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1040ez gov 7. 1040ez gov   Coverdell Education Savings Account (ESA) Table of Contents Introduction What Is a Coverdell ESAQualified Education Expenses ContributionsContribution Limits Additional Tax on Excess Contributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Transfer Because of Divorce DistributionsTax-Free Distributions Taxable Distributions When Assets Must Be Distributed Introduction If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. 1040ez gov For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. 1040ez gov There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. 1040ez gov However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. 1040ez gov See Contributions , later. 1040ez gov This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. 1040ez gov What is the tax benefit of the Coverdell ESA. 1040ez gov   Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. 1040ez gov   If, for a year, distributions from an account are not more than a designated beneficiary's qualified education expenses at an eligible educational institution, the beneficiary will not owe tax on the distributions. 1040ez gov See Tax-Free Distributions , later. 1040ez gov    Table 7-1 summarizes the main features of the Coverdell ESA. 1040ez gov Table 7-1. 1040ez gov Coverdell ESA at a Glance Do not rely on this table alone. 1040ez gov It provides only general highlights. 1040ez gov See the text for definitions of terms in bold type and for more complete explanations. 1040ez gov Question Answer What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary. 1040ez gov Where can it be established? It can be opened in the United States at any bank or other IRS-approved entity that offers Coverdell ESAs. 1040ez gov Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary. 1040ez gov Who can contribute to a Coverdell ESA? Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return). 1040ez gov Are distributions tax free? Yes, if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year. 1040ez gov What Is a Coverdell ESA A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the Designated beneficiary (defined later) of the account. 1040ez gov When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary. 1040ez gov To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. 1040ez gov The document creating and governing the account must be in writing and must satisfy the following requirements. 1040ez gov The trustee or custodian must be a bank or an entity approved by the IRS. 1040ez gov The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions. 1040ez gov The contribution is in cash. 1040ez gov The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. 1040ez gov The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000. 1040ez gov Money in the account cannot be invested in life insurance contracts. 1040ez gov Money in the account cannot be combined with other property except in a common trust fund or common investment fund. 1040ez gov The balance in the account generally must be distributed within 30 days after the earlier of the following events. 1040ez gov The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. 1040ez gov The beneficiary's death. 1040ez gov Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. 1040ez gov For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. 1040ez gov Designated beneficiary. 1040ez gov   This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account. 1040ez gov Contributions to a qualified tuition program (QTP). 1040ez gov   A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. 1040ez gov In the case of a change in beneficiary, this is a qualified expense only if the new beneficiary is a family member of that designated beneficiary. 1040ez gov See chapter 8, Qualified Tuition Program . 1040ez gov Eligible Educational Institution For purposes of Coverdell ESAs, an eligible educational institution can be either an eligible postsecondary school or an eligible elementary or secondary school. 1040ez gov Eligible postsecondary school. 1040ez gov   This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. 1040ez gov S. 1040ez gov Department of Education. 1040ez gov It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. 1040ez gov The educational institution should be able to tell you if it is an eligible educational institution. 1040ez gov   Certain educational institutions located outside the United States also participate in the U. 1040ez gov S. 1040ez gov Department of Education's Federal Student Aid (FSA) programs. 1040ez gov Eligible elementary or secondary school. 1040ez gov   This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. 1040ez gov Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. 1040ez gov As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time. 1040ez gov The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. 1040ez gov Tuition and fees. 1040ez gov Books, supplies, and equipment. 1040ez gov Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school. 1040ez gov Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). 1040ez gov The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. 1040ez gov The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. 1040ez gov The actual amount charged if the student is residing in housing owned or operated by the school. 1040ez gov Half-time student. 1040ez gov   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. 1040ez gov Qualified Elementary and Secondary Education Expenses These are expenses related to enrollment or attendance at an eligible elementary or secondary school. 1040ez gov As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. 1040ez gov There are special rules for computer-related expenses. 1040ez gov The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. 1040ez gov Tuition and fees. 1040ez gov Books, supplies, and equipment. 1040ez gov Academic tutoring. 1040ez gov Special needs services for a special needs beneficiary. 1040ez gov The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school. 1040ez gov Room and board. 1040ez gov Uniforms. 1040ez gov Transportation. 1040ez gov Supplementary items and services (including extended day programs). 1040ez gov The purchase of computer technology, equipment, or Internet access and related services is a qualified elementary and secondary education expense if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in elementary or secondary school. 1040ez gov (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. 1040ez gov ) Contributions Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI (defined later under Contribution Limits ) for the year is less than $110,000. 1040ez gov For individuals filing joint returns, that amount is $220,000. 1040ez gov Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. 1040ez gov There is no requirement that an organization's income be below a certain level. 1040ez gov Contributions must meet all of the following requirements. 1040ez gov They must be in cash. 1040ez gov They cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. 1040ez gov They must be made by the due date of the contributor's tax return (not including extensions). 1040ez gov Contributions can be made to one or several Coverdell ESAs for the same designated beneficiary provided that the total contributions are not more than the contribution limits (defined later) for a year. 1040ez gov Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary. 1040ez gov Table 7-2 summarizes many of the features of contributing to a Coverdell ESA. 1040ez gov When contributions considered made. 1040ez gov   Contributions made to a Coverdell ESA for the preceding tax year are considered to have been made on the last day of the preceding year. 1040ez gov They must be made by the due date (not including extensions) for filing your return for the preceding year. 1040ez gov   For example, if you make a contribution to a Coverdell ESA in February 2014, and you designate it as a contribution for 2013, you are considered to have made that contribution on December 31, 2013. 1040ez gov Contribution Limits There are two yearly limits: One on the total amount that can be contributed for each designated beneficiary in any year, and One on the amount that any individual can contribute for any one designated beneficiary for a year. 1040ez gov Limit for each designated beneficiary. 1040ez gov   For 2013, the total of all contributions to all Coverdell ESAs set up for the benefit of any one designated beneficiary cannot be more than $2,000. 1040ez gov This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. 1040ez gov Rollovers are discussed under Rollovers and Other Transfers , later. 1040ez gov Example. 1040ez gov When Maria Luna was born in 2012, three separate Coverdell ESAs were set up for her, one by her parents, one by her grandfather, and one by her aunt. 1040ez gov In 2013, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. 1040ez gov For example, if her grandfather contributed $2,000 to one of her Coverdell ESAs, no one else could contribute to any of her three accounts. 1040ez gov Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. 1040ez gov These contributions could be put into any of Maria's Coverdell ESA accounts. 1040ez gov Limit for each contributor. 1040ez gov   Generally, you can contribute up to $2,000 for each designated beneficiary for 2013. 1040ez gov This is the most you can contribute for the benefit of any one beneficiary for the year, regardless of the number of Coverdell ESAs set up for the beneficiary. 1040ez gov Example. 1040ez gov The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. 1040ez gov If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2013, he could also contribute $2,000 to Edgar's Coverdell ESA. 1040ez gov Reduced limit. 1040ez gov   Your contribution limit may be reduced. 1040ez gov If your MAGI (defined on this page) is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced (see Figuring the limit , later). 1040ez gov If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you cannot contribute to anyone's Coverdell ESA. 1040ez gov Table 7-2. 1040ez gov Coverdell ESA Contributions at a Glance Do not rely on this table alone. 1040ez gov It provides only general highlights. 1040ez gov See the text for more complete explanations. 1040ez gov Question Answer Are contributions deductible? No. 1040ez gov What is the annual contribution limit per designated beneficiary? $2,000 for each designated beneficiary. 1040ez gov What if more than one Coverdell ESA has been opened for the same designated beneficiary? The annual contribution limit is $2,000 for each beneficiary, no matter how many Coverdell ESAs are set up for that beneficiary. 1040ez gov What if more than one individual makes contributions for the same designated beneficiary? The annual contribution limit is $2,000 per beneficiary, no matter how many individuals contribute. 1040ez gov Can contributions other than cash be made to a Coverdell ESA? No. 1040ez gov When must contributions stop? No contributions can be made to a beneficiary's Coverdell ESA after he or she reaches age 18, unless the beneficiary is a special needs beneficiary. 1040ez gov Modified adjusted gross income (MAGI). 1040ez gov   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. 1040ez gov MAGI when using Form 1040A. 1040ez gov   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. 1040ez gov MAGI when using Form 1040. 1040ez gov   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. 1040ez gov MAGI when using Form 1040NR. 1040ez gov   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form. 1040ez gov MAGI when using Form 1040NR-EZ. 1040ez gov   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form. 1040ez gov   If you have any of these adjustments, you can use Worksheet 7-1. 1040ez gov MAGI for a Coverdell ESA , later, to figure your MAGI for Form 1040. 1040ez gov Worksheet 7-1. 1040ez gov MAGI for a Coverdell ESA 1. 1040ez gov Enter your adjusted gross income  (Form 1040, line 38)   1. 1040ez gov   2. 1040ez gov Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. 1040ez gov       3. 1040ez gov Enter your foreign housing deduction (Form 2555, line 50)   3. 1040ez gov         4. 1040ez gov Enter the amount of income from Puerto Rico you are excluding   4. 1040ez gov       5. 1040ez gov Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. 1040ez gov       6. 1040ez gov Add lines 2, 3, 4, and 5   6. 1040ez gov   7. 1040ez gov Add lines 1 and 6. 1040ez gov This is your  modified adjusted gross income   7. 1040ez gov   Figuring the limit. 1040ez gov    To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. 1040ez gov The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). 1040ez gov The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). 1040ez gov Subtract the result from $2,000. 1040ez gov This is the amount you can contribute for each beneficiary. 1040ez gov You can use Worksheet 7-2. 1040ez gov Coverdell ESA Contribution Limit to figure the limit on contributions. 1040ez gov    Worksheet 7-2. 1040ez gov Coverdell ESA Contribution Limit 1. 1040ez gov Maximum contribution   1. 1040ez gov $2,000 2. 1040ez gov Enter your modified adjusted gross income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. 1040ez gov   3. 1040ez gov Enter $190,000 if married filing jointly; $95,000 for all other filers   3. 1040ez gov   4. 1040ez gov Subtract line 3 from line 2. 1040ez gov If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. 1040ez gov   5. 1040ez gov Enter $30,000 if married filing jointly; $15,000 for all other filers   5. 1040ez gov     Note. 1040ez gov If the amount on line 4 is greater than or equal to the amount on line 5, stop here. 1040ez gov You are not allowed to contribute to a Coverdell ESA for 2013. 1040ez gov       6. 1040ez gov Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. 1040ez gov . 1040ez gov 7. 1040ez gov Multiply line 1 by line 6   7. 1040ez gov   8. 1040ez gov Subtract line 7 from line 1   8. 1040ez gov   Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. 1040ez gov Example. 1040ez gov Paul, who is single, had a MAGI of $96,500 for 2013. 1040ez gov Paul can contribute up to $1,800 in 2013 for each beneficiary, as shown in the illustrated Worksheet 7-2, Coverdell ESA Contribution Limit–Illustrated. 1040ez gov Worksheet 7-2. 1040ez gov Coverdell ESA Contribution Limit—Illustrated 1. 1040ez gov Maximum contribution   1. 