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1040x 2010 Form

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1040x 2010 Form

1040x 2010 form 4. 1040x 2010 form   Figuring Depreciation Under MACRS Table of Contents Introduction Useful Items - You may want to see: Which Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS?Rent-to-own dealer. 1040x 2010 form Rent-to-own contract. 1040x 2010 form What Is the Placed in Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies?Recovery Periods Under GDS Recovery Periods Under ADS Additions and Improvements Which Convention Applies? Which Depreciation Method Applies?Depreciation Methods for Farm Property Electing a Different Method How Is the Depreciation Deduction Figured?Using the MACRS Percentage Tables Figuring the Deduction Without Using the Tables Figuring the Deduction for Property Acquired in a Nontaxable Exchange Figuring the Deduction for a Short Tax Year How Do You Use General Asset Accounts?Grouping Property Figuring Depreciation for a GAA Disposing of GAA Property Terminating GAA Treatment Electing To Use a GAA When Do You Recapture MACRS Depreciation? Introduction The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. 1040x 2010 form MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). 1040x 2010 form Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. 1040x 2010 form To be sure you can use MACRS to figure depreciation for your property, see What Method Can You Use To Depreciate Your Property in chapter 1. 1040x 2010 form This chapter explains how to determine which MACRS depreciation system applies to your property. 1040x 2010 form It also discusses other information you need to know before you can figure depreciation under MACRS. 1040x 2010 form This information includes the property's recovery class, placed in service date, and basis, as well as the applicable recovery period, convention, and depreciation method. 1040x 2010 form It explains how to use this information to figure your depreciation deduction and how to use a general asset account to depreciate a group of properties. 1040x 2010 form Finally, it explains when and how to recapture MACRS depreciation. 1040x 2010 form Useful Items - You may want to see: Publication 225 Farmer's Tax Guide 463 Travel, Entertainment, Gift, and Car  Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 587 Business Use of Your Home (Including Use by Daycare Providers) Form (and Instructions) 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 4562 Depreciation and Amortization See chapter 6 for information about getting publications and forms. 1040x 2010 form Which Depreciation System (GDS or ADS) Applies? Your use of either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to depreciate property under MACRS determines what depreciation method and recovery period you use. 1040x 2010 form You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. 1040x 2010 form If you placed your property in service in 2013, complete Part III of Form 4562 to report depreciation using MACRS. 1040x 2010 form Complete section B of Part III to report depreciation using GDS, and complete section C of Part III to report depreciation using ADS. 1040x 2010 form If you placed your property in service before 2013 and are required to file Form 4562, report depreciation using either GDS or ADS on line 17 in Part III. 1040x 2010 form Required use of ADS. 1040x 2010 form   You must use ADS for the following property. 1040x 2010 form Listed property used 50% or less in a qualified business use. 1040x 2010 form See chapter 5 for information on listed property. 1040x 2010 form Any tangible property used predominantly outside the United States during the year. 1040x 2010 form Any tax-exempt use property. 1040x 2010 form Any tax-exempt bond-financed property. 1040x 2010 form All property used predominantly in a farming business and placed in service in any tax year during which an election not to apply the uniform capitalization rules to certain farming costs is in effect. 1040x 2010 form Any property imported from a foreign country for which an Executive Order is in effect because the country maintains trade restrictions or engages in other discriminatory acts. 1040x 2010 form If you are required to use ADS to depreciate your property, you cannot claim any special depreciation allowance (discussed in chapter 3) for the property. 1040x 2010 form Electing ADS. 1040x 2010 form   Although your property may qualify for GDS, you can elect to use ADS. 1040x 2010 form The election generally must cover all property in the same property class that you placed in service during the year. 1040x 2010 form However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. 1040x 2010 form Once you make this election, you can never revoke it. 1040x 2010 form   You make the election by completing line 20 in Part III of Form 4562. 1040x 2010 form Which Property Class Applies Under GDS? The following is a list of the nine property classifications under GDS and examples of the types of property included in each class. 1040x 2010 form These property classes are also listed under column (a) in section B, Part III, of Form 4562. 1040x 2010 form For detailed information on property classes, see Appendix B, Table of Class Lives and Recovery Periods, in this publication. 1040x 2010 form 3-year property. 1040x 2010 form Tractor units for over-the-road use. 1040x 2010 form Any race horse over 2 years old when placed in service. 1040x 2010 form (All race horses placed in service after December 31, 2008, and before January 1, 2014, are deemed to be 3-year property, regardless of age. 1040x 2010 form ) Any other horse (other than a race horse) over 12 years old when placed in service. 1040x 2010 form Qualified rent-to-own property (defined later). 1040x 2010 form 5-year property. 1040x 2010 form Automobiles, taxis, buses, and trucks. 1040x 2010 form Computers and peripheral equipment. 1040x 2010 form Office machinery (such as typewriters, calculators, and copiers). 1040x 2010 form Any property used in research and experimentation. 1040x 2010 form Breeding cattle and dairy cattle. 1040x 2010 form Appliances, carpets, furniture, etc. 1040x 2010 form , used in a residential rental real estate activity. 1040x 2010 form Certain geothermal, solar, and wind energy property. 1040x 2010 form 7-year property. 1040x 2010 form Office furniture and fixtures (such as desks, files, and safes). 1040x 2010 form Agricultural machinery and equipment. 1040x 2010 form Any property that does not have a class life and has not been designated by law as being in any other class. 1040x 2010 form Certain motorsports entertainment complex property (defined later) placed in service before January 1, 2014. 1040x 2010 form Any natural gas gathering line placed in service after April 11, 2005. 1040x 2010 form See Natural gas gathering line and electric transmission property , later. 1040x 2010 form 10-year property. 1040x 2010 form Vessels, barges, tugs, and similar water transportation equipment. 1040x 2010 form Any single purpose agricultural or horticultural structure. 1040x 2010 form Any tree or vine bearing fruits or nuts. 1040x 2010 form Qualified small electric meter and qualified smart electric grid system (defined later) placed in service on or after October 3, 2008. 1040x 2010 form 15-year property. 1040x 2010 form Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges). 1040x 2010 form Any retail motor fuels outlet (defined later), such as a convenience store. 1040x 2010 form Any municipal wastewater treatment plant. 1040x 2010 form Any qualified leasehold improvement property (defined later) placed in service before January 1, 2014. 1040x 2010 form Any qualified restaurant property (defined later) placed in service before January 1, 2014. 1040x 2010 form Initial clearing and grading land improvements for gas utility property. 1040x 2010 form Electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity placed in service after April 11, 2005. 1040x 2010 form See Natural gas gathering line and electric transmission property , later. 1040x 2010 form Any natural gas distribution line placed in service after April 11, 2005 and before January 1, 2011. 1040x 2010 form Any qualified retail improvement property placed in service before January 1, 2014. 1040x 2010 form 20-year property. 1040x 2010 form Farm buildings (other than single purpose agricultural or horticultural structures). 1040x 2010 form Municipal sewers not classified as 25-year property. 1040x 2010 form Initial clearing and grading land improvements for electric utility transmission and distribution plants. 1040x 2010 form 25-year property. 1040x 2010 form This class is water utility property, which is either of the following. 1040x 2010 form Property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to this provision, would be 20-year property. 1040x 2010 form Municipal sewers other than property placed in service under a binding contract in effect at all times since June 9, 1996. 1040x 2010 form Residential rental property. 1040x 2010 form This is any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross rental income for the tax year is from dwelling units. 1040x 2010 form A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. 1040x 2010 form It does not include a unit in a hotel, motel, or other establishment where more than half the units are used on a transient basis. 1040x 2010 form If you occupy any part of the building or structure for personal use, its gross rental income includes the fair rental value of the part you occupy. 1040x 2010 form Nonresidential real property. 1040x 2010 form This is section 1250 property, such as an office building, store, or warehouse, that is neither residential rental property nor property with a class life of less than 27. 1040x 2010 form 5 years. 1040x 2010 form Qualified rent-to-own property. 1040x 2010 form   Qualified rent-to-own property is property held by a rent-to-own dealer for purposes of being subject to a rent-to-own contract. 1040x 2010 form It is tangible personal property generally used in the home for personal use. 1040x 2010 form It includes computers and peripheral equipment, televisions, videocassette recorders, stereos, camcorders, appliances, furniture, washing machines and dryers, refrigerators, and other similar consumer durable property. 1040x 2010 form Consumer durable property does not include real property, aircraft, boats, motor vehicles, or trailers. 1040x 2010 form   If some of the property you rent to others under a rent-to-own agreement is of a type that may be used by the renters for either personal or business purposes, you still can treat this property as qualified property as long as it does not represent a significant portion of your leasing property. 1040x 2010 form However, if this dual-use property does represent a significant portion of your leasing property, you must prove that this property is qualified rent-to-own property. 1040x 2010 form Rent-to-own dealer. 