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Tax Return Military

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Tax Return Military

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

Here you'll find items of current interest — new programs, recent guidance or timely reminders.


Fuel Tax Credit Extensions: Frequently Asked Questions

These Q&As tell taxpayers how to claim the credits for qualifying sales or uses during 2012. It also describes changes to the cellulosic biofuel credit for 2013.


Legislation

In the past few years, there have been several laws passed that have tax implications. For more information, visit our pages on:


For Same-Sex Couples and Certain Domestic Partners

The following questions and answers provide information to individuals of the same sex who are lawfully married (same-sex spouses). 

Additional information may be found in: 

The following questions and answers provide information to individuals of the same sex and opposite sex who are in registered domestic partnerships, civil unions, or other similar formal relationships that are not marriages under state law. These individuals are not considered as married or spouses for federal tax purposes.

Additional information on these issues may be found in Notice 2013-61, Revenue Ruling 2013-17 and news release IR-2013-72, Treasury and IRS Announce That All Legal Same-Sex Marriages Will Be Recognized For Federal Tax Purposes; Ruling Provides Certainty, Benefits and Protections Under Federal Tax Law for Same-Sex Married Couples. 


Tax Return Preparer Requirements

The IRS has undertaken several initiatives to reach tax return preparers with education and enforcement. All paid preparers must register with the IRS and obtain a Preparer Tax Identification Number (PTIN). Find out more.


Consumer Alerts

‪Please note that the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

  • ‪If you get an unsolicited email that appears to be from the IRS, please report it by sending it to phishing@irs.gov. ‪
  • If you find a suspicious website that claims to be the IRS, please send the site’s URL by email to phishing@irs.gov, using the subject line: suspicious website.

For more information on phishing scams, please see Suspicious e-Mails and Identity Theft.

March 2014
New Email Phishing Scam

The IRS has been alerted to a new email phishing scam. The emails appear to be from the IRS Taxpayer Advocate Service and include a bogus case number and the following message:

“Your reported 2013 income is flagged for review due to a document processing error. Your case has been forwarded to the Taxpayer Advocate Service for resolution assistance. To avoid delays processing your 2013 filing contact the Taxpayer Advocate Service for resolution assistance.”

The recipient is directed to click on links that supposedly provide information about the "advocate" assigned to their case or that let them "review reported income."  The links lead to web pages that solicit personal information.

Taxpayers who get these messages should not respond to the email or click on the links. Instead, they should forward the scam emails to the IRS at phishing@irs.gov. For more information, visit the IRS's Report Phishing web page.

The Taxpayer Advocate Service is a legitimate IRS organization that helps taxpayers resolve federal tax issues that have not been resolved through the normal IRS channels. The IRS, including TAS, does not initiate contact with taxpayers by email, texting or any social media.

November 2013
Typhoon Haiyan Relief Scams

Possible scams are taking place in the wake of Typhoon Haiyan. On Nov. 8, 2013, Typhoon Haiyan — known as Yolanda in the Philippines — made landfall in the central Philippines, bringing strong winds and heavy rains that have resulted in flooding, landslides, and widespread damage.

Following major disasters, it is common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Such fraudulent schemes may involve contact by telephone, social media, email or in-person solicitations.

October 2013
Telephone Scam Now Making the Rounds

The IRS warns consumers about a sophisticated phone scam targeting taxpayers, including recent immigrants, throughout the country. Victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license. Characteristics of this scam include:

  • Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security Number.
  • Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.
  • After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

If you know you owe taxes or you think you might owe taxes, call the IRS at 1-800-829-1040. If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), call and report the incident to the Treasury Inspector General for Tax Administration at 1-800-366-4484. 

October 2012
Don't Fall for Phony IRS Websites

The IRS warns consumers about a new tax scam that uses a website that mimics the IRS e-Services online registration page.

‪The actual IRS e-Services page offers web-based products for tax preparers, not the general public. The phony web page looks almost identical to the real one.

The IRS gets many reports of fake websites like this. Criminals use these sites to lure people into providing personal and financial information that may be used to steal the victim’s money or identity. Typically, identity thieves empty the victim’s financial accounts, run up charges on the victim’s existing credit cards or apply for new loans, credit cards, services or benefits in the victim’s name.