1040ez gov $2,000 2. 1040ez gov Enter your modified adjusted gross  income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. 1040ez gov 96,500 3. 1040ez gov Enter $190,000 if married filing jointly; $95,000 for all other filers   3. 1040ez gov 95,000 4. 1040ez gov Subtract line 3 from line 2. 1040ez gov If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. 1040ez gov 1,500 5. 1040ez gov Enter $30,000 if married filing jointly; $15,000 for all other filers   5. 1040ez gov 15,000   Note. 1040ez gov If the amount on line 4 is greater than or equal to the amount on line 5,  stop here. 1040ez gov You are not allowed to  contribute to a Coverdell ESA for 2013. 1040ez gov       6. 1040ez gov Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. 1040ez gov . 1040ez gov 100 7. 1040ez gov Multiply line 1 by line 6   7. 1040ez gov 200 8. 1040ez gov Subtract line 7 from line 1   8. 1040ez gov 1,800 Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. 1040ez gov Additional Tax on Excess Contributions The beneficiary must pay a 6% excise tax each year on excess contributions that are in a Coverdell ESA at the end of the year. 1040ez gov Excess contributions are the total of the following two amounts. 1040ez gov Contributions to any designated beneficiary's Coverdell ESA for the year that are more than $2,000 (or, if less, the total of each contributor's limit for the year, as discussed earlier). 1040ez gov Excess contributions for the preceding year, reduced by the total of the following two amounts: Distributions (other than those rolled over as discussed later) during the year, and The contribution limit for the current year minus the amount contributed for the current year. 1040ez gov Exceptions. 1040ez gov   The excise tax does not apply if excess contributions made during 2013 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2014, for a calendar year taxpayer). 1040ez gov   However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. 1040ez gov You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. 1040ez gov Box 2 of that form will show the amount of earnings on your excess contributions. 1040ez gov Code “2” or “3” entered in the blank box below boxes 5 and 6 indicate the year in which the earnings are taxable. 1040ez gov See Instructions for Recipient on the back of copy B of your Form 1099-Q. 1040ez gov Enter the amount of earnings on line 21 of Form 1040 (or Form 1040NR) for the applicable tax year. 1040ez gov For more information, see Taxable Distributions , later. 1040ez gov   The excise tax does not apply to any rollover contribution. 1040ez gov Note. 1040ez gov Contributions made in one year for the preceding tax year are considered to have been made on the last day of the preceding year. 1040ez gov Example. 1040ez gov In 2012, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. 1040ez gov Because Greta did not withdraw the excess before June 1, 2013, she had to pay an additional tax of $18 (6% × $300) when she filed her 2012 tax return. 1040ez gov In 2013, excess contributions of $500 were made to Greta's account, however, she withdrew $250 from that account to use for qualified education expenses. 1040ez gov Using the steps shown earlier under Additional Tax on Excess Contributions , Greta figures the excess contribution in her account at the end of 2013 as follows. 1040ez gov (1)   $500 excess contributions made in 2013     + (2)   $300 excess contributions in ESA at end of 2012     − (2a)   $250 distribution during 2013         $550 excess at end of 2013   × 6%=$33           If Greta limits 2014 contributions to $1,450 ($2,000 maximum allowed − $550 excess contributions from 2013), she will not owe any additional tax in 2014 for excess contributions. 1040ez gov Figuring and reporting the additional tax. 1040ez gov   You figure this excise tax in Part V of Form 5329. 1040ez gov Report the additional tax on Form 1040, line 58 (or Form 1040NR, line 56). 1040ez gov Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary can be changed. 1040ez gov The beneficiary's interest can be transferred to a spouse or former spouse because of divorce. 1040ez gov Rollovers Any amount distributed from a Coverdell ESA is not taxable if it is rolled over to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary's family (including the beneficiary's spouse) who is under age 30. 1040ez gov This age limitation does not apply if the new beneficiary is a special needs beneficiary. 1040ez gov An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution. 1040ez gov Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. 1040ez gov These are not taxable distributions. 1040ez gov Members of the beneficiary's family. 1040ez gov   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. 1040ez gov Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. 1040ez gov Brother, sister, stepbrother, or stepsister. 1040ez gov Father or mother or ancestor of either. 1040ez gov Stepfather or stepmother. 1040ez gov Son or daughter of a brother or sister. 1040ez gov Brother or sister of father or mother. 1040ez gov Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. 1040ez gov The spouse of any individual listed above. 1040ez gov First cousin. 1040ez gov Example. 1040ez gov When Aaron graduated from college last year he had $5,000 left in his Coverdell ESA. 1040ez gov He wanted to give this money to his younger sister, who was still in high school. 1040ez gov In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his sister's Coverdell ESA within 60 days of the distribution. 1040ez gov Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or distribution. 1040ez gov This rule does not apply to the rollover of a military death gratuity or payment from Servicemembers' Group Life Insurance (SGLI). 1040ez gov Military death gratuity. 1040ez gov   If you received a military death gratuity or a payment from Servicemembers' Group Life Insurance (SGLI), you may roll over all or part of the amount received to one or more Coverdell ESAs for the benefit of members of the beneficiary's family (see Members of the beneficiary's family , earlier). 1040ez gov Such payments are made to an eligible survivor upon the death of a member of the armed forces. 1040ez gov The contribution to a Coverdell ESA from survivor benefits received cannot be made later than 1 year after the date on which you receive the gratuity or SGLI payment. 1040ez gov   This rollover contribution is not subject to (but is in addition to) the contribution limits discussed earlier under Contribution Limits . 1040ez gov The amount you roll over cannot exceed the total survivor benefits you received, reduced by contributions from these benefits to a Roth IRA or other Coverdell ESAs. 1040ez gov   The amount contributed from the survivor benefits is treated as part of your basis (cost) in the Coverdell ESA, and will not be taxed when distributed. 1040ez gov See Distributions , later. 1040ez gov The limit of one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment. 1040ez gov Changing the Designated Beneficiary The designated beneficiary can be changed. 1040ez gov See Members of the beneficiary's family , earlier. 1040ez gov There are no tax consequences if, at the time of the change, the new beneficiary is under age 30 or is a special needs beneficiary. 1040ez gov Example. 1040ez gov Assume the same situation for Aaron as in the last example (see Rollovers , earlier). 1040ez gov Instead of closing his Coverdell ESA and paying the distribution into his sister's Coverdell ESA, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his sister. 1040ez gov Transfer Because of Divorce If a spouse or former spouse receives a Coverdell ESA under a divorce or separation instrument, it is not a taxable transfer. 1040ez gov After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own. 1040ez gov Example. 1040ez gov In their divorce settlement, Peg received her ex-husband's Coverdell ESA. 1040ez gov In this process, the account was transferred into her name. 1040ez gov Peg now treats the funds in this Coverdell ESA as if she were the original owner. 1040ez gov Distributions The designated beneficiary of a Coverdell ESA can take a distribution at any time. 1040ez gov Whether the distributions are tax free depends, in part, on whether the distributions are equal to or less than the amount of Adjusted qualified education expenses (defined later) that the beneficiary has in the same tax year. 1040ez gov See Table 7-3, Coverdell ESA Distributions at a Glance, for highlights. 1040ez gov Table 7-3. 1040ez gov Coverdell ESA Distributions at a Glance Do not rely on this table alone. 1040ez gov It provides only general highlights. 1040ez gov See the text for definitions of terms in bold type and for more complete explanations. 1040ez gov Question Answer Is a distribution from a Coverdell ESA to pay for a designated beneficiary's qualified education expenses tax free? Generally, yes, to the extent the amount of the distribution is not more than the designated beneficiary's adjusted qualified education expenses. 1040ez gov After the designated beneficiary completes his or her education at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed? Yes. 1040ez gov Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. 1040ez gov Also, certain transfers to members of the beneficiary's family are permitted. 1040ez gov Does the designated beneficiary need to be enrolled for a minimum number of courses to take a tax-free distribution? No. 1040ez gov Adjusted qualified education expenses. 1040ez gov   To determine if total distributions for the year are more than the amount of qualified education expenses, reduce total qualified education expenses by any tax-free educational assistance. 1040ez gov Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. 1040ez gov The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses. 1040ez gov Tax-Free Distributions Generally, distributions are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year. 1040ez gov Do not report tax-free distributions (including qualifying rollovers) on your tax return. 1040ez gov Taxable Distributions A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the beneficiary's adjusted qualified education expenses for the year. 1040ez gov Excess distribution. 1040ez gov   This is the part of the total distribution that is more than the beneficiary's adjusted qualified education expenses for the year. 1040ez gov Earnings and basis. 1040ez gov   You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2013. 1040ez gov The amount of your gross distribution will be shown in box 1. 1040ez gov For 2013, instead of dividing the gross distribution between your earnings (box 2) and your basis (already-taxed amount) (box 3), the payer or trustee may report the fair market value (account balance) of the Coverdell ESA as of December 31, 2013. 1040ez gov This will be shown in the blank box below boxes 5 and 6. 1040ez gov   The amount contributed from survivor benefits (see Military death gratuity , earlier) is treated as part of your basis and will not be taxed when distributed. 1040ez gov Figuring the Taxable Portion of a Distribution The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. 1040ez gov Figure the taxable portion for 2013 as shown in the following steps. 1040ez gov Multiply the total amount distributed by a fraction. 1040ez gov The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the value (balance) of the account at the end of 2013 plus the amount distributed during 2013. 1040ez gov Subtract the amount figured in (1) from the total amount distributed during 2013. 1040ez gov The result is the amount of earnings included in the distribution(s). 1040ez gov Multiply the amount of earnings figured in (2) by a fraction. 1040ez gov The numerator is the adjusted qualified education expenses paid during 2013 and the denominator is the total amount distributed during 2013. 1040ez gov Subtract the amount figured in (3) from the amount figured in (2). 1040ez gov The result is the amount the beneficiary must include in income. 1040ez gov The taxable amount must be reported on Form 1040 or Form 1040NR, line 21. 1040ez gov Example. 1040ez gov You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2013. 1040ez gov There were no contributions in 2013. 1040ez gov This is your first distribution from the account, so your basis in the account on December 31, 2012, was $1,500. 1040ez gov The value (balance) of your account on December 31, 2013, was $950. 1040ez gov You had $700 of adjusted qualified education expenses (AQEE) for the year. 1040ez gov Using the steps in Figuring the Taxable Portion of a Distribution , earlier, figure the taxable portion of your distribution as follows. 1040ez gov   1. 1040ez gov $850 (distribution) × $1,500 basis + $0 contributions  $950 value + $850 distribution       =$708 (basis portion of distribution)     2. 1040ez gov $850 (distribution)−$708 (basis portion of distribution)     =$142 (earnings included in distribution)   3. 1040ez gov $142 (earnings) × $700 AQEE  $850 distribution           =$117 (tax-free earnings)     4. 1040ez gov $142 (earnings)−$117 (tax-free earnings)=$25 (taxable earnings)                 You must include $25 in income as distributed earnings not used for qualified education expenses. 1040ez gov Report this amount on Form 1040, line 21, listing the type and amount of income on the dotted line. 1040ez gov Worksheet 7-3, Coverdell ESA–Taxable Distributions and Basis , at the end of this chapter, can help you figure your adjusted qualified education expenses, how much of your distribution must be included in income, and the remaining basis in your Coverdell ESA(s). 1040ez gov Coordination With American Opportunity and Lifetime Learning Credits The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. 1040ez gov This means the beneficiary must reduce qualified higher education expenses by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit. 1040ez gov Example. 1040ez gov Derek Green had $5,800 of qualified higher education expenses for 2013, his first year in college. 1040ez gov He paid his college expenses from the following sources. 1040ez gov     Partial tuition scholarship (tax free) $1,500     Coverdell ESA distribution 1,000     Gift from parents 2,100     Earnings from part-time job 1,200           Of his $5,800 of qualified higher education expenses, $4,000 was tuition and related expenses that also qualified for an American opportunity credit. 