1040x 2010 form   You are a rent-to-own dealer if you meet all the following requirements. 1040x 2010 form You regularly enter into rent-to-own contracts (defined below) in the ordinary course of your business for the use of consumer property. 1040x 2010 form A substantial portion of these contracts end with the customer returning the property before making all the payments required to transfer ownership. 1040x 2010 form The property is tangible personal property of a type generally used within the home for personal use. 1040x 2010 form Rent-to-own contract. 1040x 2010 form   This is any lease for the use of consumer property between a rent-to-own dealer and a customer who is an individual which— Is titled “Rent-to-Own Agreement,” “Lease Agreement with Ownership Option,” or other similar language. 1040x 2010 form Provides a beginning date and a maximum period of time, not to exceed 156 weeks or 36 months from the beginning date, for which the contract can be in effect (including renewals or options to extend). 1040x 2010 form Provides for regular periodic (weekly or monthly) payments that can be either level or decreasing. 1040x 2010 form If the payments are decreasing, no payment can be less than 40% of the largest payment. 1040x 2010 form Provides for total payments that generally exceed the normal retail price of the property plus interest. 1040x 2010 form Provides for total payments that do not exceed $10,000 for each item of property. 1040x 2010 form Provides that the customer has no legal obligation to make all payments outlined in the contract and that, at the end of each weekly or monthly payment period, the customer can either continue to use the property by making the next payment or return the property in good working order with no further obligations and no entitlement to a return of any prior payments. 1040x 2010 form Provides that legal title to the property remains with the rent-to-own dealer until the customer makes either all the required payments or the early purchase payments required under the contract to acquire legal title. 1040x 2010 form Provides that the customer has no right to sell, sublease, mortgage, pawn, pledge, or otherwise dispose of the property until all contract payments have been made. 1040x 2010 form Motorsports entertainment complex. 1040x 2010 form   This is a racing track facility permanently situated on land that hosts one or more racing events for automobiles, trucks, or motorcycles during the 36-month period after the first day of the month in which the facility is placed in service. 1040x 2010 form The events must be open to the public for the price of admission. 1040x 2010 form Qualified smart electric grid system. 1040x 2010 form   A qualified smart electric grid system means any smart grid property used as part of a system for electric distribution grid communications, monitoring, and management placed in service after October 3, 2008, by a taxpayer who is a supplier of electrical energy or a provider of electrical energy services. 1040x 2010 form Smart grid property includes electronics and related equipment that is capable of: Sensing, collecting, and monitoring data of or from all portions of a utility's electric distribution grid, Providing real-time, two-way communications to monitor or to manage the grid, and Providing real-time analysis of an event prediction based on collected data that can be used to provide electric distribution system reliability, quality, and performance. 1040x 2010 form Retail motor fuels outlet. 1040x 2010 form   Real property is a retail motor fuels outlet if it is used to a substantial extent in the retail marketing of petroleum or petroleum products (whether or not it is also used to sell food or other convenience items) and meets any one of the following three tests. 1040x 2010 form It is not larger than 1,400 square feet. 1040x 2010 form 50% or more of the gross revenues generated from the property are derived from petroleum sales. 1040x 2010 form 50% or more of the floor space in the property is devoted to petroleum marketing sales. 1040x 2010 form A retail motor fuels outlet does not include any facility related to petroleum and natural gas trunk pipelines. 1040x 2010 form Qualified leasehold improvement property. 1040x 2010 form    Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2014) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met. 1040x 2010 form   In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor's death or in any of the following types of transactions. 1040x 2010 form A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or reacquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor's or distributor's basis in the property. 1040x 2010 form Examples include the following. 1040x 2010 form A complete liquidation of a subsidiary. 1040x 2010 form A transfer to a corporation controlled by the transferor. 1040x 2010 form An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. 1040x 2010 form Qualified restaurant property. 1040x 2010 form   Qualified restaurant property is any section 1250 property that is a building placed in service after December 31, 2008, and before January 1, 2014. 1040x 2010 form Also, more than 50% of the building's square footage must be devoted to preparation of meals and seating for on-premises consumption of prepared meals. 1040x 2010 form Qualified smart electric meter. 1040x 2010 form   A qualified smart electric meter is any time-based meter and related communication equipment which is placed in service by a supplier of electric energy or a provider of electric energy services and which is capable of being used by you as part of a system that: Measures and records electricity usage data on a time-differentiated basis in at least 24 separate time segments per day; Provides for the exchange of information between the supplier or provider and the customer's smart electric meter in support of time-based rates or other forms of demand response; Provides data to the supplier or provider so that the supplier or provider can provide energy usage information to customers electronically, and Provides all commercial and residential customers of such supplier or provider with net metering. 1040x 2010 form Net metering means allowing a customer a credit, if any, as complies with applicable federal and state laws and regulations for providing electricity to the supplier or provider. 1040x 2010 form Natural gas gathering line and electric transmission property. 1040x 2010 form   Any natural gas gathering line placed in service after April 11, 2005, is treated as 7-year property, and electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity and any natural gas distribution line placed in service after April 11, 2005, are treated as 15-year property, if the following requirements are met. 1040x 2010 form The original use of the property must have begun with you after April 11, 2005. 1040x 2010 form Original use means the first use to which the property is put, whether or not by you. 1040x 2010 form Therefore, property used by any person before April 12, 2005, is not original use. 1040x 2010 form Original use includes additional capital expenditures you incurred to recondition or rebuild your property. 1040x 2010 form However, original use does not include the cost of reconditioned or rebuilt property you acquired. 1040x 2010 form Property containing used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20% of the total cost of the property. 1040x 2010 form The property must not be placed in service under a binding contract in effect before April 12, 2005. 1040x 2010 form The property must not be self-constructed property (property you manufacture, construct, or produce for your own use), if you began the manufacture, construction, or production of the property before April 12, 2005. 1040x 2010 form Property that is manufactured, constructed, or produced for your use by another person under a written binding contract entered into by you or a related party before the manufacture, construction, or production of the property is considered to be manufactured, constructed, or produced by you. 1040x 2010 form What Is the Placed in Service Date? You begin to claim depreciation when your property is placed in service for either use in a trade or business or the production of income. 1040x 2010 form The placed in service date for your property is the date the property is ready and available for a specific use. 1040x 2010 form It is therefore not necessarily the date it is first used. 1040x 2010 form If you converted property held for personal use to use in a trade or business or for the production of income, treat the property as being placed in service on the conversion date. 1040x 2010 form See Placed in Service under When Does Depreciation Begin and End in chapter 1 for examples illustrating when property is placed in service. 1040x 2010 form What Is the Basis for Depreciation? The basis for depreciation of MACRS property is the property's cost or other basis multiplied by the percentage of business/investment use. 1040x 2010 form For a discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or Income-Producing Activity in chapter 1 . 1040x 2010 form Reduce that amount by any credits and deductions allocable to the property. 1040x 2010 form The following are examples of some credits and deductions that reduce basis. 1040x 2010 form Any deduction for section 179 property. 1040x 2010 form Any deduction under section 179B of the Internal Revenue Code for capital costs to comply with Environmental Protection Agency sulfur regulations. 1040x 2010 form Any deduction under section 179C of the Internal Revenue Code for certain qualified refinery property placed in service after August 8, 2005, and before January 1, 2014. 1040x 2010 form Any deduction under section 179D of the Internal Revenue Code for certain energy efficient commercial building property placed in service after December 31, 2005, and before January 1, 2014. 1040x 2010 form Any deduction under section 179E of the Internal Revenue Code for qualified advanced mine safety equipment property placed in service after December 20, 2006, and before January 1, 2014 . 1040x 2010 form Any deduction for removal of barriers to the disabled and the elderly. 1040x 2010 form Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. 1040x 2010 form Any special depreciation allowance. 1040x 2010 form Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. 1040x 2010 form For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. 1040x 2010 form Enter the basis for depreciation under column (c) in Part III of Form 4562. 1040x 2010 form For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property in chapter 1 . 1040x 2010 form Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. 1040x 2010 form It is determined based on the depreciation system (GDS or ADS) used. 1040x 2010 form Recovery Periods Under GDS Under GDS, property that is not qualified Indian reservation property is depreciated over one of the following recovery periods. 