‪The address of the official IRS website is www.irs.gov. Don’t be misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov.

The IRS website has information that can help you protect yourself from tax scams of all kinds. Search the site using the term: phishing.


Interim Changes to the ITIN Application Process

Effective June 22, 2012, the IRS has made interim changes that affect the Individual Taxpayer Identification Number (ITIN) application process. Some of the information below, including the documentation requirements for individuals seeking an ITIN, has been superseded by these changes. Taxpayers and their representatives should review these changes, which are further explained in these Frequently Asked Questions, before requesting an ITIN.

On Oct. 2, 2012, the IRS implemented clarifying changes to its temporary procedures for issuing ITINs for noncitizens with tax Extensions and many foreign students.

Beginning Jan. 1, 2013, the IRS implemented improvements to the Individual Taxpayer Identification Number (ITIN) application process. These changes were developed based on an extensive review and feedback from a variety of stakeholders. The updated ITIN procedures build on changes announced last summer and fall to better protect the integrity of the ITIN application process and strengthen the refund process. Read about the new program changes and check out the latest frequently asked questions for more information.


Help for Victims of Ponzi Investment Schemes

If you've been the victim of a Ponzi scheme, find out more about how it affects your tax situation. We also have some new Q&As about distributions received from a trustee/receiver.


Principal Reduction Alternative Under the Home Affordable Modification Program

Find the answers to your tax questions on the Principal Reduction Alternative under the Home Affordable Modification Program (HAMP), which was established by the Departments of the Treasury and Housing and Urban Development to help distressed homeowners lower their monthly mortgage payments. The Principal Reduction Alternative does not apply to loans that are owned or guaranteed by Fannie Mae or Freddie Mac.


Tax Scams

Don't fall victim to tax scams. Remember — if it sounds too good to be true, it probably is. If you know of a tax fraud, you can report it to the IRS by sending completed Form 3949-A, Information Referral, to Internal Revenue Service, Fresno, CA 93888. Download the form or call 1-800-829-3676 to order by mail.

For recent scams, see:

  • IR-2014-16, IRS Releases the “Dirty Dozen” Tax Scams for 2014; Identity Theft, Phone Scams Lead List
  • IR-2013-33, IRS Releases the Dirty Dozen Tax Scams for 2013
  • IR-2012-23, IRS Releases the Dirty Dozen Tax Scams for 2012
  • IR-2011-73, IRS Urges Taxpayers to Avoid Becoming Victims of Tax Scam
  • IR-2011-39, Don’t Fall Prey to the 2011 Dirty Dozen Tax Scams

Education is the best way to avoid the pitfalls of these “too good to be true” tax scams. For additional information, see:


Phishing Scams

The IRS does not send taxpayers unsolicited emails about their tax accounts, tax situations or personal tax issues. If you receive such an email, most likely it's a scam.

IRS impersonation schemes flourish during filing season. These schemes may take place via phone, fax, Internet sites, social networking sites and particularly email. 

Many impersonations are identity theft scams that try to trick victims into revealing personal and financial information that can be used to access their financial accounts. Some email scams contain attachments or links that, when clicked, download malicious code (virus) that infects your computer or direct you to a bogus form or site posing as a genuine IRS form or web site. 

Some impersonations may be commercial Internet sites that consumers unknowingly visit, thinking they're accessing the genuine IRS website, www.IRS.gov. However, such sites have no connection to the IRS.

For more information on scams and what to do if you're subject to one, see: 


Tax Avoidance Transactions

Read up on the IRS's campaign against abusive tax avoidance transactions. Taxpayers with unreported income relating to offshore transactions who wish to voluntarily disclose the information to the IRS can find information on the process.


Why Pay Taxes? The Truth about Frivolous Tax Arguments

The Truth About Frivolous Tax Arguments (PDF 405K) addresses some of the more common false "legal" arguments made by individuals and groups who oppose compliance with the federal tax laws. These arguments are grouped under six general categories, with variations within each category. Each contention is briefly explained, followed by a discussion of the legal authority that rejects the contention. The second section deals with frivolous arguments encountered in collection due process cases. The final section illustrates penalties imposed on those pursuing frivolous cases.