1040ez gov Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. 1040ez gov Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses. 1040ez gov     Total qualified higher education expenses $5,800     Minus: Tax-free educational assistance −1,500     Minus: Expenses taken into account in  figuring American opportunity credit − 4,000     Equals: Adjusted qualified higher education  expenses (AQHEE) $ 300           Since the adjusted qualified higher education expenses ($300) are less than the Coverdell ESA distribution ($1,000), part of the distribution will be taxable. 1040ez gov The balance in Derek's account was $1,800 on December 31, 2013. 1040ez gov Prior to 2013, $2,100 had been contributed to this account. 1040ez gov Contributions for 2013 totaled $400. 1040ez gov Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below. 1040ez gov   1. 1040ez gov $1,000 (distribution) × $2,100 basis + $400 contributions  $1,800 value + $1,000 distribution           =$893 (basis portion of distribution)     2. 1040ez gov $1,000 (distribution)−$893 (basis portion of distribution)     = $107 (earnings included in distribution)   3. 1040ez gov $107 (earnings) × $300 AQHEE  $1,000 distribution       =$32 (tax-free earnings)     4. 1040ez gov $107 (earnings)−$32 (tax-free earnings)=$75 (taxable earnings)                 Derek must include $75 in income (Form 1040, line 21). 1040ez gov This is the amount of distributed earnings not used for adjusted qualified higher education expenses. 1040ez gov Coordination With Qualified Tuition Program (QTP) Distributions If a designated beneficiary receives distributions from both a Coverdell ESA and a QTP in the same year, and the total distribution is more than the beneficiary's adjusted qualified higher education expenses, those expenses must be allocated between the distribution from the Coverdell ESA and the distribution from the QTP before figuring how much of each distribution is taxable. 1040ez gov The following two examples illustrate possible allocations. 1040ez gov Example 1. 1040ez gov In 2013, Beatrice graduated from high school and began her first semester of college. 1040ez gov That year, she had $1,000 of qualified elementary and secondary education expenses (QESEE) for high school and $3,000 of qualified higher education expenses (QHEE) for college. 1040ez gov To pay these expenses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. 1040ez gov No one claimed Beatrice as a dependent, nor was she eligible for an education credit. 1040ez gov She did not receive any tax-free educational assistance in 2013. 1040ez gov Beatrice must allocate her total qualified education expenses between the two distributions. 1040ez gov Beatrice knows that tax-free treatment will be available if she applies her $800 Coverdell ESA distribution toward her $1,000 of qualified education expenses for high school. 1040ez gov The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free. 1040ez gov Next, Beatrice matches her $4,200 QTP distribution to her $3,000 of QHEE, and finds she has an excess QTP distribution of $1,200 ($4,200 QTP − $3,000 QHEE). 1040ez gov She cannot use the extra $200 of high school expenses (from (1) above) against the QTP distribution because those expenses do not qualify a QTP for tax-free treatment. 1040ez gov Finally, Beatrice figures the taxable and tax-free portions of her QTP distribution based on her $3,000 of QHEE. 1040ez gov (See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program for more information. 1040ez gov ) Example 2. 1040ez gov Assume the same facts as in Example 1 , except that Beatrice withdrew $1,800 from her Coverdell ESA and $3,200 from her QTP. 1040ez gov In this case, she allocates her qualified education expenses as follows. 1040ez gov Using the same reasoning as in Example 1, Beatrice matches $1,000 of her Coverdell ESA distribution to her $1,000 of QESEE—she has $800 of her distribution remaining. 1040ez gov Because higher education expenses can also qualify a Coverdell ESA distribution for tax-free treatment, Beatrice allocates her $3,000 of QHEE between the remaining $800 Coverdell ESA and the $3,200 QTP distributions ($4,000 total). 1040ez gov   $3,000 QHEE × $800 ESA distribution  $4,000 total distribution = $600 QHEE (ESA)     $3,000 QHEE × $3,200 QTP distribution  $4,000 total distribution = $2,400 QHEE (QTP)   Beatrice then figures the taxable part of her: Coverdell ESA distribution based on qualified education expenses of $1,600 ($1,000 QESEE + $600 QHEE). 1040ez gov See Figuring the Taxable Portion of a Distribution , earlier, in this chapter. 1040ez gov   QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program). 1040ez gov The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. 1040ez gov However, you do not have to allocate your expenses in the same way. 1040ez gov You can use any reasonable method. 1040ez gov Losses on Coverdell ESA Investments If you have a loss on your investment in a Coverdell ESA, you may be able to deduct the loss on your income tax return. 1040ez gov You can deduct the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. 1040ez gov Your basis is the total amount of contributions to that Coverdell ESA. 1040ez gov You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. 1040ez gov If you have distributions from more than one Coverdell ESA account during a year, you must combine the information (amount of distribution, basis, etc. 1040ez gov ) from all such accounts in order to determine your taxable earnings for the year. 1040ez gov By doing this, the loss from one ESA account reduces the distributed earnings (if any) from any other ESA account. 1040ez gov For examples of the calculation, see Losses on QTP Investments in chapter 8, Qualified Tuition Program. 1040ez gov Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. 1040ez gov Exceptions. 1040ez gov   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. 1040ez gov Made because the designated beneficiary is disabled. 1040ez gov A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. 1040ez gov A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. 1040ez gov Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. 1040ez gov Made on account of the attendance of the designated beneficiary at a U. 1040ez gov S. 1040ez gov military academy (such as the USMA at West Point). 1040ez gov This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. 1040ez gov S. 1040ez gov Code) attributable to such attendance. 1040ez gov Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier). 1040ez gov Made before June 1, 2014, of an excess 2013 contribution (and any earnings on it). 1040ez gov The distributed earnings must be included in gross income for the year in which the excess contribution was made. 1040ez gov Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. 1040ez gov Figuring the additional tax. 1040ez gov    Use Part II of Form 5329, to figure any additional tax. 1040ez gov Report the amount on Form 1040, line 58, or Form 1040NR, line 56. 1040ez gov When Assets Must Be Distributed Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs. 1040ez gov The designated beneficiary reaches age 30. 1040ez gov In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. 1040ez gov However, this rule does not apply if the beneficiary is a special needs beneficiary. 1040ez gov The designated beneficiary dies before reaching age 30. 1040ez gov In this case, the remaining assets must generally be distributed within 30 days after the date of death. 1040ez gov Exception for Transfer to Surviving Spouse or Family Member If a Coverdell ESA is transferred to a surviving spouse or other family member as the result of the death of the designated beneficiary, the Coverdell ESA retains its status. 1040ez gov (“Family member” was defined earlier under Rollovers . 1040ez gov ) This means the spouse or other family member can treat the Coverdell ESA as his or her own and does not need to withdraw the assets until he or she reaches age 30. 1040ez gov This age limitation does not apply if the new beneficiary is a special needs beneficiary. 1040ez gov There are no tax consequences as a result of the transfer. 1040ez gov How To Figure the Taxable Earnings When a total distribution is made because the designated beneficiary either reached age 30 or died, the earnings that accumulated tax free in the account must be included in taxable income. 1040ez gov You determine these earnings as shown in the following two steps. 1040ez gov Multiply the amount distributed by a fraction. 1040ez gov The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the balance in the account at the end of 2013 plus the amount distributed during 2013. 1040ez gov Subtract the amount figured in (1) from the total amount distributed during 2013. 1040ez gov The result is the amount of earnings included in the distribution. 1040ez gov For an example, see steps (1) and (2) of the Example under Figuring the Taxable Portion of a Distribution, earlier. 1040ez gov The beneficiary or other person receiving the distribution must report this amount on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line. 1040ez gov Worksheet 7-3 Instructions. 1040ez gov Coverdell ESA—Taxable Distributions and Basis Line G. 1040ez gov Enter the total distributions received from all Coverdell ESAs during 2013. 1040ez gov Do not include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). 1040ez gov Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year for which the contributions were made. 1040ez gov Line 2. 1040ez gov Your basis (amount already taxed) in this Coverdell ESA as of December 31, 2012, is the total of:   •All contributions to this Coverdell ESA before 2013 •Minus the tax-free portion of any distributions from this Coverdell ESA before 2013. 1040ez gov   If your last distribution from this Coverdell ESA was before 2013, you must start with the basis in your account as of the end of the last year in which you took a distribution. 1040ez gov For years before 2002, you can find that amount on the last line of the worksheet in the Instructions for Form 8606, Nondeductible IRAs, that you completed for that year. 1040ez gov For years after 2001, you can find that amount by using the ending basis from the worksheet in Publication 970 for that year. 1040ez gov You can determine your basis in this Coverdell ESA as of December 31, 2012, by adding to the basis as of the end of that year any contributions made to that account after the year of the distribution and before 2013. 1040ez gov Line 4. 1040ez gov Enter the total distributions received from this Coverdell ESA in 2013. 1040ez gov Do not include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). 1040ez gov   Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year of the contributions. 1040ez gov Line 7. 1040ez gov Enter the total value of this Coverdell ESA as of December 31, 2013, plus any outstanding rollovers contributed to the account after 2012, but before the end of the 60-day rollover period. 1040ez gov A statement should be sent to you by January 31, 2014, for this Coverdell ESA showing the value on December 31, 2013. 1040ez gov   A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. 1040ez gov An outstanding rollover is any amount withdrawn within 60 days before the end of 2013 (November 2 through December 31) that was rolled over after December 31, 2013, but within the 60-day rollover period. 1040ez gov Worksheet 7-3. 1040ez gov Coverdell ESA—Taxable Distributions and Basis How to complete this worksheet. 1040ez gov • • • Complete Part I, lines A through H, on only one worksheet. 1040ez gov  Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs. 1040ez gov  Complete Part III, the Summary (line 16), on only one worksheet. 1040ez gov Part I. 1040ez gov Qualified Education Expenses (Complete for total expenses)       A. 1040ez gov Enter your total qualified education expenses for 2013   A. 1040ez gov   B. 1040ez gov Enter those qualified education expenses paid for with tax-free educational assistance (for example, tax-free scholarships, veterans' educational benefits, Pell grants, employer-provided educational assistance)   B. 1040ez gov         C. 1040ez gov Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040). 1040ez gov Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040 or 1040NR)   C. 1040ez gov         D. 1040ez gov Enter those qualified higher education expenses on which  an American opportunity or lifetime learning credit was based   D. 1040ez gov         E. 1040ez gov Add lines B, C, and D   D. 1040ez gov   F. 1040ez gov Subtract line E from line A. 1040ez gov This is your adjusted qualified education expense for 2013   E. 1040ez gov   G. 1040ez gov Enter your total distributions from all Coverdell ESAs during 2013. 1040ez gov Do not include rollovers  or the return of excess contributions (see instructions)   F. 1040ez gov   H. 1040ez gov Divide line F by line G. 1040ez gov Enter the result as a decimal (rounded to at least 3 places). 1040ez gov If the  result is 1. 1040ez gov 000 or more, enter 1. 1040ez gov 000   G. 1040ez gov . 1040ez gov Part II. 1040ez gov Taxable Distributions and Basis (Complete separately for each account) 1. 1040ez gov Enter the amount contributed to this Coverdell ESA for 2013, including contributions made for 2013 from January 1, 2014, through April 15, 2014. 1040ez gov Do not include rollovers or the return of excess contributions   1. 1040ez gov   2. 1040ez gov Enter your basis in this Coverdell ESA as of December 31, 2012 (see instructions)   2. 1040ez gov   3. 1040ez gov Add lines 1 and 2   3. 1040ez gov   4. 1040ez gov Enter the total distributions from this Coverdell ESA during 2013. 1040ez gov Do not include rollovers  or the return of excess contributions (see instructions)   4. 1040ez gov   5. 1040ez gov Multiply line 4 by line H. 1040ez gov This is the amount of adjusted qualified  education expense attributable to this Coverdell ESA   5. 1040ez gov         6. 1040ez gov Subtract line 5 from line 4   6. 1040ez gov         7. 1040ez gov Enter the total value of this Coverdell ESA as of December 31, 2013,  plus any outstanding rollovers (see instructions)   7. 1040ez gov         8. 1040ez gov Add lines 4 and 7   8. 1040ez gov         9. 1040ez gov Divide line 3 by line 8. 1040ez gov Enter the result as a decimal (rounded to  at least 3 places). 1040ez gov If the result is 1. 1040ez gov 000 or more, enter 1. 1040ez gov 000   9. 1040ez gov . 1040ez gov       10. 1040ez gov Multiply line 4 by line 9. 1040ez gov This is the amount of basis allocated to your  distributions, and is tax free   10. 1040ez gov     Note. 1040ez gov If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15. 1040ez gov       11. 1040ez gov Subtract line 10 from line 4   11. 1040ez gov   12. 1040ez gov Divide line 5 by line 4. 1040ez gov Enter the result as a decimal (rounded to  at least 3 places). 1040ez gov If the result is 1. 1040ez gov 000 or more, enter 1. 1040ez gov 000   12. 1040ez gov . 1040ez gov       13. 1040ez gov Multiply line 11 by line 12. 1040ez gov This is the amount of qualified education  expenses allocated to your distributions, and is tax free   13. 1040ez gov   14. 1040ez gov Subtract line 13 from line 11. 1040ez gov This is the portion of the distributions from this  Coverdell ESA in 2013 that you must include in income   14. 1040ez gov   15. 1040ez gov Subtract line 10 from line 3. 1040ez gov This is your basis in this Coverdell ESA as of December 31, 2013   15. 1040ez gov   Part III. 1040ez gov Summary (Complete only once)       16. 1040ez gov Taxable amount. 1040ez gov Add together all amounts on line 14 for all your Coverdell ESAs. 1040ez gov Enter here  and include on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line   16. 1040ez gov   Prev  Up  Next   Home   More Online Publications