1040x 2010 form Property Class Recovery Period 3-year property   3 years 1   5-year property   5 years     7-year property   7 years     10-year property   10 years     15-year property   15 years 2   20-year property   20 years     25-year property   25 years 3   Residential rental property   27. 1040x 2010 form 5 years     Nonresidential real property   39 years 4   15 years for qualified rent-to-own property placed in service before August 6, 1997. 1040x 2010 form 239 years for property that is a retail motor fuels outlet placed in service before August 20, 1996 (31. 1040x 2010 form 5 years if placed in service before May 13, 1993), unless you elected to depreciate it over 15 years. 1040x 2010 form 320 years for property placed in service before June 13, 1996, or under a binding contract in effect before June 10, 1996. 1040x 2010 form 431. 1040x 2010 form 5 years for property placed in service before May 13, 1993 (or before January 1, 1994, if the purchase or construction of the property is under a binding contract in effect before May 13, 1993, or if construction began before May 13, 1993). 1040x 2010 form The GDS recovery periods for property not listed above can be found in Appendix B, Table of Class Lives and Recovery Periods. 1040x 2010 form Residential rental property and nonresidential real property are defined earlier under Which Depreciation System (GDS or ADS) Applies. 1040x 2010 form Enter the appropriate recovery period on Form 4562 under column (d) in section B of Part III, unless already shown (for 25-year property, residential rental property, and nonresidential real property). 1040x 2010 form Office in the home. 1040x 2010 form   If your home is a personal-use single family residence and you begin to use part of your home as an office, depreciate that part of your home as nonresidential real property over 39 years (31. 1040x 2010 form 5 years if you began using it for business before May 13, 1993). 1040x 2010 form However, if your home is an apartment in an apartment building that you own and the building is residential rental property as defined earlier under Which Depreciation System (GDS or ADS) Applies , depreciate the part used as an office as residential rental property over 27. 1040x 2010 form 5 years. 1040x 2010 form See Publication 587 for a discussion of the tests you must meet to claim expenses, including depreciation, for the business use of your home. 1040x 2010 form Home changed to rental use. 1040x 2010 form   If you begin to rent a home that was your personal home before 1987, you depreciate it as residential rental property over 27. 1040x 2010 form 5 years. 1040x 2010 form Indian Reservation Property The recovery periods for qualified property you placed in service on an Indian reservation after 1993 and before 2014 are shorter than those listed earlier. 1040x 2010 form The following table shows these shorter recovery periods. 1040x 2010 form Property Class Recovery  Period 3-year property 2 years 5-year property 3 years 7-year property 4 years 10-year property 6 years 15-year property 9 years 20-year property 12 years Nonresidential real property 22 years Nonresidential real property is defined earlier under Which Property Class Applies Under GDS . 1040x 2010 form Use this chart to find the correct percentage table to use for qualified Indian reservation property. 1040x 2010 form IF your recovery period is: THEN use the following table in Appendix A: 2 years A-21 3 years A-1, A-2, A-3, A-4, or A-5 4 years A-22 6 years A-23 9 years A-14, A-15, A-16, A-17, or A-18 12 years A-14, A-15, A-16, A-17, or A-18 22 years A-24 Qualified property. 1040x 2010 form   Property eligible for the shorter recovery periods are 3-, 5-, 7-, 10-, 15-, and 20-year property and nonresidential real property. 1040x 2010 form You must use this property predominantly in the active conduct of a trade or business within an Indian reservation. 1040x 2010 form The rental of real property that is located on an Indian reservation is treated as the active conduct of a trade or business within an Indian reservation. 1040x 2010 form   The following property is not qualified property. 1040x 2010 form Property used or located outside an Indian reservation on a regular basis, other than qualified infrastructure property. 1040x 2010 form Property acquired directly or indirectly from a related person. 1040x 2010 form Property placed in service for purposes of conducting or housing class I, II, or III gaming activities. 1040x 2010 form These activities are defined in section 4 of the Indian Regulatory Act (25 U. 1040x 2010 form S. 1040x 2010 form C. 1040x 2010 form 2703). 1040x 2010 form Any property you must depreciate under ADS. 1040x 2010 form Determine whether property is qualified without regard to the election to use ADS and after applying the special rules for listed property not used predominantly for qualified business use (discussed in chapter 5). 1040x 2010 form Qualified infrastructure property. 1040x 2010 form   Item (1) above does not apply to qualified infrastructure property located outside the reservation that is used to connect with qualified infrastructure property within the reservation. 1040x 2010 form Qualified infrastructure property is property that meets all the following rules. 1040x 2010 form It is qualified property, as defined earlier, except that it is outside the reservation. 1040x 2010 form It benefits the tribal infrastructure. 1040x 2010 form It is available to the general public. 1040x 2010 form It is placed in service in connection with the active conduct of a trade or business within a reservation. 1040x 2010 form Infrastructure property includes, but is not limited to, roads, power lines, water systems, railroad spurs, and communications facilities. 1040x 2010 form Related person. 1040x 2010 form   For purposes of item (2) above, see Related persons in the discussion on property owned or used in 1986 under What Method Can You Use To Depreciate Your Property in chapter 1 for a description of related persons. 1040x 2010 form Indian reservation. 1040x 2010 form   The term Indian reservation means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 (25 U. 1040x 2010 form S. 1040x 2010 form C. 1040x 2010 form 1452(d)) or section 4(10) of the Indian Child Welfare Act of 1978 (25 U. 1040x 2010 form S. 1040x 2010 form C. 1040x 2010 form 1903(10)). 1040x 2010 form Section 3(d) of the Indian Financing Act of 1974 defines reservation to include former Indian reservations in Oklahoma. 1040x 2010 form For a definition of the term “former Indian reservations in Oklahoma,” see Notice 98-45 in Internal Revenue Bulletin 1998-35. 1040x 2010 form Recovery Periods Under ADS The recovery periods for most property generally are longer under ADS than they are under GDS. 1040x 2010 form The following table shows some of the ADS recovery periods. 1040x 2010 form Property Recovery  Period Rent-to-own property 4 years Automobiles and light duty trucks 5 years Computers and peripheral equipment 5 years High technology telephone station equipment installed on customer premises 5 years High technology medical equipment 5 years Personal property with no class life 12 years Natural gas gathering lines 14 years Single purpose agricultural and horticultural structures 15 years Any tree or vine bearing fruit or nuts 20 years Initial clearing and grading land  improvements for gas utility property 20 years Initial clearing and grading land  improvements for electric utility  transmission and distribution plants 25 years Electric transmission property used in the transmission at 69 or more kilovolts of electricity 30 years Natural gas distribution lines 35 years Any qualified leasehold improvement property 39 years Any qualified restaurant property 39 years Nonresidential real property 40 years Residential rental property 40 years Section 1245 real property not listed in Appendix B 40 years Railroad grading and tunnel bore 50 years The ADS recovery periods for property not listed above can be found in the tables in Appendix B. 1040x 2010 form Rent-to-own property, qualified leasehold improvement property, qualified restaurant property, residential rental property, and nonresidential real property are defined earlier under Which Property Class Applies Under GDS . 1040x 2010 form Tax-exempt use property subject to a lease. 1040x 2010 form   The ADS recovery period for any property leased under a lease agreement to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership) cannot be less than 125% of the lease term. 1040x 2010 form Additions and Improvements An addition or improvement you make to depreciable property is treated as separate depreciable property. 1040x 2010 form See How Do You Treat Repairs and Improvements in chapter 1 for a definition of improvements. 1040x 2010 form Its property class and recovery period are the same as those that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. 1040x 2010 form The recovery period begins on the later of the following dates. 1040x 2010 form The date you place the addition or improvement in service. 1040x 2010 form The date you place in service the property to which you made the addition or improvement. 1040x 2010 form If the improvement you make is qualified leasehold improvement property, qualified restaurant property, or qualified retail improvement property, the GDS recovery period is 15 years (39 years under ADS). 1040x 2010 form Example. 1040x 2010 form You own a rental home that you have been renting out since 1981. 1040x 2010 form If you put an addition on the home and place the addition in service this year, you would use MACRS to figure your depreciation deduction for the addition. 1040x 2010 form Under GDS, the property class for the addition is residential rental property and its recovery period is 27. 1040x 2010 form 5 years because the home to which the addition is made would be residential rental property if you had placed it in service this year. 1040x 2010 form Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. 1040x 2010 form The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property. 1040x 2010 form The mid-month convention. 1040x 2010 form   Use this convention for nonresidential real property, residential rental property, and any railroad grading or tunnel bore. 1040x 2010 form   Under this convention, you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. 1040x 2010 form This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of. 1040x 2010 form   Your use of the mid-month convention is indicated by the “MM” already shown under column (e) in Part III of Form 4562. 1040x 2010 form The mid-quarter convention. 1040x 2010 form   Use this convention if the mid-month convention does not apply and the total depreciable bases of MACRS property you placed in service during the last 3 months of the tax year (excluding nonresidential real property, residential rental property, any railroad grading or tunnel bore, property placed in service and disposed of in the same year, and property that is being depreciated under a method other than MACRS) are more than 40% of the total depreciable bases of all MACRS property you placed in service during the entire year. 1040x 2010 form   Under this convention, you treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed of at the midpoint of that quarter. 