 

Page Last Reviewed or Updated: 28-Mar-2014

The Tax Return Military

Tax return military 18. Tax return military   Alimony Table of Contents IntroductionSpouse or former spouse. Tax return military Divorce or separation instrument. Tax return military Useful Items - You may want to see: General RulesMortgage payments. Tax return military Taxes and insurance. Tax return military Other payments to a third party. Tax return military Instruments Executed After 1984Payments to a third party. Tax return military Exception. Tax return military Substitute payments. Tax return military Specifically designated as child support. Tax return military Contingency relating to your child. Tax return military Clearly associated with a contingency. Tax return military 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. Tax return military It covers the following topics. Tax return military What payments are alimony. Tax return military What payments are not alimony, such as child support. Tax return military How to deduct alimony you paid. Tax return military How to report alimony you received as income. Tax return military Whether you must recapture the tax benefits of alimony. Tax return military Recapture means adding back in your income all or part of a deduction you took in a prior year. Tax return military Alimony is a payment to or for a spouse or former spouse under a divorce or separation instrument. Tax return military It does not include voluntary payments that are not made under a divorce or separation instrument. Tax return military Alimony is deductible by the payer and must be included in the spouse's or former spouse's income. Tax return military 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. Tax return military To be alimony, a payment must meet certain requirements. Tax return military Different requirements generally apply to payments under instruments executed after 1984 and to payments under instruments executed before 1985. Tax return military This chapter discusses the rules for payments under instruments executed after 1984. Tax return military If you need the rules for payments under pre-1985 instruments, get and keep a copy of the 2004 version of Publication 504. Tax return military That was the last year the information on pre-1985 instruments was included in Publication 504. Tax return military Use Table 18-1 in this chapter as a guide to determine whether certain payments are considered alimony. Tax return military Definitions. Tax return military   The following definitions apply throughout this chapter. Tax return military Spouse or former spouse. Tax return military   Unless otherwise stated, the term “spouse” includes former spouse. Tax return military Divorce or separation instrument. Tax return military   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. Tax return military 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). Tax return military 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. Tax return military Payments not alimony. Tax return military   Not all payments under a divorce or separation instrument are alimony. Tax return military 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. Tax return military Payments to a third party. Tax return military   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. Tax return military These include payments for your spouse's medical expenses, housing costs (rent, utilities, etc. Tax return military ), taxes, tuition, etc. Tax return military The payments are treated as received by your spouse and then paid to the third party. Tax return military Life insurance premiums. Tax return military   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. Tax return military Payments for jointly-owned home. Tax return military   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. Tax return military Mortgage payments. Tax return military   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. Tax return military If you itemize deductions and the home is a qualified home, you can claim one-half of the interest in figuring your deductible interest. Tax return military Your spouse must report one-half of the payments as alimony received. Tax return military 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. Tax return military Taxes and insurance. Tax return military   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. Tax return military Your spouse must report one-half of these payments as alimony received. Tax return military If you and your spouse itemize deductions, you can each claim one-half of the real estate taxes and none of the home insurance. Tax return military    If your home is held as tenants by the entirety or joint tenants, none of your payments for taxes or insurance are alimony. Tax return military But if you itemize deductions, you can claim all of the real estate taxes and none of the home insurance. Tax return military Other payments to a third party. Tax return military   If you made other third-party payments, see Publication 504 to see whether any part of the payments qualifies as alimony. Tax return military Instruments Executed After 1984 The following rules for alimony apply to payments under divorce or separation instruments executed after 1984. Tax return military Exception for instruments executed before 1985. Tax return military   There are two situations where the rules for instruments executed after 1984 apply to instruments executed before 1985. Tax return military A divorce or separation instrument executed before 1985 and then modified after 1984 to specify that the after-1984 rules will apply. Tax return military 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. Tax return military   For the rules for alimony payments under pre-1985 instruments not meeting these exceptions, get the 2004 version of Publication 504 at www. Tax return military irs. Tax return military gov/pub504. Tax return military Example 1. Tax return military In November 1984, you and your former spouse executed a written separation agreement. Tax return military In February 1985, a decree of divorce was substituted for the written separation agreement. Tax return military The decree of divorce did not change the terms for the alimony you pay your former spouse. Tax return military The decree of divorce is treated as