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Understanding your CP2006 Notice

 
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The 1040ez Gov

1040ez gov Publication 908 - Main Content Table of Contents Bankruptcy Code Tax Compliance RequirementsTax Returns Due for Periods Ending Before the Bankruptcy Filing in Chapter 13 Cases Tax Returns Due After the Bankruptcy Filing Individuals in Chapter 12 or 13 Individuals in Chapter 7 or 11Debtor's Election To End Tax Year – Form 1040 Taxes and the Bankruptcy Estate Bankruptcy Estate – Income, Deductions, and Credits Tax Reporting – Chapter 11 Cases Bankruptcy Estate Tax Return Filing Requirements and Payment of Tax Due Tax Return Example – Form 1041 Partnerships and CorporationsFiling Requirements Partnerships Corporations Receiverships Determination of TaxPrompt Determination Requests Court Jurisdiction Over Tax MattersBankruptcy Court Tax Court Federal Tax ClaimsUnsecured Tax Claims Discharge of Unpaid Tax Debt CancellationExclusions Reduction of Tax Attributes Partnerships Corporations Tax Attribute Reduction Example How To Get Tax HelpTaxpayer Advocacy Panel (TAP). 1040ez gov Low Income Taxpayer Clinics (LITCs). 1040ez gov Bankruptcy Code Tax Compliance Requirements Tax Returns Due for Periods Ending Before the Bankruptcy Filing in Chapter 13 Cases The Bankruptcy Code requires chapter 13 debtors to file all required tax returns for tax periods ending within 4 years of the debtor's bankruptcy filing. 1040ez gov All such federal tax returns must be filed with the IRS before the date first set for the first meeting of creditors. 1040ez gov The debtor may request the trustee to hold the meeting open for an additional 120 days to enable the debtor to file the returns (or until the day the returns are due under an automatic IRS extension, if later). 1040ez gov After notice and hearing, the bankruptcy court may extend the period for another 30 days. 1040ez gov Failure to timely file the returns can prevent confirmation of a chapter 13 plan and result in either dismissal of the chapter 13 case or conversion to a chapter 7 case. 1040ez gov Note. 1040ez gov Individual debtors should use their home address when filing Form 1040 with the IRS. 1040ez gov Returns should not be filed “in care of” the trustee's address. 1040ez gov Ordering tax transcripts and copies of returns. 1040ez gov   Trustees may require the debtor to submit copies or transcripts of the debtor's returns as proof of filing. 1040ez gov The debtor can request free transcripts of the debtor's income tax returns by filing Form 4506-T, Request for Transcript of Tax Return, with the IRS or by placing a request on the IRS's free Automated Delivery Service (ADS), available by calling 1-800-829-1040. 1040ez gov If requested through ADS, the transcript will be mailed to the debtor's most current address according to the IRS's records. 1040ez gov Transcripts requested using Form 4506-T may be mailed to any address, including to the attention of the trustee in the debtor's bankruptcy case. 1040ez gov Transcripts are normally mailed within 10 to 15 days of receipt of the request by the IRS. 1040ez gov A transcript contains most of the information on the debtor's filed return, but it is not a copy of the return. 1040ez gov To request a copy of the debtor's filed return, file Form 4506, Request for Copy of Tax Return. 1040ez gov It may take up to 60 days for the IRS to provide the copies after receipt of the debtor's request, and there is a fee of $57. 1040ez gov 00 per tax return for copies of the returns. 1040ez gov Tax Returns Due After the Bankruptcy Filing For debtors filing bankruptcy under all chapters (chapters 7, 11, 12, or 13), the Bankruptcy Code provides that if the debtor does not file a tax return that becomes due after the commencement of the bankruptcy case, or obtain an extension for filing the return before the due date, the taxing authority may request that the bankruptcy court either dismiss the case or convert the case to a case under another chapter of the Bankruptcy Code. 1040ez gov If the debtor does not file the required return or obtain an extension within 90 days after the request is made, the bankruptcy court must dismiss or convert the case. 1040ez gov Tax returns and payment of taxes in chapter 11 cases. 1040ez gov   The Bankruptcy Code provides that a chapter 11 debtor's failure to timely file tax returns and pay taxes owed after the date of the “order for relief” (the bankruptcy petition date in voluntary cases) is cause for dismissal of the chapter 11 case, conversion to a chapter 7 case, or appointment of a chapter 11 trustee. 1040ez gov Disclosure of debtor's return information to trustee. 1040ez gov   In bankruptcy cases filed under chapter 7 or 11 by individuals, the debtor's income tax returns for the year the bankruptcy case begins and for earlier years are, upon written request, open to inspection by or disclosure to the trustee. 1040ez gov If the bankruptcy case was not voluntary, disclosure cannot be made before the bankruptcy court has entered an order for relief, unless the court rules that the disclosure is needed for determining whether relief should be ordered. 1040ez gov    In bankruptcy cases other than those of individuals filing under chapter 7 or 11, the debtor's income tax returns for the current and prior years are, upon written request, open to inspection by or disclosure to the trustee, but only if the IRS finds that the trustee has a material interest that will be affected by information on the return. 1040ez gov Material interest is generally defined as a financial or monetary interest. 1040ez gov Material interest is not limited to the trustee's responsibility to file a return on behalf of the bankruptcy estate. 1040ez gov   However, the U. 1040ez gov S. 1040ez gov Trustee (an officer of the Department of Justice, responsible for maintaining and supervising a panel of private trustees for chapter 7 bankruptcy cases) and the standing chapter 13 trustee (the administrator of chapter 13 cases in a specific geographic region) generally do not have a material interest in the debtor’s return or return information. 1040ez gov Disclosure of bankruptcy estate's return information to debtor. 1040ez gov    The bankruptcy estate's tax return(s) are open, upon written request, to inspection by or disclosure to the individual debtor in a chapter 7 or 11 bankruptcy. 1040ez gov Disclosure of the estate's return to the debtor may be necessary to enable the debtor to determine the amount and nature of the tax attributes, if any, that the debtor assumes when the bankruptcy estate terminates. 1040ez gov Individuals in Chapter 12 or 13 Only individuals may file a chapter 13 bankruptcy. 1040ez gov Chapter 13 relief is not available to corporations or partnerships. 1040ez gov The bankruptcy estate is not treated as a separate entity for tax purposes when an individual files a petition under chapter 12 (Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income) or 13 (Adjustment of Debts of an Individual with Regular Income) of the Bankruptcy Code. 1040ez gov In these cases the individual continues to file the same federal income tax returns that were filed prior to the bankruptcy petition, Form 1040, U. 1040ez gov S. 1040ez gov Individual Income Tax Return. 1040ez gov On the debtor's individual tax return, Form 1040, report all income received during the entire year and deduct all allowable expenses. 1040ez gov Do not include in income the amount from any debt canceled due to the debtor's bankruptcy. 1040ez gov To the extent the debtor has any losses, credits, or basis in property that were previously reduced as a result of canceled debt, these reductions must be included on the debtor's return. 1040ez gov See Debt Cancellation, later. 1040ez gov Interest on trust accounts in chapter 13 cases. 1040ez gov   In chapter 13 proceedings, do not include interest earned on amounts held by the trustee in trust accounts as income on the debtor's return. 1040ez gov This interest is not available to either the debtor or creditors, it is available only to the trustee for use by the U. 1040ez gov S. 1040ez gov Trustee system. 1040ez gov The interest is also not taxable to the trustee as income. 1040ez gov Individuals in Chapter 7 or 11 When an individual debtor files for bankruptcy under chapter 7 or 11 of the Bankruptcy Code, the bankruptcy estate is treated as a new taxable entity, separate from the individual taxpayer. 1040ez gov The bankruptcy estate in a chapter 7 case is represented by a trustee. 1040ez gov The trustee is appointed to administer the estate and liquidate any nonexempt assets. 1040ez gov In chapter 11 cases, the debtor often remains in control of the assets as a “debtor-in-possession” and acts as the bankruptcy trustee. 1040ez gov However, the bankruptcy court, for cause, may appoint a trustee if such appointment is in the best interests of the creditors and the estate. 1040ez gov During the chapter 7 or 11 bankruptcy, the debtor continues to file an individual tax return on Form 1040. 1040ez gov The bankruptcy trustee files a Form 1041 for the bankruptcy estate. 1040ez gov However, when a debtor in a chapter 11 bankruptcy case remains a debtor-in-possession, he or she must file both a Form 1040 individual return and a Form 1041 estate return for the bankruptcy estate (if return filing requirements are met). 1040ez gov Although a husband and wife may file a joint bankruptcy petition whose bankruptcy estates are jointly administered, the estates are be treated as two separate entities for tax purposes. 1040ez gov Two separate bankruptcy estate income tax returns must be filed (if each spouse separately meets the filing requirements). 1040ez gov For information about determining the tax due and paying tax for a chapter 7 or 11 bankruptcy estate, see Bankruptcy Estate Tax Return Filing Requirements and Payment of Tax Due, later. 1040ez gov Debtor's Election To End Tax Year – Form 1040 Short tax years. 1040ez gov   An individual debtor in a chapter 7 or 11 case may elect to close the debtor's tax year for the year in which the bankruptcy petition is filed, as of the day before the date on which the bankruptcy case commences. 1040ez gov If the debtor makes this election, the debtor's tax year is divided into 2 short tax years of less than 12 months each. 1040ez gov The first tax year ends on the day before the commencement date and the second tax year begins on the commencement date. 1040ez gov   If the election is made, the debtor's federal income tax liability for the first short tax year becomes an allowable claim against the bankruptcy estate arising before the bankruptcy filing. 1040ez gov Also, the tax liability for the first short tax year is not subject to discharge under the Bankruptcy Code. 1040ez gov    If the debtor does not make an election to end the tax year, the commencement of the bankruptcy case does not affect the debtor's tax year. 1040ez gov Also, no part of the debtor's income tax liability for the year in which the bankruptcy case commences can be collected from the bankruptcy estate. 1040ez gov Note. 1040ez gov The debtor cannot make a short tax year election if no assets, other than exempt property, are in the bankruptcy estate. 1040ez gov Making the Election - Filing Requirements First short tax year. 1040ez gov   The debtor can elect to end the debtor's tax year by filing a return on Form 1040 for the first short tax year. 1040ez gov The return must be filed on or before the 15th day of the fourth full month after the end of that first tax year. 1040ez gov Second short tax year. 1040ez gov   If the debtor elects to end the tax year on the day before filing the bankruptcy case, the debtor must file the return for the first short tax year in the manner discussed above. 1040ez gov   If the debtor makes this election, the debtor must also file a separate Form 1040 for the second short tax year by the regular due date. 1040ez gov To avoid delays in processing the return, write “Second Short Year Return After Section 1398 Election” at the top of the return. 1040ez gov Example. 1040ez gov Jane Doe, an individual calendar year taxpayer, filed a bankruptcy petition under chapter 7 or 11 on May 8, 2012. 1040ez gov If Jane elected to close her tax year at the commencement of her case, Jane's first short year for 2012 runs from January 1 through May 7, 2012. 1040ez gov Jane's second short year runs from May 8, 2012, through December 31, 2012. 1040ez gov To have a timely filed election for the first short year, Jane must file Form 1040 (or an extension of time to file) for the period January 1 through May 7 by September 15. 1040ez gov To avoid delays in processing the return, write “Section 1398 Election” at the top of the return. 1040ez gov The debtor may also make the election by attaching a statement to Form 4868, Automatic Extension of Time to File an U. 1040ez gov S. 1040ez gov Individual Tax Return. 