1040x 2010 form This means that 1½ months of depreciation is allowed for the quarter the property is placed in service or disposed of. 1040x 2010 form   If you use this convention, enter “MQ” under column (e) in Part III of Form 4562. 1040x 2010 form    For purposes of determining whether the mid-quarter convention applies, the depreciable basis of property you placed in service during the tax year reflects the reduction in basis for amounts expensed under section 179 and the part of the basis of property attributable to personal use. 1040x 2010 form However, it does not reflect any reduction in basis for any special depreciation allowance. 1040x 2010 form The half-year convention. 1040x 2010 form   Use this convention if neither the mid-quarter convention nor the mid-month convention applies. 1040x 2010 form   Under this convention, you treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the midpoint of the year. 1040x 2010 form This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of. 1040x 2010 form   If you use this convention, enter “HY” under column (e) in Part III of Form 4562. 1040x 2010 form Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. 1040x 2010 form The 200% declining balance method over a GDS recovery period. 1040x 2010 form The 150% declining balance method over a GDS recovery period. 1040x 2010 form The straight line method over a GDS recovery period. 1040x 2010 form The straight line method over an ADS recovery period. 1040x 2010 form For property placed in service before 1999, you could have elected the 150% declining balance method using the ADS recovery periods for certain property classes. 1040x 2010 form If you made this election, continue to use the same method and recovery period for that property. 1040x 2010 form Table 4–1 lists the types of property you can depreciate under each method. 1040x 2010 form It also gives a brief explanation of the method, including any benefits that may apply. 1040x 2010 form Depreciation Methods for Farm Property If you place personal property in service in a farming business after 1988, you generally must depreciate it under GDS using the 150% declining balance method unless you are a farmer who must depreciate the property under ADS using the straight line method or you elect to depreciate the property under GDS or ADS using the straight line method. 1040x 2010 form You can depreciate real property using the straight line method under either GDS or ADS. 1040x 2010 form Fruit or nut trees and vines. 1040x 2010 form   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a recovery period of 10 years. 1040x 2010 form ADS required for some farmers. 1040x 2010 form   If you elect not to apply the uniform capitalization rules to any plant produced in your farming business, you must use ADS. 1040x 2010 form You must use ADS for all property you place in service in any year the election is in effect. 1040x 2010 form See the regulations under section 263A of the Internal Revenue Code for information on the uniform capitalization rules that apply to farm property. 1040x 2010 form Electing a Different Method As shown in Table 4–1 , you can elect a different method for depreciation for certain types of property. 1040x 2010 form You must make the election by the due date of the return (including extensions) for the year you placed the property in service. 1040x 2010 form However, if you timely filed your return for the year without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 1040x 2010 form Attach the election to the amended return and write “Filed pursuant to section 301. 1040x 2010 form 9100-2” on the election statement. 1040x 2010 form File the amended return at the same address you filed the original return. 1040x 2010 form Once you make the election, you cannot change it. 1040x 2010 form If you elect to use a different method for one item in a property class, you must apply the same method to all property in that class placed in service during the year of the election. 1040x 2010 form However, you can make the election on a property-by-property basis for nonresidential real and residential rental property. 1040x 2010 form 150% election. 1040x 2010 form   Instead of using the 200% declining balance method over the GDS recovery period for nonfarm property in the 3-, 5-, 7-, and 10-year property classes, you can elect to use the 150% declining balance method. 1040x 2010 form Make the election by entering “150 DB” under column (f) in Part III of Form 4562. 1040x 2010 form Straight line election. 1040x 2010 form   Instead of using either the 200% or 150% declining balance methods over the GDS recovery period, you can elect to use the straight line method over the GDS recovery period. 1040x 2010 form Make the election by entering  “S/L” under column (f) in Part III of Form 4562. 1040x 2010 form Election of ADS. 1040x 2010 form   As explained earlier under Which Depreciation System (GDS or ADS) Applies , you can elect to use ADS even though your property may come under GDS. 1040x 2010 form ADS uses the straight line method of depreciation over fixed ADS recovery periods. 1040x 2010 form Most ADS recovery periods are listed in Appendix B, or see the table under Recovery Periods Under ADS , earlier. 1040x 2010 form   Make the election by completing line 20 in Part III of Form 4562. 1040x 2010 form Farm property. 1040x 2010 form   Instead of using the 150% declining balance method over a GDS recovery period for property you use in a farming business (other than real property), you can elect to depreciate it using either of the following methods. 1040x 2010 form The straight line method over a GDS recovery period. 1040x 2010 form The straight line method over an ADS recovery period. 1040x 2010 form Table 4-1. 1040x 2010 form Depreciation Methods Note. 1040x 2010 form The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. 1040x 2010 form Method Type of Property Benefit GDS using 200% DB • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction GDS using 150% DB • All farm property (except real property) • All 15- and 20-year property (except qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property placed in service before January 1, 2014) • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction1 GDS using SL • Nonresidential real property • Qualified leasehold improvement property placed in service before January 1, 2014 • Qualified restaurant property placed in service before January 1, 2014 • Qualified retail improvement property placed in service before January 1, 2014 • Residential rental property • Trees or vines bearing fruit or nuts • Water utility property • All 3-, 5-, 7-, 10-, 15-, and 20-year property2 • Property for which you elected section 168(k)(4) • Provides for equal yearly deductions (except for the first and last years) ADS using SL • Listed property used 50% or less for business • Property used predominantly outside the U. 1040x 2010 form S. 1040x 2010 form  • Tax-exempt property • Tax-exempt bond-financed property • Farm property used when an election not to apply the uniform capitalization rules is in effect • Imported property3 • Any property for which you elect to use this method4 • Provides for equal yearly deductions (except for the first and last years) 1The MACRS percentage tables in Appendix A have the switch to the straight line method built into their rates 2See section 168(b)(5) of the Internal Revenue Code. 1040x 2010 form 3See section 168(g)(6) of the Internal Revenue Code 4See section 168(g)(7) of the Internal Revenue Code How Is the Depreciation Deduction Figured? To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed in service date, basis amount, recovery period, convention, and depreciation method that applies to your property. 1040x 2010 form Then, you are ready to figure your depreciation deduction. 1040x 2010 form You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table. 1040x 2010 form Using the MACRS Percentage Tables To help you figure your deduction under MACRS, the IRS has established percentage tables that incorporate the applicable convention and depreciation method. 1040x 2010 form These percentage tables are in Appendix A near the end of this publication. 1040x 2010 form Which table to use. 1040x 2010 form    Appendix A contains the MACRS Percentage Table Guide, which is designed to help you locate the correct percentage table to use for depreciating your property. 1040x 2010 form The percentage tables immediately follow the guide. 1040x 2010 form Rules Covering the Use of the Tables The following rules cover the use of the percentage tables. 1040x 2010 form You must apply the rates in the percentage tables to your property's unadjusted basis. 1040x 2010 form You cannot use the percentage tables for a short tax year. 1040x 2010 form See Figuring the Deduction for a Short Tax Year, later, for information on the short tax year rules. 1040x 2010 form Once you start using the percentage tables for any item of property, you generally must continue to use them for the entire recovery period of the property. 1040x 2010 form You must stop using the tables if you adjust the basis of the property for any reason other than— Depreciation allowed or allowable, or An addition or improvement to that property that is depreciated as a separate item of property. 1040x 2010 form Basis adjustments other than those made due to the items listed in (4) include an increase in basis for the recapture of a clean-fuel deduction or credit and a reduction in basis for a casualty loss. 1040x 2010 form Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. 1040x 2010 form   If you increase the basis of your property because of the recapture of part or all of a deduction for clean-fuel vehicles or the credit for clean-fuel vehicle refueling property placed in service before January 1, 2006, you cannot continue to use the percentage tables. 1040x 2010 form For the year of the adjustment and the remaining recovery period, you must figure the depreciation deduction yourself using the property's adjusted basis at the end of the year. 1040x 2010 form See Figuring the Deduction Without Using the Tables, later. 1040x 2010 form Basis adjustment due to casualty loss. 1040x 2010 form   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. 1040x 2010 form For the year of the adjustment and the remaining recovery period, you must figure the depreciation yourself using the property's adjusted basis at the end of the year. 1040x 2010 form See Figuring the Deduction Without Using the Tables, later. 1040x 2010 form Example. 1040x 2010 form On October 26, 2012, Sandra Elm, a calendar year taxpayer, bought and placed in service in her business a new item of 7-year property. 