Taylor received a final distribution of $1,000 from QTP #1. Statetaxforms His unrecovered basis in that account before the distribution was $3,000. Statetaxforms If Taylor itemizes his deductions, he can claim the $2,000 loss on Schedule A (Form 1040). Statetaxforms Example 2. Statetaxforms Assume the same facts as in Example 1 , except that Taylor also had a distribution of $9,000 from QTP #2, giving him total distributions for 2013 of $10,000. Statetaxforms His total basis in these distributions was $4,500 ($3,000 for QTP #1 and $1,500 for QTP #2). Statetaxforms Taylor's adjusted qualified education expenses for 2013 totaled $6,000. Statetaxforms In order to figure his taxable earnings, Taylor combines the two accounts and determines his taxable earnings as follows. Statetaxforms   1. Statetaxforms $10,000 (total distribution)−$4,500 (basis portion of distribution)     = $5,500 (earnings included in distribution)   2. Statetaxforms $5,500 (earnings) x $6,000 AQEE  $10,000 distribution           =$3,300 (tax-free earnings)     3. Statetaxforms $5,500 (earnings)−$3,300 (tax-free earnings)     =$2,200 (taxable earnings)                 Taylor must include $2,200 in income on Form 1040, line 21. Statetaxforms Because Taylor's accounts must be combined, he cannot deduct his $2,000 loss (QTP #1) on Schedule A (Form 1040). Statetaxforms Instead, the $2,000 loss reduces the total earnings that were distributed, thereby reducing his taxable earnings. Statetaxforms Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. Statetaxforms Exceptions. Statetaxforms   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. Statetaxforms Made because the designated beneficiary is disabled. Statetaxforms A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. Statetaxforms A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. Statetaxforms Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Statetaxforms Made on account of the attendance of the designated beneficiary at a U. Statetaxforms S. Statetaxforms military academy (such as the USNA at Annapolis). Statetaxforms This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. Statetaxforms S. Statetaxforms Code) attributable to such attendance. Statetaxforms Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier. Statetaxforms ) Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. Statetaxforms Figuring the additional tax. Statetaxforms    Use Part II of Form 5329, to figure any additional tax. Statetaxforms Report the amount on Form 1040, line 58, or Form 1040NR, line 56. Statetaxforms Rollovers and Other Transfers Assets can be rolled over or transferred from one QTP to another. Statetaxforms In addition, the designated beneficiary can be changed without transferring accounts. Statetaxforms Rollovers Any amount distributed from a QTP is not taxable if it is rolled over to another QTP for the benefit of the same beneficiary or for the benefit of a member of the beneficiary's family (including the beneficiary's spouse). Statetaxforms An amount is rolled over if it is paid to another QTP within 60 days after the date of the distribution. Statetaxforms Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. Statetaxforms These are not taxable distributions. Statetaxforms Members of the beneficiary's family. Statetaxforms   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. Statetaxforms Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. Statetaxforms Brother, sister, stepbrother, or stepsister. Statetaxforms Father or mother or ancestor of either. Statetaxforms Stepfather or stepmother. Statetaxforms Son or daughter of a brother or sister. Statetaxforms Brother or sister of father or mother. Statetaxforms Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Statetaxforms The spouse of any individual listed above. Statetaxforms First cousin. Statetaxforms Example. Statetaxforms When Aaron graduated from college last year he had $5,000 left in his QTP. Statetaxforms He wanted to give this money to his younger brother, who was in junior high school. Statetaxforms In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his brother's QTP within 60 days of the distribution. Statetaxforms If the rollover is to another QTP for the same beneficiary, only one rollover is allowed within 12 months of a previous transfer to any QTP for that designated beneficiary. Statetaxforms Changing the Designated Beneficiary There are no income tax consequences if the designated beneficiary of an account is changed to a member of the beneficiary's family. Statetaxforms See Members of the beneficiary's family , earlier. Statetaxforms Example. Statetaxforms Assume the same situation as in the last example. Statetaxforms Instead of closing his QTP and paying the distribution into his brother's QTP, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his brother. 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