1040ez gov The statement must state that the debtor elects under IRC section 1398(d)(2) to close the debtor's tax year on the day before filing the bankruptcy case. 1040ez gov The debtor must file Form 4868 by the due date of the return for the first short tax year. 1040ez gov The debtor's spouse may also elect to close his or her tax year, see Election by debtor's spouse, below. 1040ez gov Election by debtor's spouse. 1040ez gov   If the debtor is married, the debtor's spouse may join in the election to end the tax year. 1040ez gov If the debtor and spouse make a joint election, the debtor must file a joint return for the first short tax year. 1040ez gov The debtor must elect by the due date for filing the return for the first short tax year. 1040ez gov Once the election is made, it cannot be revoked for the first short tax year. 1040ez gov However, the election does not prevent the debtor and the spouse from filing separate returns for the second short tax year. 1040ez gov Later bankruptcy of spouse. 1040ez gov    If the debtor's spouse files for bankruptcy later in the same year, he or she may also choose to end his or her tax year, regardless of whether he or she joined in the election to end the debtor's tax year. 1040ez gov   As each spouse has a separate bankruptcy, one or both of them may have 3 short tax years in the same calendar year. 1040ez gov If the debtor's spouse joined the debtor's election or if the debtor had not made the election to end the tax year, the debtor can join in the spouse's election. 1040ez gov However, if the debtor made an election and the spouse did not join that election, the debtor cannot then join the spouse's later election. 1040ez gov The debtor and the spouse are precluded from this election because they have different tax years. 1040ez gov This results because the debtor does not have a tax year ending the day before the spouse's filing for bankruptcy, and the debtor cannot file a joint return for a year ending on the day before the spouse's filing of bankruptcy. 1040ez gov Example 1. 1040ez gov Paul and Mary Harris are calendar-year taxpayers. 1040ez gov Paul's voluntary chapter 7 bankruptcy case begins on March 4. 1040ez gov If Paul does not make an election, his tax year does not end on March 3. 1040ez gov If he makes an election, Paul's first tax year is January 1–March 3, and his second tax year begins on March 4. 1040ez gov Mary could join in Paul's election as long as they file a joint return for the tax year January 1–March 3. 1040ez gov They must make the election by July 15, the due date for filing the joint return. 1040ez gov Example 2. 1040ez gov Fred and Ethel Barnes are calendar-year taxpayers. 1040ez gov Fred's voluntary chapter 7 bankruptcy case begins on May 6, and Ethel's bankruptcy case begins on November 1 of the same year. 1040ez gov Ethel could elect to end her tax year on October 31. 1040ez gov If Fred did not elect to end his tax year on May 5, or if he elected to do so but Ethel had not joined in his election, Ethel would have 2 tax years in the same calendar year if she decided to close her tax year. 1040ez gov Her first tax year is January 1–October 31, and her second year is November 1–December 31. 1040ez gov If Fred did not end his tax year as of May 5, he could join in Ethel's election to close her tax year on October 31, but only if they file a joint return for the tax year January 1–October 31. 1040ez gov If Fred elected to end his tax year on May 5, but Ethel did not join in Fred's election, Fred cannot join in Ethel's election to end her tax year on October 31. 1040ez gov Fred and Ethel cannot file a joint return for that short tax year because their tax years preceding October 31 were not the same. 1040ez gov Example 3. 1040ez gov Jack and Karen Thomas are calendar-year taxpayers. 1040ez gov Karen's voluntary chapter 7 bankruptcy case began on April 10, and Jack's voluntary chapter 7 bankruptcy case began on October 3 of the same year. 1040ez gov Karen elected to close her tax year on April 9 and Jack joins in Karen's election. 1040ez gov Under these facts, Jack would have 3 tax years for the same calendar year if he makes the election relating to his own bankruptcy case. 1040ez gov The first tax year would be January 1–April 9; the second, April 10–October 2; and the third, October 3–December 31. 1040ez gov Karen may join in Jack's election if they file a joint return for the second short tax year (April 10–October 2). 1040ez gov If Karen does join in, she would have the same 3 short tax years as Jack. 1040ez gov Also, if Karen joins in Jack's election, they may file a joint return for the third tax year (October 3–December 31), but they are not required to do so. 1040ez gov Annualizing taxable income. 1040ez gov   If the debtor elects to close the tax year, the debtor must annualize taxable income for each short tax year in the same manner a change in annual accounting period is calculated. 1040ez gov See Short Tax Year in Publication 538, for information on how to annualize the debtor's income and to figure the tax for the short tax year. 1040ez gov Dismissal of bankruptcy case. 1040ez gov   If the bankruptcy court later dismisses an individual chapter 7 or 11 case, the bankruptcy estate is no longer treated as a separate taxable entity. 1040ez gov It is as if no bankruptcy estate was created for tax purposes. 1040ez gov In this situation, the debtor must file amended tax returns on Form 1040X, to replace all full or short year individual returns (Form 1040) and bankruptcy estate returns (Form 1041) filed as a result of the bankruptcy case. 1040ez gov Income, deductions, and credits previously reported by the bankruptcy estate must be reported on the debtor's amended returns. 1040ez gov Attach a statement to the amended returns explaining why the debtor is filing an amended return. 1040ez gov Taxes and the Bankruptcy Estate Property of the bankruptcy estate. 1040ez gov   At the commencement of a bankruptcy case a bankruptcy estate is created. 1040ez gov Bankruptcy law determines which of the debtor's assets become part of a bankruptcy estate. 1040ez gov This estate generally includes all of the debtor's legal and equitable interests in property as of the commencement date. 1040ez gov However, there are exceptions and certain property is exempted or excluded from the bankruptcy estate. 1040ez gov Note. 1040ez gov Exempt property and abandoned property are initially part of the bankruptcy estate, but are subsequently removed from the estate. 1040ez gov Excluded property is never included in the estate. 1040ez gov Transfer of assets between debtor and bankruptcy estate. 1040ez gov   The transfer (other than by sale or exchange) of an asset from the debtor to the bankruptcy estate is not treated as a disposition for income tax purposes. 1040ez gov The transfer does not result in gain or loss, acceleration of income or deductions, or recapture of deductions or credits. 1040ez gov For example, the transfer of an installment obligation to the estate would not accelerate gain under the rules for reporting installment sales. 1040ez gov The estate assumes the same basis, holding period, and character of the transferred assets. 1040ez gov Also, the estate generally accounts for the transferred assets in the same manner as debtor. 1040ez gov   When the bankruptcy estate is terminated or dissolved, any resulting transfer (other than by sale or exchange) of the estate's assets back to the debtor is also not treated as a disposition for tax purposes. 1040ez gov The transfer does not result in gain or loss, acceleration of income or deductions, or recapture of deductions or credits to the estate. 1040ez gov Abandoned property. 1040ez gov    The abandonment of property by the estate to the debtor is a nontaxable disposition of property. 1040ez gov If the debtor received abandoned property from the bankruptcy estate, the debtor assumes the same basis in the property that the bankruptcy estate had. 1040ez gov Separate taxable entity. 1040ez gov   When an individual files a bankruptcy petition under chapter 7 or 11, the bankruptcy estate is treated as a separate taxable entity from the debtor. 1040ez gov The court appointed trustee or the debtor-in-possession is responsible for preparing and filing all of the bankruptcy estate's tax returns, including its income tax return on Form 1041, U. 1040ez gov S. 1040ez gov Income Tax Return for Estates and Trusts, and paying its taxes. 1040ez gov The debtor remains responsible for filing his or her own returns on Form 1040, U. 1040ez gov S. 1040ez gov Individual Income Tax Return, and paying taxes on income that does not belong to the estate. 1040ez gov Employer identification number. 1040ez gov   The trustee or debtor-in-possession must obtain an EIN for a bankruptcy estate. 1040ez gov The trustee or debtor-in-possession uses this EIN on all tax returns filed for the bankruptcy estate with the IRS, including estimated tax returns. 1040ez gov See Employer identification number, under Bankruptcy Estate Tax Return Filing Requirements and Payment of Tax Due, later. 1040ez gov    The social security number of the individual debtor cannot be used as the EIN for the bankruptcy estate. 1040ez gov Income, deductions, and credits – Form 1040. 1040ez gov   In an individual chapter 7 or 11 bankruptcy case, do not include the income, deductions, and credits that belong to the bankruptcy estate on the debtor's individual income tax return (Form 1040). 1040ez gov Also, do not include as income on the debtor's return the amount of any debt canceled by reason of the bankruptcy discharge. 1040ez gov The bankruptcy estate must reduce certain losses, credits, and the basis in property (to the extent of these items) by the amount of canceled debt. 1040ez gov See Debt Cancellation, below. 1040ez gov Note. 1040ez gov The debtor may not be able to claim certain deductions available to the bankruptcy estate such as administrative expenses. 1040ez gov Additionally, the bankruptcy exclusion cannot be used to exclude income from a cancelled debt if the discharge of indebtedness was not within the bankruptcy case, even though the debtor was under the bankruptcy court's protection at the time. 1040ez gov However, other exclusions, such as the insolvency exclusion, may apply. 1040ez gov Bankruptcy Estate – Income, Deductions, and Credits Bankruptcy Estate Income Income of the estate in individual chapter 7 cases. 1040ez gov    The gross income of the bankruptcy estate includes gross income of the debtor to which the estate is entitled under the Bankruptcy Code. 1040ez gov Gross income also includes income generated by the bankruptcy estate from property of the estate after the commencement of the case. 1040ez gov   Gross income of the bankruptcy estate does not include amounts received or accrued by the debtor before the commencement of the case. 1040ez gov Additionally, in chapter 7 cases, gross income of the bankruptcy estate does not include any income that the debtor earns after the date of the bankruptcy petition. 1040ez gov Income of the estate in individual chapter 11 cases. 1040ez gov    In chapter 11 cases, under IRC section 1398(e)(1), gross income of the bankruptcy estate includes income that the debtor earns for services performed after the bankruptcy petition date. 1040ez gov Also, earnings from services performed by an individual debtor after the commencement of the chapter 11 case are property of the bankruptcy estate under section 1115 of the Bankruptcy Code (11 U. 1040ez gov S. 1040ez gov C. 1040ez gov section 1115). 1040ez gov Note. 1040ez gov A debtor-in-possession may be compensated by the estate for managing or operating a trade or business that the debtor conducted before the commencement of the bankruptcy case. 1040ez gov Such payments should be reported by the debtor as miscellaneous income on his or her individual income tax return (Form 1040). 1040ez gov Amounts paid by the estate to the debtor-in-possession for managing or operating the trade or business may qualify as administrative expenses of the estate. 1040ez gov See Administrative expenses, below. 1040ez gov Conversion or dismissal of chapter 11 cases. 1040ez gov   If a chapter 11 case is converted to a chapter 13 case, the chapter 13 estate is not a separate taxable entity and earnings from post-conversion services and income from property of the estate realized after the conversion to chapter 13 are taxed to the debtor. 1040ez gov If the chapter 11 case is converted to a chapter 7 case, 11 U. 1040ez gov S. 1040ez gov C. 1040ez gov section 1115 does not apply after conversion and: Earnings from post-conversion services will be taxed to the debtor, rather than the estate, and The property of the chapter 11 estate will become property of the chapter 7 estate. 1040ez gov Any income on this property will be taxed to the estate even if the income is realized after the conversion to chapter 7. 1040ez gov If a chapter 11 case is dismissed, the debtor is treated as if the bankruptcy case had never been filed and as if no bankruptcy estate had been created. 1040ez gov Bankruptcy Estate Deductions and Credits A bankruptcy estate deducts expenses incurred in a trade, business, or activity, and uses credits in the same way the debtor would have deducted or credited them had he or she continued operations. 1040ez gov Note. 1040ez gov Expenses may be disallowed under other provisions of the IRC (such as the disallowance of certain capital expenditures or expenses relating to tax-exempt interest). 1040ez gov Administrative expenses. 1040ez gov   Allowable expenses include administrative expenses. 1040ez gov    Administrative expenses can only be deducted by the estate, never by the debtor. 1040ez gov   The bankruptcy estate is allowed deductions for bankruptcy administrative expenses and fees, including accounting fees, attorney fees, and court costs. 1040ez gov These expenses are deductible on Form 1040, Schedule A as miscellaneous itemized deductions not subject to the 2% floor on miscellaneous itemized deductions, because they would not have been incurred if property had not been held by the bankruptcy estate. 1040ez gov See IRC section 67(e). 1040ez gov Administrative expenses of the bankruptcy estate attributable to conducting a trade or business for the production of estate rents or royalties are deductible in arriving at adjusted gross income on Form 1040, Schedules C, E, and F. 1040ez gov Note. 1040ez gov The bankruptcy estate uses Form 1041 as a transmittal for the tax return prepared using Form 1040 and its schedules. 