1040x 2010 form It cost $39,000 and she elected a section 179 deduction of $24,000. 1040x 2010 form She also took a special depreciation allowance of $7,500 [50% of $15,000 ($39,000 − $24,000)]. 1040x 2010 form Her unadjusted basis after the section 179 deduction and special depreciation allowance was $7,500 ($15,000 − $7,500). 1040x 2010 form She figured her MACRS depreciation deduction using the percentage tables. 1040x 2010 form For 2012, her MACRS depreciation deduction was $268. 1040x 2010 form In July 2013, the property was vandalized and Sandra had a deductible casualty loss of $3,000. 1040x 2010 form She must adjust the property's basis for the casualty loss, so she can no longer use the percentage tables. 1040x 2010 form Her adjusted basis at the end of 2013, before figuring her 2013 depreciation, is $4,232. 1040x 2010 form She figures that amount by subtracting the 2012 MACRS depreciation of $268 and the casualty loss of $3,000 from the unadjusted basis of $7,500. 1040x 2010 form She must now figure her depreciation for 2013 without using the percentage tables. 1040x 2010 form Figuring the Unadjusted Basis of Your Property You must apply the table rates to your property's unadjusted basis each year of the recovery period. 1040x 2010 form Unadjusted basis is the same basis amount you would use to figure gain on a sale, but you figure it without reducing your original basis by any MACRS depreciation taken in earlier years. 1040x 2010 form However, you do reduce your original basis by other amounts, including the following. 1040x 2010 form Any amortization taken on the property. 1040x 2010 form Any section 179 deduction claimed. 1040x 2010 form Any special depreciation allowance taken on the property. 1040x 2010 form For business property you purchase during the year, the unadjusted basis is its cost minus these and other applicable adjustments. 1040x 2010 form If you trade property, your unadjusted basis in the property received is the cash paid plus the adjusted basis of the property traded minus these adjustments. 1040x 2010 form MACRS Worksheet You can use this worksheet to help you figure your depreciation deduction using the percentage tables. 1040x 2010 form Use a separate worksheet for each item of property. 1040x 2010 form Then, use the information from this worksheet to prepare Form 4562. 1040x 2010 form Do not use this worksheet for automobiles. 1040x 2010 form Use the Depreciation Worksheet for Passenger Automobiles in chapter 5. 1040x 2010 form MACRS Worksheet Part I   1. 1040x 2010 form MACRS system (GDS or ADS)   2. 1040x 2010 form Property class   3. 1040x 2010 form Date placed in service   4. 1040x 2010 form Recovery period   5. 1040x 2010 form Method and convention   6. 1040x 2010 form Depreciation rate (from tables)   Part II   7. 1040x 2010 form Cost or other basis* $     8. 1040x 2010 form Business/investment use   %   9. 1040x 2010 form Multiply line 7 by line 8   $ 10. 1040x 2010 form Total claimed for section 179 deduction and other items   $ 11. 1040x 2010 form Subtract line 10 from line 9. 1040x 2010 form This is your tentative basis for depreciation   $ 12. 1040x 2010 form Multiply line 11 by . 1040x 2010 form 50 if the 50% special depreciation allowance applies. 1040x 2010 form This is your special depreciation allowance. 1040x 2010 form Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   $ 13. 1040x 2010 form Subtract line 12 from line 11. 1040x 2010 form This is your basis for depreciation     14. 1040x 2010 form Depreciation rate (from line 6)     15. 1040x 2010 form Multiply line 13 by line 14. 1040x 2010 form This is your MACRS depreciation deduction   $ *If real estate, do not include cost (basis) of land. 1040x 2010 form The following example shows how to figure your MACRS depreciation deduction using the percentage tables and the MACRS worksheet. 1040x 2010 form Example. 1040x 2010 form You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2013. 1040x 2010 form You use the furniture only for business. 1040x 2010 form This is the only property you placed in service this year. 1040x 2010 form You did not elect a section 179 deduction and the property is not qualified property for purposes of claiming a special depreciation allowance so your property's unadjusted basis is its cost, $10,000. 1040x 2010 form You use GDS and the half-year convention to figure your depreciation. 1040x 2010 form You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. 1040x 2010 form Multiply your property's unadjusted basis each year by the percentage for 7-year property given in Table A-1. 1040x 2010 form You figure your depreciation deduction using the MACRS worksheet as follows. 1040x 2010 form MACRS Worksheet Part I 1. 1040x 2010 form MACRS system (GDS or ADS) GDS 2. 1040x 2010 form Property class 7-year 3. 1040x 2010 form Date placed in service 8/11/13 4. 1040x 2010 form Recovery period 7-Year 5. 1040x 2010 form Method and convention 200%DB/Half-Year 6. 1040x 2010 form Depreciation rate (from tables) . 1040x 2010 form 1429 Part II 7. 1040x 2010 form Cost or other basis* $10,000     8. 1040x 2010 form Business/investment use 100 %   9. 1040x 2010 form Multiply line 7 by line 8   $10,000 10. 1040x 2010 form Total claimed for section 179 deduction and other items   -0- 11. 1040x 2010 form Subtract line 10 from line 9. 1040x 2010 form This is your tentative basis for depreciation   $10,000 12. 1040x 2010 form Multiply line 11 by . 1040x 2010 form 50 if the 50% special depreciation allowance applies. 1040x 2010 form This is your special depreciation allowance. 1040x 2010 form Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   -0- 13. 1040x 2010 form Subtract line 12 from line 11. 1040x 2010 form This is your basis for depreciation   $10,000 14. 1040x 2010 form Depreciation rate (from line 6)   . 1040x 2010 form 1429 15. 1040x 2010 form Multiply line 13 by line 14. 1040x 2010 form This is your MACRS depreciation deduction   $1,429 *If real estate, do not include cost (basis) of land. 1040x 2010 form If there are no adjustments to the basis of the property other than depreciation, your depreciation deduction for each subsequent year of the recovery period will be as follows. 1040x 2010 form Year   Basis Percentage Deduction 2014 $ 10,000 24. 1040x 2010 form 49%   $2,449   2015   10,000 17. 1040x 2010 form 49   1,749   2016   10,000 12. 1040x 2010 form 49   1,249   2017   10,000 8. 1040x 2010 form 93   893   2018   10,000 8. 1040x 2010 form 92   892   2019   10,000 8. 1040x 2010 form 93   893   2020   10,000 4. 1040x 2010 form 46   446   Examples The following examples are provided to show you how to use the percentage tables. 1040x 2010 form In both examples, assume the following. 1040x 2010 form You use the property only for business. 1040x 2010 form You use the calendar year as your tax year. 1040x 2010 form You use GDS for all the properties. 1040x 2010 form Example 1. 1040x 2010 form You bought a building and land for $120,000 and placed it in service on March 8. 1040x 2010 form The sales contract showed that the building cost $100,000 and the land cost $20,000. 1040x 2010 form It is nonresidential real property. 1040x 2010 form The building's unadjusted basis is its original cost, $100,000. 1040x 2010 form You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. 1040x 2010 form March is the third month of your tax year, so multiply the building's unadjusted basis, $100,000, by the percentages for the third month in Table A-7a. 1040x 2010 form Your depreciation deduction for each of the first 3 years is as follows: Year   Basis Percentage Deduction 1st $ 100,000 2. 1040x 2010 form 033%   $2,033   2nd   100,000 2. 1040x 2010 form 564   2,564   3rd   100,000 2. 1040x 2010 form 564   2,564   Example 2. 1040x 2010 form During the year, you bought a machine (7-year property) for $4,000, office furniture (7-year property) for $1,000, and a computer (5-year property) for $5,000. 1040x 2010 form You placed the machine in service in January, the furniture in September, and the computer in October. 1040x 2010 form You do not elect a section 179 deduction and none of these items is qualified property for purposes of claiming a special depreciation allowance. 1040x 2010 form You placed property in service during the last 3 months of the year, so you must first determine if you have to use the mid-quarter convention. 1040x 2010 form The total bases of all property you placed in service during the year is $10,000. 1040x 2010 form The $5,000 basis of the computer, which you placed in service during the last 3 months (the fourth quarter) of your tax year, is more than 40% of the total bases of all property ($10,000) you placed in service during the year. 1040x 2010 form Therefore, you must use the mid-quarter convention for all three items. 1040x 2010 form You refer to the MACRS Percentage Table Guide in Appendix A to determine which table you should use under the mid-quarter convention. 1040x 2010 form The machine is 7-year property placed in service in the first quarter, so you use Table A-2. 1040x 2010 form The furniture is 7-year property placed in service in the third quarter, so you use Table A-4. 1040x 2010 form Finally, because the computer is 5-year property placed in service in the fourth quarter, you use Table A-6. 1040x 2010 form Knowing what table to use for each property, you figure the depreciation for the first 2 years as follows. 1040x 2010 form Year Property Basis Percentage Deduction 1st Machine $4,000 25. 1040x 2010 form 00 $1,000   2nd Machine 4,000 21. 1040x 2010 form 43 857   1st Furniture 1,000 10. 1040x 2010 form 71 107   2nd Furniture 1,000 25. 1040x 2010 form 51 255   1st Computer 5,000 5. 1040x 2010 form 00 250   2nd Computer 5,000 38. 1040x 2010 form 00 1,900   Sale or Other Disposition Before the Recovery Period Ends If you sell or otherwise dispose of your property before the end of its recovery period, your depreciation deduction for the year of the disposition will be only part of the depreciation amount for the full year. 1040x 2010 form You have disposed of your property if you have permanently withdrawn it from use in your business or income-producing activity because of its sale, exchange, retirement, abandonment, involuntary conversion, or destruction. 1040x 2010 form After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property. 1040x 2010 form Half-year convention used. 1040x 2010 form   For property for which you used a half-year convention, the depreciation deduction for the year of the disposition is half the depreciation determined for the full year. 1040x 2010 form Mid-quarter convention used. 1040x 2010 form   For property for which you used the mid-quarter convention, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter in which you disposed of the property. 1040x 2010 form Quarter Percentage First 12. 1040x 2010 form 5% Second 37. 1040x 2010 form 5 Third 62. 1040x 2010 form 5 Fourth 87. 1040x 2010 form 5 Example. 1040x 2010 form On December 2, 2010, you placed in service an item of 5-year property costing $10,000. 