executed before 1985. Tax return military Alimony payments under this decree are not subject to the rules for payments under instruments executed after 1984. Tax return military Example 2. Tax return military Assume the same facts as in Example 1 except that the decree of divorce changed the amount of the alimony. Tax return military In this example, the decree of divorce is not treated as executed before 1985. Tax return military The alimony payments are subject to the rules for payments under instruments executed after 1984. Tax return military Alimony requirements. Tax return military   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. Tax return military The payment is in cash. Tax return military The instrument does not designate the payment as not alimony. Tax return military Spouses legally separated under a decree of divorce or separate maintenance are not members of the same household. Tax return military There is no liability to make any payment (in cash or property) after the death of the recipient spouse. Tax return military The payment is not treated as child support. Tax return military Each of these requirements is discussed below. Tax return military Cash payment requirement. Tax return military   Only cash payments, including checks and money orders, qualify as alimony. Tax return military The following do not qualify as alimony. Tax return military Transfers of services or property (including a debt instrument of a third party or an annuity contract). Tax return military Execution of a debt instrument by the payer. Tax return military The use of the payer's property. Tax return military Payments to a third party. Tax return military   Cash payments to a third party under the terms of your divorce or separation instrument can qualify as cash payments to your spouse. Tax return military See Payments to a third party under General Rules, earlier. Tax return military   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. Tax return military The payments are in lieu of payments of alimony directly to your spouse. Tax return military The written request states that both spouses intend the payments to be treated as alimony. Tax return military You receive the written request from your spouse before you file your return for the year you made the payments. Tax return military Payments designated as not alimony. Tax return military   You and your spouse can designate that otherwise qualifying payments are not alimony. Tax return military 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. Tax return military 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). Tax return military If you are subject to temporary support orders, the designation must be made in the original or a later temporary support order. Tax return military   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. Tax return military The copy must be attached each year the designation applies. Tax return military Spouses cannot be members of the same household. Tax return military    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. Tax return military A home you formerly shared is considered one household, even if you physically separate yourselves in the home. Tax return military   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. Tax return military Exception. Tax return military   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. Tax return military Table 18-1. Tax return military 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. Tax return military Payments are not required by a divorce or separation instrument. Tax return military Payer and recipient spouse do not file a joint return with each other. Tax return military Payer and recipient spouse file a joint return with each other. Tax return military Payment is in cash (including checks or money orders). Tax return military Payment is: Not in cash, A noncash property settlement, Spouse's part of community income, or To keep up the payer's property. Tax return military Payment is not designated in the instrument as not alimony. Tax return military Payment is designated in the instrument as not alimony. Tax return military Spouses legally separated under a decree of divorce or separate maintenance are not members of the same household. Tax return military Spouses legally separated under a decree of divorce or separate maintenance are members of the same household. Tax return military Payments are not required after death of the recipient spouse. Tax return military Payments are required after death of the recipient spouse. Tax return military Payment is not treated as child support. Tax return military Payment is treated as child support. Tax return military These payments are deductible by the payer and includible in income by the recipient. Tax return military These payments are neither deductible by the payer nor includible in income by the recipient. Tax return military Liability for payments after death of recipient spouse. Tax return military   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. Tax return military If all of the payments would continue, then none of the payments made before or after the death are alimony. Tax return military   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. Tax return military Example. Tax return military You must pay your former spouse $10,000 in cash each year for 10 years. Tax return military Your divorce decree states that the payments will end upon your former spouse's death. Tax return military You must also pay your former spouse or your former spouse's estate $20,000 in cash each year for 10 years. Tax return military The death of your spouse would not terminate these payments under state law. Tax return military The $10,000 annual payments may qualify as alimony. Tax return military The $20,000 annual payments that do not end upon your former spouse's death are not alimony. Tax return military Substitute payments. Tax return military   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. Tax return military 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. Tax return military Whether or not such payments will be treated as not alimony depends on all the facts and circumstances. Tax return military Example 1. Tax return military Under your divorce decree, you must pay your former spouse $30,000 