1040ez gov See Transmittal for Form 1040 under Tax Return Filing Requirements and Payment of Tax, later. 1040ez gov Administrative expense loss. 1040ez gov   If the administrative expenses of the bankruptcy estate are more than its gross income for a tax year, the excess amount may be carried back 3 years and forward 7 years. 1040ez gov The amounts can only be carried to a tax year of the estate and never to a debtor's tax year. 1040ez gov The excess amount to be carried back or forward is treated like a net operating loss (NOL) and must first be carried back to the earliest year possible. 1040ez gov For a discussion of NOLs, see Publication 536. 1040ez gov Attribute carryovers. 1040ez gov   The bankruptcy estate may use its tax attributes the same way that the debtor would have used them. 1040ez gov These items are determined as of the first day of the debtor's tax year in which the bankruptcy case begins. 1040ez gov The bankruptcy estate assumes the following tax attributes from the debtor: NOL carryovers, Carryovers of excess charitable contributions, Recovery of tax benefit items, Credit carryovers, Capital loss carryovers, Basis, holding period, and character of assets, Method of accounting, Passive activity loss and credit carryovers, Unused at-risk deductions, and Other tax attributes provided in the regulations. 1040ez gov   Certain tax attributes of the bankruptcy estate must be reduced by the amount of income that was previously excluded as a result of cancellation of debt during the bankruptcy proceeding. 1040ez gov See Debt Cancellation, later. 1040ez gov   When the bankruptcy estate is terminated (for example, when the case ends), the debtor assumes any remaining tax attributes previously taken over by the bankruptcy estate. 1040ez gov The debtor also generally assumes any of the tax attributes, listed above, that arose during the administration of the bankruptcy estate. 1040ez gov Note. 1040ez gov The debtor does not assume the bankruptcy estate's administrative expense losses because they cannot be used by an individual taxpayer filing Form 1040. 1040ez gov See Administrative expense loss, above. 1040ez gov Passive and at-risk activities. 1040ez gov   For bankruptcy cases beginning after November 8, 1992, passive activity carryover losses and credits and unused at-risk deductions are treated as tax attributes passing from the debtor to the bankruptcy estate, which the estate then passes back to the debtor when the bankruptcy estate terminates. 1040ez gov Additionally, transfers to the debtor (other than by sale or exchange) of interests in passive or at-risk activities are treated as non-taxable exchanges. 1040ez gov These transfers include the return of exempt property and abandonment of estate property to the debtor. 1040ez gov Carrybacks from the debtor's activities. 1040ez gov   The debtor cannot carry back any NOL or credit carryback from a tax year ending after the bankruptcy case has begun to any tax year ending before the case began. 1040ez gov Carrybacks from the bankruptcy estate. 1040ez gov   If the bankruptcy estate has an NOL that did not pass to the estate from the debtor under the attribute carryover rules, the estate can carry the loss back not only to its own earlier tax years but also to the debtor's tax years before the year the bankruptcy case began. 1040ez gov The estate may also carry back excess credits, such as the general business credit, to the pre-bankruptcy tax years. 1040ez gov Tax Reporting – Chapter 11 Cases Allocation of income and credits on information returns and required statement for returns for individual chapter 11 cases. 1040ez gov    In chapter 11 cases, when an employer issues a Form W-2 reporting all of the debtor's wages, salary, or other compensation for a calendar year, and a portion of the earnings represent post-petition services includible in the estate's gross income, the Form W-2 amounts must be allocated between the estate and the debtor. 1040ez gov The debtor-in-possession or trustee must allocate the income amount reported in box 1 and the income tax withheld reported in box 2 between the debtor and the estate. 1040ez gov These allocations must reflect that the debtor's gross earnings from post-petition services and gross income from post-petition property are, generally, includible in the estate's gross income and not the debtor's gross income. 1040ez gov The debtor and trustee may use a simple percentage method to allocate income and income tax withheld. 1040ez gov The same method must be used to allocate the income and the withheld tax. 1040ez gov Example. 1040ez gov If 20% of the wages reported on Form W-2 for a calendar year were earned after the commencement of the case and are included in the estate's gross income, 20% of the withheld income tax reported on Form W-2 must also be claimed as a credit on the estate's income tax return. 1040ez gov Likewise, 80% of wages must be reported by the debtor and 80% of the income tax withheld must be claimed as a credit on the debtor's income tax return. 1040ez gov See IRC section 31(a). 1040ez gov   If information returns are issued to the debtor for gross income, gross proceeds, or other reportable payments that should have been reported to the bankruptcy estate, the debtor-in-possession or trustee must allocate the improperly reported income in a reasonable manner between the debtor and the estate. 1040ez gov In general, the allocation must ensure that any income and income tax withheld attributable to the post-petition period is reported on the estate's return, and any income and income tax withheld attributable to the pre-petition period is reported on the debtor's return. 1040ez gov    IRS Notice 2006-83 requires the debtor to attach a statement to his or her individual income tax return (Form 1040) stating that the return is filed subject to a chapter 11 bankruptcy case. 1040ez gov The statement must also: Show the allocations of income and income tax withheld, Describe the method used to allocate income and income tax withheld, and List the filing date of the bankruptcy case, the bankruptcy court in which the case is pending, the bankruptcy court case number, and the bankruptcy estate's EIN. 1040ez gov Note. 1040ez gov The debtor-in-possession or trustee must attach a similar statement to the bankruptcy estate's income tax return (Form 1041). 1040ez gov   The model Notice 2006-83 Statement, shown above, may be used by debtors, debtors-in-possession, and trustees to satisfy the reporting requirement. 1040ez gov Self-employment taxes in individual chapter 11 cases. 1040ez gov   IRC section 1401 imposes a tax upon the self-employment income, that is, the net earnings from self-employment of an individual. 1040ez gov Net earnings from self-employment are equal to the gross income derived by an individual from any trade or business carried on by such individual, less deductions attributable to the business. 1040ez gov   Neither section 1115 of the Bankruptcy Code nor IRC section 1398 addresses the application of self-employment tax to the post-petition earnings of the individual debtor. 1040ez gov Therefore, if the debtor continues to derive gross income from the performance of services as a self-employed individual after the commencement of the bankruptcy case, the debtor must continue to report the debtor's self-employment income on Schedule SE (Form 1040) of the debtor's income tax return. 1040ez gov This schedule includes self-employment income earned post-petition and the attributable deductions. 1040ez gov The debtor must pay any self-employment tax imposed by IRC section 1401. 1040ez gov Employment taxes and employer's obligation to file Form W-2 in individual chapter 11 cases. 1040ez gov   In chapter 11 cases, post-petition wages earned by a debtor are generally treated as gross income of the estate. 1040ez gov However, section 1115 of the Bankruptcy Code (11 U. 1040ez gov S. 1040ez gov C. 1040ez gov section 1115) does not affect the determination of what are deemed wages for Federal Insurance Contributions Act (FICA) tax, Federal Unemployment Tax Act (FUTA) tax, or Federal Income Tax Withholding purposes. 1040ez gov See Notice 2006-83. 1040ez gov   The reporting and withholding obligations of a debtor's employer also do not change. 1040ez gov An employer should continue to report the wages and tax withholding on a Form W-2 issued under the debtor's name and social security number. 1040ez gov Notice to persons required to file information returns (other than Form W-2, Wage and Tax Statement) in individual chapter 11 cases. 1040ez gov   Within a reasonable time after the commencement of a chapter 11 bankruptcy case, the trustee or debtor-in-possession should provide notification of the bankruptcy estate's EIN to all persons (or entities) that are required to file information returns for the bankruptcy estate's gross income, gross proceeds, or other types of reportable payments. 1040ez gov See IRC section 6109(a)(2). 1040ez gov As these payments are the property of the estate under section 1115 of the Bankruptcy Code, the payors should report the gross income, gross proceeds, or other reportable payments on the appropriate information return using the estate's name and EIN as required under the IRC and regulations (see IRC sections 6041 through 6049). 1040ez gov   The trustee or debtor-in-possession should not, however, provide the EIN to a person (or entity) filing Form W-2 reporting the debtor's wages or other compensation, as section 1115 of the Bankruptcy Code does not affect the determination of what constitutes wages for purposes of federal income tax withholding or FICA. 1040ez gov See Notice 2006-83. 1040ez gov An employer should continue to report all wage income and tax withholding, both pre-petition and post-petition, on a Form W-2 to the debtor under the debtor's social security number. 1040ez gov   The debtor in a chapter 11 case is not required to file a new Form W-4 with an employer solely because the debtor filed a chapter 11 case and the post-petition wages are includible in the estate's income and not the debtor's income. 1040ez gov However, a new Form W-4 may be necessary if the debtor is no longer entitled to claim the same number of allowances previously claimed because certain deductions or credits now belong to the estate. 1040ez gov See Employment Tax Regulations section 31. 1040ez gov 3402(f)(2)-1. 1040ez gov Additionally, the debtor may wish to file a new Form W-4 to increase the income tax withheld from post-petition wages allocated to the estate to avoid having to make estimated tax payments for the estate. 1040ez gov See IRC section 6654(a). 1040ez gov Notice required in converted and dismissed cases. 1040ez gov   When a chapter 11 bankruptcy case is closed, dismissed, or converted to a chapter 12 or 13 case, the bankruptcy estate ends as a separate taxable entity. 1040ez gov The debtor should, within a reasonable time, send notice of such event to the persons (or entities) previously notified of the bankruptcy case. 1040ez gov This helps to ensure that gross income, proceeds, and other reportable payments realized after the event are reported to the debtor under the correct TIN rather than to the estate. 1040ez gov   When a chapter 11 case is converted to a chapter 7 case, the bankruptcy estate will continue to exist as a separate taxable entity. 1040ez gov Gross income (other than post-conversion income from the debtor's services), gross proceeds, or other reportable payments should continue to be reported to the estate if they are property of the chapter 7 estate. 1040ez gov However, income from services performed by the debtor after conversion of the case to chapter 7 is not property of the chapter 7 estate. 1040ez gov After the conversion, the debtor should notify payors required to report the debtor's nonemployee compensation that compensation earned after the conversion should be reported using the debtor's name and TIN, not the estate's name and EIN. 1040ez gov Employment taxes. 1040ez gov   The trustee or debtor-in-possession must withhold income and social security taxes and file employment tax returns for any wages paid by the trustee or debtor, including wage claims paid as administrative expenses. 1040ez gov See Publication 15, Circular E, Employer's Tax Guide, for details on employer tax responsibilities. 1040ez gov   The trustee also has the duty to prepare and file Forms W-2 for wage claims paid by the trustee, regardless of whether the claims accrued before or during bankruptcy. 1040ez gov For a further discussion of employment taxes, see Employment Taxes, later. 1040ez gov Notice 2006-83 Statement Pending Bankruptcy Case The taxpayer, , filed a bankruptcy petition under chapter 11 of the Bankruptcy Code in the bankruptcy court for the District of . 1040ez gov The bankruptcy court case number is . 1040ez gov Gross income, and withheld federal income tax, reported on Form W-2, Forms 1099, Schedule K-1, and other information returns received under the taxpayer's name and social security number (or other taxpayer identification number) are allocated between the taxpayer's TIN and the bankruptcy estate's EIN as follows, using [describe allocation method]:. 1040ez gov   Year Taxpayer   Estate 1. 1040ez gov Form W-2, Payor: $   $     Withheld income tax shown on Form W-2 $   $   2. 1040ez gov Form 1099-INT Payor: $   $     Withheld income tax (if any) shown on Form 1099-INT $   $   3. 1040ez gov Form 1099-DIV Payor: $   $     Withheld income tax (if any) shown on Form 1099-DIV $   $   4. 1040ez gov Form 1099-MISC Payor: $   $     Withheld income tax (if any) shown on Form 1099-MISC $   $   Bankruptcy Estate Tax Return Filing Requirements and Payment of Tax Due Filing Requirements Filing threshold. 1040ez gov   If the bankruptcy estate has gross income that meets or exceeds the minimum amount required for filing, the trustee or debtor-in-possession must file an income tax return on Form 1041. 1040ez gov This amount is equal to the sum of the personal exemption amount plus the basic standard deduction for a married individual filing separately. 1040ez gov   For 2012, the threshold filing amount for a bankruptcy estate is $9,750 (the sum of the $3,800 personal exemption plus the $5,950 standard deduction for married individuals filing separately). 1040ez gov   These amounts are generally adjusted annually. 