1040x 2010 form You did not claim a section 179 deduction and the property does not qualify for a special depreciation allowance. 1040x 2010 form Your unadjusted basis for the property was $10,000. 1040x 2010 form You used the mid-quarter convention because this was the only item of business property you placed in service in 2010 and it was placed in service during the last 3 months of your tax year. 1040x 2010 form Your property is in the 5-year property class, so you used Table A-5 to figure your depreciation deduction. 1040x 2010 form Your deductions for 2010, 2011, and 2012 were $500 (5% of $10,000), $3,800 (38% of $10,000), and $2,280 (22. 1040x 2010 form 80% of $10,000). 1040x 2010 form You disposed of the property on April 6, 2013. 1040x 2010 form To determine your depreciation deduction for 2013, first figure the deduction for the full year. 1040x 2010 form This is $1,368 (13. 1040x 2010 form 68% of $10,000). 1040x 2010 form April is in the second quarter of the year, so you multiply $1,368 by 37. 1040x 2010 form 5% to get your depreciation deduction of $513 for 2013. 1040x 2010 form Mid-month convention used. 1040x 2010 form   If you dispose of residential rental or nonresidential real property, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by a fraction. 1040x 2010 form The numerator of the fraction is the number of months (including partial months) in the year that the property is considered in service. 1040x 2010 form The denominator is 12. 1040x 2010 form Example. 1040x 2010 form On July 2, 2011, you purchased and placed in service residential rental property. 1040x 2010 form The property cost $100,000, not including the cost of land. 1040x 2010 form You used Table A-6 to figure your MACRS depreciation for this property. 1040x 2010 form You sold the property on March 2, 2013. 1040x 2010 form You file your tax return based on the calendar year. 1040x 2010 form A full year of depreciation for 2013 is $3,636. 1040x 2010 form This is $100,000 multiplied by . 1040x 2010 form 03636 (the percentage for the seventh month of the third recovery year) from Table A-6 . 1040x 2010 form You then apply the mid-month convention for the 2½ months of use in 2013. 1040x 2010 form Treat the month of disposition as one-half month of use. 1040x 2010 form Multiply $3,636 by the fraction, 2. 1040x 2010 form 5 over 12, to get your 2013 depreciation deduction of $757. 1040x 2010 form 50. 1040x 2010 form Figuring the Deduction Without Using the Tables Instead of using the rates in the percentage tables to figure your depreciation deduction, you can figure it yourself. 1040x 2010 form Before making the computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year. 1040x 2010 form Figuring MACRS deductions without using the tables generally will result in a slightly different amount than using the tables. 1040x 2010 form Declining Balance Method When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property. 1040x 2010 form You must use the applicable convention for the first tax year and you must switch to the straight line method beginning in the first year for which it will give an equal or greater deduction. 1040x 2010 form The straight line method is explained later. 1040x 2010 form You figure depreciation for the year you place property in service as follows. 1040x 2010 form Multiply your adjusted basis in the property by the declining balance rate. 1040x 2010 form Apply the applicable convention. 1040x 2010 form You figure depreciation for all other years (before the year you switch to the straight line method) as follows. 1040x 2010 form Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years. 1040x 2010 form Multiply this new adjusted basis by the same declining balance rate used in earlier years. 1040x 2010 form If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to figure depreciation for the year you dispose of it. 1040x 2010 form Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1 , later, under Examples. 1040x 2010 form Declining balance rate. 1040x 2010 form   You figure your declining balance rate by dividing the specified declining balance percentage (150% or 200% changed to a decimal) by the number of years in the property's recovery period. 1040x 2010 form For example, for 3-year property depreciated using the 200% declining balance method, divide 2. 1040x 2010 form 00 (200%) by 3 to get 0. 1040x 2010 form 6667, or a 66. 1040x 2010 form 67% declining balance rate. 1040x 2010 form For 15-year property depreciated using the 150% declining balance method, divide 1. 1040x 2010 form 50 (150%) by 15 to get 0. 1040x 2010 form 10, or a 10% declining balance rate. 1040x 2010 form   The following table shows the declining balance rate for each property class and the first year for which the straight line method gives an equal or greater deduction. 1040x 2010 form Property Class Method Declining Balance Rate Year 3-year 200% DB 66. 1040x 2010 form 667% 3rd 5-year 200% DB 40. 1040x 2010 form 0 4th 7-year 200% DB 28. 1040x 2010 form 571 5th 10-year 200% DB 20. 1040x 2010 form 0 7th 15-year 150% DB 10. 1040x 2010 form 0 7th 20-year 150% DB 7. 1040x 2010 form 5 9th Straight Line Method When using the straight line method, you apply a different depreciation rate each year to the adjusted basis of your property. 1040x 2010 form You must use the applicable convention in the year you place the property in service and the year you dispose of the property. 1040x 2010 form You figure depreciation for the year you place property in service as follows. 1040x 2010 form Multiply your adjusted basis in the property by the straight line rate. 1040x 2010 form Apply the applicable convention. 1040x 2010 form You figure depreciation for all other years (including the year you switch from the declining balance method to the straight line method) as follows. 1040x 2010 form Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method). 1040x 2010 form Determine the depreciation rate for the year. 1040x 2010 form Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2). 1040x 2010 form If you dispose of property before the end of its recovery period, see Using the Applicable Convention , later, for information on how to figure depreciation for the year you dispose of it. 1040x 2010 form Straight line rate. 1040x 2010 form   You determine the straight line depreciation rate for any tax year by dividing the number 1 by the years remaining in the recovery period at the beginning of that year. 1040x 2010 form When figuring the number of years remaining, you must take into account the convention used in the year you placed the property in service. 1040x 2010 form If the number of years remaining is less than 1, the depreciation rate for that tax year is 1. 1040x 2010 form 0 (100%). 1040x 2010 form Using the Applicable Convention The applicable convention (discussed earlier under Which Convention Applies ) affects how you figure your depreciation deduction for the year you place your property in service and for the year you dispose of it. 1040x 2010 form It determines how much of the recovery period remains at the beginning of each year, so it also affects the depreciation rate for property you depreciate under the straight line method. 1040x 2010 form See Straight line rate in the previous discussion. 1040x 2010 form Use the applicable convention as explained in the following discussions. 1040x 2010 form Half-year convention. 1040x 2010 form   If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate the property. 1040x 2010 form You deduct a full year of depreciation for any other year during the recovery period. 1040x 2010 form   Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for a full year by 2. 1040x 2010 form If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. 1040x 2010 form If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final 6 months of the recovery period is the amount of your unrecovered basis in the property. 1040x 2010 form Mid-quarter convention. 1040x 2010 form   If this convention applies, the depreciation you can deduct for the first year you depreciate the property depends on the quarter in which you place the property in service. 1040x 2010 form   A quarter of a full 12-month tax year is a period of 3 months. 1040x 2010 form The first quarter in a year begins on the first day of the tax year. 1040x 2010 form The second quarter begins on the first day of the fourth month of the tax year. 1040x 2010 form The third quarter begins on the first day of the seventh month of the tax year. 1040x 2010 form The fourth quarter begins on the first day of the tenth month of the tax year. 1040x 2010 form A calendar year is divided into the following quarters. 1040x 2010 form Quarter Months First January, February, March Second April, May, June Third July, August, September Fourth October, November, December   Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by the percentage listed below for the quarter you place the property in service. 1040x 2010 form Quarter Percentage First 87. 1040x 2010 form 5% Second 62. 1040x 2010 form 5 Third 37. 1040x 2010 form 5 Fourth 12. 1040x 2010 form 5   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter you dispose of the property. 1040x 2010 form Quarter Percentage First 12. 1040x 2010 form 5% Second 37. 1040x 2010 form 5 Third 62. 1040x 2010 form 5 Fourth 87. 1040x 2010 form 5   If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final quarter of the recovery period is the amount of your unrecovered basis in the property. 1040x 2010 form Mid-month convention. 1040x 2010 form   If this convention applies, the depreciation you can deduct for the first year that you depreciate the property depends on the month in which you place the property in service. 1040x 2010 form Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by a fraction. 1040x 2010 form The numerator of the fraction is the number of full months in the year that the property is in service plus ½ (or 0. 1040x 2010 form 5). 1040x 2010 form The denominator is 12. 1040x 2010 form   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. 1040x 2010 form If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final month of the recovery period is the amount of your unrecovered basis in the property. 1040x 2010 form Example. 1040x 2010 form You use the calendar year and place nonresidential real property in service in August. 1040x 2010 form The property is in service 4 full months (September, October, November, and December). 1040x 2010 form Your numerator is 4. 1040x 2010 form 5 (4 full months plus 0. 1040x 2010 form 5). 1040x 2010 form You multiply the depreciation for a full year by 4. 1040x 2010 form 5/12, or 0. 1040x 2010 form 375. 1040x 2010 form Examples The following examples show how to figure depreciation under MACRS without using the percentage tables. 1040x 2010 form Figures are rounded for purposes of the examples. 1040x 2010 form Assume for all the examples that you use a calendar year as your tax year. 1040x 2010 form Example 1—200% DB method and half-year convention. 