annually. Tax return military The payments will stop at the end of 6 years or upon your former spouse's death, if earlier. Tax return military Your former spouse has custody of your minor children. Tax return military 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. Tax return military The trust income and corpus (principal) are to be used for your children's benefit. Tax return military 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. Tax return military Of each of the $30,000 annual payments, $10,000 is not alimony. Tax return military Example 2. Tax return military Under your divorce decree, you must pay your former spouse $30,000 annually. Tax return military The payments will stop at the end of 15 years or upon your former spouse's death, if earlier. Tax return military 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. Tax return military For example, if your spouse dies at the end of the tenth year, you must pay the estate $150,000 ($450,000 − $300,000). Tax return military 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. Tax return military None of the annual payments are alimony. Tax return military 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. Tax return military Child support. Tax return military   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. Tax return military The amount of child support may vary over time. Tax return military Child support payments are not deductible by the payer and are not taxable to the recipient. Tax return military Specifically designated as child support. Tax return military   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. Tax return military A payment may be treated as specifically designated as child support even if other separate payments are specifically designated as child support. Tax return military Contingency relating to your child. Tax return military   A contingency relates to your child if it depends on any event relating to that child. Tax return military It does not matter whether the event is certain or likely to occur. Tax return military 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. Tax return military Clearly associated with a contingency. Tax return military   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. Tax return military 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. Tax return military 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. Tax return military This certain age must be the same for each child, but need not be a whole number of years. Tax return military In all other situations, reductions in payments are not treated as clearly associated with the happening of a contingency relating to your child. Tax return military   Either you or the IRS can overcome the presumption in the two situations above. Tax return military 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. Tax return military 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. Tax return military How To Deduct Alimony Paid You can deduct alimony you paid, whether or not you itemize deductions on your return. Tax return military You must file Form 1040. Tax return military You cannot use Form 1040A or Form 1040EZ. Tax return military Enter the amount of alimony you paid on Form 1040, line 31a. Tax return military In the space provided on line 31b, enter your spouse's social security number (SSN) or individual taxpayer identification number (ITIN). Tax return military If you paid alimony to more than one person, enter the SSN or ITIN of one of the recipients. Tax return military Show the SSN or ITIN and amount paid to each other recipient on an attached statement. Tax return military Enter your total payments on line 31a. Tax return military You must provide your spouse's SSN or ITIN. Tax return military If you do not, you may have to pay a $50 penalty and your deduction may be disallowed. Tax return military For more information on SSNs and ITINs, see Social Security Number (SSN) in chapter 1. Tax return military How To Report Alimony Received Report alimony you received as income on Form 1040, line 11. Tax return military You cannot use Form 1040A or Form 1040EZ. Tax return military You must give the person who paid the alimony your SSN or ITIN. Tax return military If you do not, you may have to pay a $50 penalty. Tax return military Recapture Rule If your alimony payments decrease or end during the first 3 calendar years, you may be subject to the recapture rule. Tax return military 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. Tax return military Your spouse can deduct in the third year part of the alimony payments he or she previously included in income. Tax return military 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. Tax return military Do not include any time in which payments were being made under temporary support orders. Tax return military The second and third years are the next 2 calendar years, whether or not payments are made during those years. Tax return military 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. Tax return military When to apply the recapture rule. Tax return military   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. Tax return military   When you figure a decrease in alimony, do not include the following amounts. Tax return military Payments made under a temporary support order. Tax return military 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. Tax return military 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. Tax return military Figuring the recapture. Tax return military   You can use Worksheet 1 in Publication 504 to figure recaptured alimony. Tax return military Including the recapture in income. Tax return military   If you must include a recapture amount in income, show it on Form 1040, line 11 (“Alimony received”). Tax return military Cross out “received” and enter “recapture. Tax return military ” On the dotted line next to the amount, enter your spouse's last name and SSN or ITIN. Tax return military Deducting the recapture. Tax return military   If you can deduct a recapture amount, show it on Form 1040, line 31a (“Alimony paid”). Tax return military Cross out “paid” and enter “recapture. Tax return military ” In the space provided, enter your spouse's SSN or ITIN. Tax return military Prev  Up  Next   Home   More Online Publications