1040ez gov See the present year Form 1041 Instructions at www. 1040ez gov irs. 1040ez gov gov/form1041 for the current dollar amounts. 1040ez gov Accounting period. 1040ez gov   A bankruptcy estate may have a fiscal year. 1040ez gov However, this period cannot be longer than 12 months. 1040ez gov Change of accounting period. 1040ez gov   The bankruptcy estate may change its accounting period (tax year) once without IRS approval. 1040ez gov This rule allows the bankruptcy trustee to close the estate's tax year early, before the expected termination of the bankruptcy estate. 1040ez gov The trustee can then file a return for the first short tax year to get a quick determination of the estate's tax liability. 1040ez gov Employer identification number. 1040ez gov   The trustee or debtor-in-possession must obtain an EIN for a bankruptcy estate. 1040ez gov The trustee or debtor-in-possession uses this EIN on all tax returns filed for the bankruptcy estate with the IRS, including estimated tax returns. 1040ez gov    The social security number of the individual debtor cannot be used as the EIN for the bankruptcy estate. 1040ez gov   Obtain an EIN for a bankruptcy estate by applying: Online by clicking on the EIN link at www. 1040ez gov irs. 1040ez gov gov/businesses/small. 1040ez gov The EIN is issued immediately once the application information is validated. 1040ez gov By telephone at 1-800-829-4933 from 7:00 a. 1040ez gov m. 1040ez gov to 7:00 p. 1040ez gov m. 1040ez gov in the trustee's or debtor-in-possession's local time zone. 1040ez gov Assistance provided to callers from Alaska and Hawaii will be based on the hours of operation in the Pacific time zone, or By mailing or faxing Form SS-4, Application for Employer Identification Number. 1040ez gov   If the trustee or debtor-in-possession has not received the bankruptcy estate's EIN by the time the return is due, write “Applied for” and the date you applied in the space for the EIN. 1040ez gov For more details, see Pub. 1040ez gov 583, Starting a Business and Keeping Records. 1040ez gov   Trustees representing ten or more bankruptcy estates (other than estates that will be filing employment or excise tax returns) may request a series or block of EINs. 1040ez gov Figuring tax due. 1040ez gov   The bankruptcy estate figures its taxable income the same way an individual figures taxable income. 1040ez gov However, the estate uses the tax rates for a married individual filing separately to calculate the tax on its taxable income. 1040ez gov The estate is entitled to one personal exemption and may either itemize deductions or take the basic standard deduction for a married individual filing a separate return. 1040ez gov The estate cannot take the higher standard deduction allowed for married persons filing separately who are 65 or older or blind. 1040ez gov Tax rate schedule. 1040ez gov The tax on income for bankruptcy estates is calculated using the tax rate schedule for Married Individuals Filing Separately not the Estates and Trusts tax rate schedule. 1040ez gov When to file. 1040ez gov   Calendar year bankruptcy estates must file Form 1041 by April 15th. 1040ez gov Fiscal year bankruptcy estates must file on or before the 15th day of the 4th month following the close of its tax year. 1040ez gov For example, an estate that has a tax year that ends on June 30th must file Form 1041 by October 15th of the tax year. 1040ez gov If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day. 1040ez gov Note. 1040ez gov The bankruptcy estate is allowed an automatic 6-month extension of time to file the bankruptcy estate tax return upon filing the required application, Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns. 1040ez gov Transmittal for Form 1040. 1040ez gov   Form 1041 is used as a transmittal for Form 1040. 1040ez gov If a return is required, the trustee or debtor-in-possession must complete the identification area at the top of Form 1041 and indicate the chapter under which the bankruptcy estate filed, either chapter 7 or chapter 11. 1040ez gov   Prepare the bankruptcy estate's return by completing Form 1040. 1040ez gov In the top margin of Form 1040, write “Attachment to Form 1041 —DO NOT DETACH. 1040ez gov ” Then, attach Form 1040 to the Form 1041 transmittal. 1040ez gov Enter the tax and payment amounts on lines 23 through 29 of Form 1041, then sign and date the return. 1040ez gov An example of a bankruptcy estate's tax return is prepared below. 1040ez gov Note. 1040ez gov The filing of the bankruptcy estate's tax return does not relieve a debtor from the requirement to file his or her individual tax return on Form 1040. 1040ez gov Payment of Tax Due Payment methods. 1040ez gov   Payment of tax due may be made by check or money order or by credit or debit card. 1040ez gov For information on how to make payments electronically by credit or debit card, go to irs. 1040ez gov gov/e-pay. 1040ez gov      Payments may also be made electronically using the Electronic Federal Tax Payment System (EFTPS), a free tax payment system that allows you to make payments online or by phone. 1040ez gov To enroll in EFTPS, go to eftps. 1040ez gov gov or call 1-800-555-4477. 1040ez gov For more information see Publication 966, Electronic Federal Tax Payment System: A Guide to Getting Started. 1040ez gov Payment voucher – Form 1041-V. 1040ez gov   Form 1041-V accompanies payments made by check or money order for Form 1041. 1040ez gov The voucher includes information about the bankruptcy estate, including the name of the bankruptcy estate, trustee, EIN, and amount due. 1040ez gov Using Form 1041-V assists the IRS in processing the payment more accurately and efficiently. 1040ez gov We recommend the use of Form 1041-V; however, there is no penalty if the voucher is not used. 1040ez gov Estimated tax – Form 1041-ES. 1040ez gov   In most cases, the trustee or debtor-in-possession must pay any required estimated tax due for the bankruptcy estate. 1040ez gov See the Form 1041-ES Instructions for information on the minimum threshold amount required for filing Form 1041-ES, paying the estimated tax, and exceptions to filing. 1040ez gov Employment Taxes The trustee or debtor-in-possession must withhold income and social security taxes and file employment tax returns for any wages paid by the trustee or debtor, including wage claims paid as administrative expenses. 1040ez gov Until these employment taxes are deposited as required by the IRC, they should be set aside in a separate bank account to ensure that funds are available to satisfy the liability. 1040ez gov If the employment taxes are not paid as required, the trustee may be held personally liable for payment of the taxes. 1040ez gov   See Publication 15, (Circular E), Employer's Tax Guide, for details on employer tax responsibilities. 1040ez gov Also see IRS Notice 931, Deposit Requirements for Employment Taxes, for details on the deposit rules, including the requirement that federal employment tax deposits be made by electronic funds transfer. 1040ez gov The trustee also has a duty to prepare and file Forms W-2, Wage and Tax Statement, for wage claims paid by the trustee, regardless of whether the claims accrued before or during bankruptcy. 1040ez gov If the debtor fails to prepare and file Forms W-2 for wages paid before bankruptcy, the trustee should instruct the employees to file a Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. 1040ez gov , with their individual income tax returns. 1040ez gov Tax Return Example – Form 1041 This publication is not revised annually. 1040ez gov Future changes to the forms and their instructions may not be reflected in this example. 1040ez gov Note. 1040ez gov The following return was prepared for tax year 2011. 1040ez gov In 2011, the threshold filing amount for a bankruptcy estate was $9,500 (the sum of the $3,700 personal exemption plus the $5,800 standard deduction for married individuals filing separately). 1040ez gov Facts and circumstances. 1040ez gov   On December 15, 2010, Thomas Smith filed a bankruptcy petition under chapter 7. 1040ez gov Joan Black was appointed trustee to administer the bankruptcy estate and to distribute the assets. 1040ez gov   The estate received the following assets from Mr. 1040ez gov Smith: A $100,000 certificate of deposit, Commercial rental real estate with a fair market value (FMV) of $280,000, and His personal residence with an FMV of $200,000. 1040ez gov   Also, the estate received a $251,500 capital loss carryover. 1040ez gov   Mr. 1040ez gov Smith's bankruptcy case was closed on December 31, 2011. 1040ez gov During 2011, Mr. 1040ez gov Smith was relieved of $70,000 of debt by the bankruptcy court. 1040ez gov The estate chose a calendar year as its tax year. 1040ez gov Joan, the trustee, reviews the estate's transactions and reports the taxable events on the estate's final return. 1040ez gov Schedule B (Form 1040). 1040ez gov    The certificate of deposit earned $5,500 of interest during 2011. 1040ez gov Joan reports this interest on Schedule B. 1040ez gov She completes this schedule and enters the result on Form 1040. 1040ez gov Form 4562. 1040ez gov   Joan enters the depreciation allowed on Form 4562. 1040ez gov She completes the form and enters the result on Schedule E. 1040ez gov Schedule E (Form 1040). 1040ez gov   The commercial real estate was rented through the date of sale. 1040ez gov Joan reports the income and expenses on Schedule E. 1040ez gov She enters the net income on Form 1040. 1040ez gov Form 4797. 1040ez gov   The commercial real estate was sold on July 1, 2011, for $280,000. 1040ez gov The property was purchased in 2001 at a cost of $250,000. 1040ez gov The total depreciation allowable as of the date of sale was $120,000. 1040ez gov Additionally, $25,000 of selling expenses were incurred. 1040ez gov Joan reports the gain or loss from the sale on Form 4797. 1040ez gov She completes the form and enters the gain on Schedule D (Form 1040). 1040ez gov   Mr. 1040ez gov Smith's former residence was sold on September 30, 2011. 1040ez gov The sale price was $200,000, the selling expenses were $20,000, and his adjusted basis was $130,000. 1040ez gov This sale is excluded from gross income under IRC section 121. 1040ez gov Note. 1040ez gov Gains from the sale of personal residences are excluded from gross income up to $250,000 under IRC section 121 ($500,000 for married couples filing a joint return). 1040ez gov Bankruptcy estates succeed to this exclusion at the commencement of the case. 1040ez gov See Regulation section 1. 1040ez gov 1398-3. 1040ez gov Schedule D (Form 1040). 1040ez gov   Joan completes Schedule D, taking into account the $250,000 capital loss carryover from 2010 ($251,500 transferred to the estate minus $1,500 used on the estate's 2010 return). 1040ez gov She enters the results on Form 1040. 1040ez gov Form 1040, page 1. 1040ez gov   Joan completes page 1 of the Form 1040 and enters the adjusted gross income on the first line of Form 1040, page 2. 1040ez gov Schedule A (Form 1040). 1040ez gov   During 2011, the estate paid mortgage interest and real property tax on Mr. 1040ez gov Smith's former residence. 1040ez gov It also paid income tax to the state. 1040ez gov Joan enters the mortgage interest, real estate tax, and income tax on Schedule A. 1040ez gov Also, she reports the bankruptcy estate's administrative expenses as a miscellaneous deduction not subject to the 2% floor on miscellaneous itemized deductions. 1040ez gov She completes the Schedule A and enters the result on page 2 of Form 1040. 1040ez gov Form 1040, page 2. 1040ez gov   Joan determines the estate's taxable income and figures its tax using the tax rate schedule for married filing separately. 1040ez gov She then enters the estate's estimated tax payments and figures the amount the estate still owes. 1040ez gov Form 982. 1040ez gov   Joan completes the Schedule D Tax Worksheet to figure the capital loss carryover. 1040ez gov Because $70,000 of debt was canceled, Joan must reduce the tax attributes of the estate by the amount of the canceled debt. 1040ez gov See Debt Cancellation, later. 1040ez gov After the bankruptcy case ends, Mr. 1040ez gov Smith will assume the estate's tax attributes. 1040ez gov Mr. 1040ez gov Smith will assume a capital loss carryover of $53,500 ($123,500 carryover minus the $70,000 attribute reduction) for use in preparation of his individual tax return (Form 1040). 1040ez gov Note. 1040ez gov If the bankruptcy estate had continued, the capital loss carryover would be available to the bankruptcy estate for the 2012 tax year. 1040ez gov Form 1041. 1040ez gov   Joan enters the total tax, estimated tax payments, and tax due from Form 1040 on Form 1041. 1040ez gov She completes the identification area at the top of Form 1041, then signs and dates the return as the trustee on behalf of the bankruptcy estate. 1040ez gov This image is too large to be displayed in the current screen. 1040ez gov Please click the link to view the image. 1040ez gov Sample Form 1040 - page 1 This image is too large to be displayed in the current screen. 1040ez gov Please click the link to view the image. 1040ez gov Sample Form 1040 - page 2 This image is too large to be displayed in the current screen. 1040ez gov Please click the link to view the image. 1040ez gov Sample Schedule A This image is too large to be displayed in the current screen. 1040ez gov Please click the link to view the image. 1040ez gov Sample Schedule B This image is too large to be displayed in the current screen. 1040ez gov Please click the link to view the image. 1040ez gov Sample Schedule D This image is too large to be displayed in the current screen. 1040ez gov Please click the link to view the image. 1040ez gov Sample Schedule E This image is too large to be displayed in the current screen. 1040ez gov Please click the link to view the image. 1040ez gov Sample Form 4797 - page 1 This image is too large to be displayed in the current screen. 1040ez gov Please click the link to view the image. 1040ez gov Sample Form 2119 This image is too large to be displayed in the current screen. 1040ez gov Please click the link to view the image. 1040ez gov Sample Form 4797 - page 2 This image is too large to be displayed in the current screen. 1040ez gov Please click the link to view the image. 1040ez gov Sample Form 4562 This image is too large to be displayed in the current screen. 1040ez gov Please click the link to view the image. 