1040x 2010 form In February, you placed in service depreciable property with a 5-year recovery period and a basis of $1,000. 1040x 2010 form You do not elect to take the section 179 deduction and the property does not qualify for a special depreciation allowance. 1040x 2010 form You use GDS and the 200% declining balance (DB) method to figure your depreciation. 1040x 2010 form When the straight line (SL) method results in an equal or larger deduction, you switch to the SL method. 1040x 2010 form You did not place any property in service in the last 3 months of the year, so you must use the half-year convention. 1040x 2010 form First year. 1040x 2010 form You figure the depreciation rate under the 200% DB method by dividing 2 (200%) by 5 (the number of years in the recovery period). 1040x 2010 form The result is 40%. 1040x 2010 form You multiply the adjusted basis of the property ($1,000) by the 40% DB rate. 1040x 2010 form You apply the half-year convention by dividing the result ($400) by 2. 1040x 2010 form Depreciation for the first year under the 200% DB method is $200. 1040x 2010 form You figure the depreciation rate under the straight line (SL) method by dividing 1 by 5, the number of years in the recovery period. 1040x 2010 form The result is 20%. 1040x 2010 form You multiply the adjusted basis of the property ($1,000) by the 20% SL rate. 1040x 2010 form You apply the half-year convention by dividing the result ($200) by 2. 1040x 2010 form Depreciation for the first year under the SL method is $100. 1040x 2010 form The DB method provides a larger deduction, so you deduct the $200 figured under the 200% DB method. 1040x 2010 form Second year. 1040x 2010 form You reduce the adjusted basis ($1,000) by the depreciation claimed in the first year ($200). 1040x 2010 form You multiply the result ($800) by the DB rate (40%). 1040x 2010 form Depreciation for the second year under the 200% DB method is $320. 1040x 2010 form You figure the SL depreciation rate by dividing 1 by 4. 1040x 2010 form 5, the number of years remaining in the recovery period. 1040x 2010 form (Based on the half-year convention, you used only half a year of the recovery period in the first year. 1040x 2010 form ) You multiply the reduced adjusted basis ($800) by the result (22. 1040x 2010 form 22%). 1040x 2010 form Depreciation under the SL method for the second year is $178. 1040x 2010 form The DB method provides a larger deduction, so you deduct the $320 figured under the 200% DB method. 1040x 2010 form Third year. 1040x 2010 form You reduce the adjusted basis ($800) by the depreciation claimed in the second year ($320). 1040x 2010 form You multiply the result ($480) by the DB rate (40%). 1040x 2010 form Depreciation for the third year under the 200% DB method is $192. 1040x 2010 form You figure the SL depreciation rate by dividing 1 by 3. 1040x 2010 form 5. 1040x 2010 form You multiply the reduced adjusted basis ($480) by the result (28. 1040x 2010 form 57%). 1040x 2010 form Depreciation under the SL method for the third year is $137. 1040x 2010 form The DB method provides a larger deduction, so you deduct the $192 figured under the 200% DB method. 1040x 2010 form Fourth year. 1040x 2010 form You reduce the adjusted basis ($480) by the de
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The 1040x 2010 Form

1040x 2010 form 7. 1040x 2010 form   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. 1040x 2010 form For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. 1040x 2010 form There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. 1040x 2010 form However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. 1040x 2010 form See Contributions , later. 1040x 2010 form This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. 1040x 2010 form What is the tax benefit of the Coverdell ESA. 1040x 2010 form   Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. 1040x 2010 form   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. 1040x 2010 form See Tax-Free Distributions , later. 1040x 2010 form    Table 7-1 summarizes the main features of the Coverdell ESA. 1040x 2010 form Table 7-1. 1040x 2010 form Coverdell ESA at a Glance Do not rely on this table alone. 1040x 2010 form It provides only general highlights. 1040x 2010 form See the text for definitions of terms in bold type and for more complete explanations. 1040x 2010 form Question Answer What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary. 1040x 2010 form 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. 1040x 2010 form Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary. 1040x 2010 form 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). 1040x 2010 form Are distributions tax free? Yes, if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year. 1040x 2010 form 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. 1040x 2010 form When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary. 1040x 2010 form To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. 1040x 2010 form The document creating and governing the account must be in writing and must satisfy the following requirements. 1040x 2010 form The trustee or custodian must be a bank or an entity approved by the IRS. 1040x 2010 form The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions. 1040x 2010 form The contribution is in cash. 1040x 2010 form The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. 1040x 2010 form The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000. 1040x 2010 form Money in the account cannot be invested in life insurance contracts. 1040x 2010 form Money in the account cannot be combined with other property except in a common trust fund or common investment fund. 1040x 2010 form The balance in the account generally must be distributed within 30 days after the earlier of the following events. 1040x 2010 form The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. 1040x 2010 form The beneficiary's death. 1040x 2010 form Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. 1040x 2010 form For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. 1040x 2010 form Designated beneficiary. 1040x 2010 form   This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account. 1040x 2010 form Contributions to a qualified tuition program (QTP). 1040x 2010 form   A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. 1040x 2010 form 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. 1040x 2010 form See chapter 8, Qualified Tuition Program . 1040x 2010 form 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. 1040x 2010 form Eligible postsecondary school. 1040x 2010 form   This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. 1040x 2010 form S. 1040x 2010 form Department of Education. 1040x 2010 form It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. 1040x 2010 form The educational institution should be able to tell you if it is an eligible educational institution. 1040x 2010 form   Certain educational institutions located outside the United States also participate in the U. 1040x 2010 form S. 1040x 2010 form Department of Education's Federal Student Aid (FSA) programs. 1040x 2010 form Eligible elementary or secondary school. 1040x 2010 form   This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. 1040x 2010 form Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. 1040x 2010 form 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. 1040x 2010 form The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. 1040x 2010 form Tuition and fees. 1040x 2010 form Books, supplies, and equipment. 1040x 2010 form 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. 1040x 2010 form Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). 1040x 2010 form The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. 1040x 2010 form 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. 1040x 2010 form The actual amount charged if the student is residing in housing owned or operated by the school. 1040x 2010 form Half-time student. 1040x 2010 form   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. 1040x 2010 form Qualified Elementary and Secondary Education Expenses These are expenses related to enrollment or attendance at an eligible elementary or secondary school. 1040x 2010 form As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. 1040x 2010 form There are special rules for computer-related expenses. 1040x 2010 form The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. 1040x 2010 form Tuition and fees. 1040x 2010 form Books, supplies, and equipment. 1040x 2010 form Academic tutoring. 1040x 2010 form Special needs services for a special needs beneficiary. 1040x 2010 form The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school. 1040x 2010 form Room and board. 1040x 2010 form Uniforms. 1040x 2010 form Transportation. 1040x 2010 form Supplementary items and services (including extended day programs). 1040x 2010 form 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. 1040x 2010 form (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. 1040x 2010 form ) 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. 1040x 2010 form For individuals filing joint returns, that amount is $220,000. 1040x 2010 form Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. 1040x 2010 form There is no requirement that an organization's income be below a certain level. 1040x 2010 form Contributions must meet all of the following requirements. 1040x 2010 form They must be in cash. 1040x 2010 form They cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. 1040x 2010 form They must be made by the due date of the contributor's tax return (not including extensions). 1040x 2010 form 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. 1040x 2010 form Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary. 1040x 2010 form Table 7-2 summarizes many of the features of contributing to a Coverdell ESA. 1040x 2010 form When contributions considered made. 1040x 2010 form   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. 1040x 2010 form They must be made by the due date (not including extensions) for filing your return for the preceding year. 1040x 2010 form   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. 1040x 2010 form 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. 1040x 2010 form Limit for each designated beneficiary. 1040x 2010 form   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. 1040x 2010 form This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. 1040x 2010 form Rollovers are discussed under Rollovers and Other Transfers , later. 1040x 2010 form Example. 1040x 2010 form 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. 1040x 2010 form In 2013, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. 1040x 2010 form 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. 1040x 2010 form Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. 1040x 2010 form These contributions could be put into any of Maria's Coverdell ESA accounts. 