1040ez gov Sample Capital Loss Carryover Worksheet This image is too large to be displayed in the current screen. 1040ez gov Please click the link to view the image. 1040ez gov Sample Form 982 Capital Loss Carryover Worksheet—Lines 6 and 14 Use this worksheet to figure your capital loss carryovers from 2010 to 2011 if your 2010 Schedule D, line 21, is a loss and (a) that loss is a smaller loss than the loss on your 2010 Schedule D, line 16, or (b) the amount on your 2010 Form 1040, line 41 (or your 2010 Form 1040NR, line 38, if applicable) is less than zero. 1040ez gov Otherwise, you do not have any carryovers. 1040ez gov 1. 1040ez gov Enter the amount from your 2010 Form 1040, line 41, or Form 1040NR, line 38. 1040ez gov If a loss, enclose the amount in parentheses 1. 1040ez gov 19,880   2. 1040ez gov Enter the loss from your 2010 Schedule D, line 21, as a positive amount 2. 1040ez gov 1,500   3. 1040ez gov Combine lines 1 and 2. 1040ez gov If zero or less, enter -0- 3. 1040ez gov 21,380   4. 1040ez gov Enter the smaller of line 2 or line 3 4. 1040ez gov 1,500     If line 7 of your 2010 Schedule D is a loss, go to line 5; otherwise, enter -0- on line 5 and go to line 9. 1040ez gov       5. 1040ez gov Enter the loss from your 2010 Schedule D, line 7, as a positive amount 5. 1040ez gov 0   6. 1040ez gov Enter any gain from your 2010 Schedule D, line 15. 1040ez gov If a loss, enter -0- 6. 1040ez gov         7. 1040ez gov Add lines 4 and 6 7. 1040ez gov 1,500   8. 1040ez gov Short-term capital loss carryover for 2011. 1040ez gov Subtract line 7 from line 5. 1040ez gov If zero or less, enter -0-. 1040ez gov If more than zero, also enter this amount on Schedule D, line 6 8. 1040ez gov 0     If line 15 of your 2010 Schedule D is a loss, go to line 9; otherwise, skip lines 9 through 13. 1040ez gov       9. 1040ez gov Enter the loss from your 2010 Schedule D, line 15, as a positive amount 9. 1040ez gov 251,500   10. 1040ez gov Enter any gain from your 2010 Schedule D, line 7. 1040ez gov If a loss, enter -0- 10. 1040ez gov 0       11. 1040ez gov Subtract line 5 from line 4. 1040ez gov If zero or less, enter -0- 11. 1040ez gov 1,500       12. 1040ez gov Add lines 10 and 11 12. 1040ez gov 1,500   13. 1040ez gov Long-term capital loss carryover for 2011. 1040ez gov Subtract line 12 from line 9. 1040ez gov If zero or less, enter -0-. 1040ez gov If more than zero, also enter this amount on Schedule D, line 14 13. 1040ez gov 250,000                       Partnerships and Corporations Filing Requirements A separate taxable estate is not created when a partnership or corporation files a bankruptcy petition and their tax return filing requirements do not change. 1040ez gov The debtor-in-possession, court appointed trustee, assignee, or receiver must file the entity's income tax returns on Form 1065, Form 1120 or, Form 1120S. 1040ez gov In cases where a trustee or receiver is not appointed, the debtor-in-possession continues business operations and remains in possession of the business' property during the bankruptcy proceeding. 1040ez gov The debtor-in-possession, rather than the general partner of a partnership or corporate officer of a corporation, assumes the fiduciary responsibility to file the business' tax returns. 1040ez gov Partnerships The filing requirements for a partnership in a bankruptcy proceeding do not change. 1040ez gov However, the responsibility to file the required returns becomes that of the court appointed trustee, receiver, or debtor-in-possession. 1040ez gov A partnership's debt that is canceled as a result of the bankruptcy proceeding is not included in the partnership's income. 1040ez gov However, It may or may not be included in the individual partners' income. 1040ez gov See Partnerships, below under Debt Cancellation. 1040ez gov Corporations The filing requirements for a corporation in a bankruptcy proceeding also do not change. 1040ez gov A bankruptcy trustee, receiver, or debtor-in-possession, having possession of or holding title to substantially all of the property or business operations of the debtor corporation, must file the debtor's corporate income tax return for the tax year. 1040ez gov The following discussion only highlights bankruptcy tax rules applying to corporations. 1040ez gov The complex details of corporate bankruptcy reorganizations are beyond the scope of this publication. 1040ez gov Therefore, you may wish to seek the help of a professional tax advisor. 1040ez gov See Corporations under Debt Cancellation for information about a corporation's debt canceled in a bankruptcy proceeding. 1040ez gov Tax-Free Reorganizations The tax-free reorganization provisions of the Internal Revenue Code allow a corporation to transfer all or part of its assets to another corporation in a bankruptcy under title 11 of the United States Code or in a similar case. 1040ez gov However, under the reorganization plan, the stock or securities of the corporation to which the assets are transferred must be distributed in a transaction that qualifies under IRC section 354, 355, or 356. 1040ez gov A “similar case” includes a receivership, foreclosure, or other similar proceeding in a federal or state court. 1040ez gov In these cases, any party to the reorganization must be under the jurisdiction of the court and the transfer of assets under the plan of reorganization must be approved by the court. 1040ez gov In a receivership, foreclosure, or similar proceeding before a federal or state agency involving certain financial institutions, the agency is treated as a court. 1040ez gov Generally, IRC section 354 provides that no gain or loss is recognized if a corporation's stock is exchanged solely for stock or securities in a corporation that is a party to the reorganization under a qualifying reorganization plan. 1040ez gov In this case, shareholders in the bankrupt corporation would recognize no gain or loss if they exchange their stock solely for stock or securities of the corporation acquiring the bankrupt corporation's assets. 1040ez gov IRC section 355 generally provides that no gain or loss is recognized by a shareholder if a corporation distributes solely stock or securities of another corporation that the distributing corporation controls immediately before the distribution. 1040ez gov IRC section 356 allows tax-free exchanges in situations that would qualify under IRC section 354 or 355, except that other property or money, in addition to the permitted stock or securities, is received by the shareholder. 1040ez gov In this situation, gain is recognized by the shareholder, but only to the extent of the money and the FMV of the other property received. 1040ez gov No loss is recognized in this situation. 1040ez gov Exemption from tax return filing A trustee, receiver, or assignee of a corporation in bankruptcy, receivership, or in the process of dissolving, may apply to the IRS for relief from filing federal income tax returns for the corporation. 1040ez gov To qualify, the corporation must have ceased business operations and have no assets nor income for the tax year. 1040ez gov The exemption request must be submitted to the local IRS Insolvency Office handling the case. 1040ez gov The request to the IRS must include the name, address, and EIN of the corporation and a statement of the facts (with any supporting documents) showing why the debtor needs relief from the filing requirements. 1040ez gov The request must also include the following statement: “I hereby request relief from filing federal income tax returns for tax years ending _____ for the above-named corporation and declare under penalties of perjury that to the best of my knowledge and belief the information contained herein is correct. 1040ez gov ” The statement must be signed by the trustee, receiver or assignee. 1040ez gov The statement must also include notice of appointment to act on behalf of the corporation (this is not required for bankruptcy trustees or debtors-in-possession). 1040ez gov The IRS will act on your request within 90 days. 1040ez gov Disclosure of return information to trustee. 1040ez gov   Upon written request, current and earlier returns of the debtor are open to inspection by or disclosure to the trustee or receiver. 1040ez gov However, in bankruptcy cases other than those of individuals filing under chapter 7 or 11, such as a corporate bankruptcy, the IRS must find that the trustee has a material interest that will be affected by information on the return. 1040ez gov Material interest is generally defined as a financial or monetary interest. 1040ez gov Material interest is not limited to the trustee's responsibility to file a return on behalf of the bankruptcy estate. 1040ez gov Receiverships Court-established receiverships sometimes arise in connection with bankruptcies. 1040ez gov Certain court-established receiverships should be treated as qualified settlement funds ("QSFs") for purposes of IRC section 468B and the underlying Treasury Regulations. 1040ez gov QSFs are required to file an annual income tax return, Form 1120-SF, U. 1040ez gov S. 1040ez gov Income Tax Return for Settlement Funds. 1040ez gov More information about QSFs may be found in Treasury Regulation sections 1. 1040ez gov 468B-1 through -5. 1040ez gov Determination of Tax The determination of the proper amount of tax due for a tax year begins with the bankruptcy estate's filing of Form 1041, and the individual debtor's filing of Form 1040, or for bankrupt entities filing Forms 1065, 1120, or 1120S. 1040ez gov After a return is filed, the IRS will either accept the return as filed or select the return for examination. 1040ez gov Under examination the IRS may redetermine the tax liability shown on the return. 1040ez gov If the bankruptcy estate or debtor disagrees with the redetermined tax due, the tax as redetermined by the IRS may be contested in the bankruptcy court, or Tax Court, as applicable. 1040ez gov See Court Jurisdiction over Tax Matters, later. 1040ez gov Prompt Determination Requests Pursuant to Rev. 1040ez gov Proc. 1040ez gov 2006-24, 2006-22 I. 1040ez gov R. 1040ez gov B. 1040ez gov 943, www. 1040ez gov irs. 1040ez gov gov/irb/2006-22_IRB/ar12, as modified by Announcement 2011-77, www. 1040ez gov irs. 1040ez gov gov/irb/2011-51_IRB/ar13, the bankruptcy trustee may request a determination of any unpaid tax liability incurred by the bankruptcy estate during the administration of the case, by filing a tax return and a request for such determination with the IRS. 1040ez gov Unless the return is fraudulent or contains a material misrepresentation, the estate, trustee, debtor, and any successor to the debtor are discharged from liability upon payment of the tax: As determined by the IRS, As determined by the bankruptcy court, after completion of the IRS examination, or As shown on the return, if the IRS does not: Notify the trustee within 60 days after the request for determination that the return has been selected for examination, or Complete the examination and notify the trustee of any tax due within 180 days after the request (or any additional time permitted by the bankruptcy court). 1040ez gov Making the request for determination. 1040ez gov   As detailed in Rev. 1040ez gov Proc. 1040ez gov 2006-24, as modified by Announcement 2011-77, to request a prompt determination of any unpaid tax liability of the estate, the trustee must file a signed written request, in duplicate, with the Internal Revenue Service, Centralized Insolvency Operation, P. 1040ez gov O. 1040ez gov Box 7346, Philadelphia, PA 19101–7346 (marked “Request for Prompt Determination”). 1040ez gov   The request must be submitted in duplicate and must be executed under penalties of perjury. 1040ez gov In addition, the trustee must submit along with the request an exact copy of the return(s) filed by the trustee with the IRS for each completed tax period. 1040ez gov The request must contain the following information: A statement indicating that it is a Request for Prompt Determination of Tax Liability, specifying the type of return and tax period for each return being filed. 1040ez gov The name and location of the office where the return was filed. 1040ez gov The name of the debtor. 1040ez gov Debtor's social security number, TIN, or EIN. 1040ez gov Type of bankruptcy estate. 1040ez gov Bankruptcy case number. 1040ez gov Court where the bankruptcy case is pending. 1040ez gov   The copy of the return(s) submitted with the request must be an exact copy of a valid return. 1040ez gov A request for prompt determination will be considered incomplete and returned to the trustee if it is filed with a copy of a document that does not qualify as a valid return. 1040ez gov    To qualify as valid, a return must meet certain criteria, including a signature under penalties of perjury. 1040ez gov A document filed by the trustee with the jurat stricken, deleted, or modified will not qualify as a valid return. 1040ez gov Examination of return. 1040ez gov   The IRS will notify the trustee within 60 days from receipt of the request whether the return filed by the trustee has been selected for examination or has been accepted as filed. 1040ez gov If the return is selected for examination, it will be examined as soon as possible. 1040ez gov The IRS will notify the trustee of any tax due within 180 days from receipt of the application or within any additional time permitted by the bankruptcy court. 1040ez gov   If a prompt determination request is incomplete, all the documents received by the IRS will be returned to the trustee by the assigned Field Insolvency Office with an explanation identifying the missing item(s) and instructions to re-file the request once corrected. 1040ez gov   Once corrected, the request must be filed with the IRS at the Field Insolvency Office address specified in the correspondence accompanying the returned incomplete request. 1040ez gov   In the case of an incomplete request submitted with a copy of an invalid return document, the trustee must file a valid original return with the appropriate IRS office and submit a copy of that return with the corrected request when the request is re-filed. 1040ez gov Note. 1040ez gov An incomplete request includes those submitted with a copy of a return form, the original of which does not qualify as a valid return. 1040ez gov   The 60-day period to notify the trustee whether the return is accepted as filed or has been selected for examination does not begin to run until a complete request package is recei