1040x 2010 form Limit for each contributor. 1040x 2010 form   Generally, you can contribute up to $2,000 for each designated beneficiary for 2013. 1040x 2010 form 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. 1040x 2010 form Example. 1040x 2010 form The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. 1040x 2010 form If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2013, he could also contribute $2,000 to Edgar's Coverdell ESA. 1040x 2010 form Reduced limit. 1040x 2010 form   Your contribution limit may be reduced. 1040x 2010 form 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). 1040x 2010 form 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. 1040x 2010 form Table 7-2. 1040x 2010 form Coverdell ESA Contributions at a Glance Do not rely on this table alone. 1040x 2010 form It provides only general highlights. 1040x 2010 form See the text for more complete explanations. 1040x 2010 form Question Answer Are contributions deductible? No. 1040x 2010 form What is the annual contribution limit per designated beneficiary? $2,000 for each designated beneficiary. 1040x 2010 form 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. 1040x 2010 form 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. 1040x 2010 form Can contributions other than cash be made to a Coverdell ESA? No. 1040x 2010 form 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. 1040x 2010 form Modified adjusted gross income (MAGI). 1040x 2010 form   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. 1040x 2010 form MAGI when using Form 1040A. 1040x 2010 form   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. 1040x 2010 form MAGI when using Form 1040. 1040x 2010 form   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. 1040x 2010 form MAGI when using Form 1040NR. 1040x 2010 form   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form. 1040x 2010 form MAGI when using Form 1040NR-EZ. 1040x 2010 form   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form. 1040x 2010 form   If you have any of these adjustments, you can use Worksheet 7-1. 1040x 2010 form MAGI for a Coverdell ESA , later, to figure your MAGI for Form 1040. 1040x 2010 form Worksheet 7-1. 1040x 2010 form MAGI for a Coverdell ESA 1. 1040x 2010 form Enter your adjusted gross income  (Form 1040, line 38)   1. 1040x 2010 form   2. 1040x 2010 form Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. 1040x 2010 form       3. 1040x 2010 form Enter your foreign housing deduction (Form 2555, line 50)   3. 1040x 2010 form         4. 1040x 2010 form Enter the amount of income from Puerto Rico you are excluding   4. 1040x 2010 form       5. 1040x 2010 form Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. 1040x 2010 form       6. 1040x 2010 form Add lines 2, 3, 4, and 5   6. 1040x 2010 form   7. 1040x 2010 form Add lines 1 and 6. 1040x 2010 form This is your  modified adjusted gross income   7. 1040x 2010 form   Figuring the limit. 1040x 2010 form    To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. 1040x 2010 form The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). 1040x 2010 form The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). 1040x 2010 form Subtract the result from $2,000. 1040x 2010 form This is the amount you can contribute for each beneficiary. 1040x 2010 form You can use Worksheet 7-2. 1040x 2010 form Coverdell ESA Contribution Limit to figure the limit on contributions. 1040x 2010 form    Worksheet 7-2. 1040x 2010 form Coverdell ESA Contribution Limit 1. 1040x 2010 form Maximum contribution   1. 1040x 2010 form $2,000 2. 1040x 2010 form 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. 1040x 2010 form   3. 1040x 2010 form Enter $190,000 if married filing jointly; $95,000 for all other filers   3. 1040x 2010 form   4. 1040x 2010 form Subtract line 3 from line 2. 1040x 2010 form If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. 1040x 2010 form   5. 1040x 2010 form Enter $30,000 if married filing jointly; $15,000 for all other filers   5. 1040x 2010 form     Note. 1040x 2010 form If the amount on line 4 is greater than or equal to the amount on line 5, stop here. 1040x 2010 form You are not allowed to contribute to a Coverdell ESA for 2013. 1040x 2010 form       6. 1040x 2010 form Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. 1040x 2010 form . 1040x 2010 form 7. 1040x 2010 form Multiply line 1 by line 6   7. 1040x 2010 form   8. 1040x 2010 form Subtract line 7 from line 1   8. 1040x 2010 form   Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. 1040x 2010 form Example. 1040x 2010 form Paul, who is single, had a MAGI of $96,500 for 2013. 1040x 2010 form 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. 1040x 2010 form Worksheet 7-2. 1040x 2010 form Coverdell ESA Contribution Limit—Illustrated 1. 1040x 2010 form Maximum contribution   1. 1040x 2010 form $2,000 2. 1040x 2010 form 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. 1040x 2010 form 96,500 3. 1040x 2010 form Enter $190,000 if married filing jointly; $95,000 for all other filers   3. 1040x 2010 form 95,000 4. 1040x 2010 form Subtract line 3 from line 2. 1040x 2010 form If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. 1040x 2010 form 1,500 5. 1040x 2010 form Enter $30,000 if married filing jointly; $15,000 for all other filers   5. 1040x 2010 form 15,000   Note. 1040x 2010 form If the amount on line 4 is greater than or equal to the amount on line 5,  stop here. 1040x 2010 form You are not allowed to  contribute to a Coverdell ESA for 2013. 1040x 2010 form       6. 1040x 2010 form Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. 1040x 2010 form . 1040x 2010 form 100 7. 1040x 2010 form Multiply line 1 by line 6   7. 1040x 2010 form 200 8. 1040x 2010 form Subtract line 7 from line 1   8. 1040x 2010 form 1,800 Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. 1040x 2010 form 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. 1040x 2010 form Excess contributions are the total of the following two amounts. 1040x 2010 form 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). 1040x 2010 form 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. 1040x 2010 form Exceptions. 1040x 2010 form   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). 1040x 2010 form   However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. 1040x 2010 form You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. 1040x 2010 form Box 2 of that form will show the amount of earnings on your excess contributions. 1040x 2010 form Code “2” or “3” entered in the blank box below boxes 5 and 6 indicate the year in which the earnings are taxable. 1040x 2010 form See Instructions for Recipient on the back of copy B of your Form 1099-Q. 1040x 2010 form Enter the amount of earnings on line 21 of Form 1040 (or Form 1040NR) for the applicable tax year. 1040x 2010 form For more information, see Taxable Distributions , later. 1040x 2010 form   The excise tax does not apply to any rollover contribution. 1040x 2010 form Note. 1040x 2010 form Contributions made in one year for the preceding tax year are considered to have been made on the last day of the preceding year. 1040x 2010 form Example. 1040x 2010 form In 2012, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. 1040x 2010 form 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. 1040x 2010 form 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. 1040x 2010 form 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. 1040x 2010 form (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. 1040x 2010 form Figuring and reporting the additional tax. 1040x 2010 form   You figure this excise tax in Part V of Form 5329. 1040x 2010 form Report the additional tax on Form 1040, line 58 (or Form 1040NR, line 56). 1040x 2010 form Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary can be changed. 1040x 2010 form The beneficiary's interest can be transferred to a spouse or former spouse because of divorce. 1040x 2010 form 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. 1040x 2010 form This age limitation does not apply if the new beneficiary is a special needs beneficiary. 1040x 2010 form An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution. 1040x 2010 form Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. 1040x 2010 form These are not taxable distributions. 1040x 2010 form Members of the beneficiary's family. 1040x 2010 form   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. 1040x 2010 form Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. 1040x 2010 form Brother, sister, stepbrother, or stepsister. 1040x 2010 form Father or mother or ancestor of either. 1040x 2010 form Stepfather or stepmother. 1040x 2010 form Son or daughter of a brother or sister. 1040x 2010 form Brother or sister of father or mother. 1040x 2010 form Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. 1040x 2010 form The spouse of any individual listed above. 1040x 2010 form First cousin. 1040x 2010 form Example. 1040x 2010 form When Aaron graduated from college last year he had $5,000 left in his Coverdell ESA. 1040x 2010 form He wanted to give this money to his younger sister, who was still in high school. 1040x 2010 form 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. 1040x 2010 form Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or distribution. 1040x 2010 form This rule does not apply to the rollover of a military death gratuity or payment from Servicemembers' Group Life Insurance (SGLI). 1040x 2010 form Military death gratuity. 1040x 2010 form   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). 1040x 2010 form Such payments are made to an eligible survivor upon the death of a member of the armed forces. 1040x 2010 form 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. 1040x 2010 form   This rollover contribution is not subject to (but is in addition to) the contribution limits discussed earlier under Contribution Limits . 1040x 2010 form 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. 1040x 2010 form   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. 1040x 2010 form See Distributions , later. 1040x 2010 form The limit of one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment. 1040x 2010 form Changing the Designated Beneficiary The designated beneficiary can be changed. 1040x 2010 form See Members of the beneficiary's family , earlier. 1040x 2010 form 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. 1040x 2010 form Example. 1040x 2010 form Assume the same situation for Aaron as in the last example (see Rollovers , earlier). 1040x 2010 form 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. 1040x 2010 form 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. 1040x 2010 form After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own. 1040x 2010 form Example. 1040x 2010 form In their divorce settlement, Peg received her ex-husband's Coverdell ESA. 1040x 2010 form In this process, the account was transferred into her name. 1040x 2010 form Peg now treats the funds in this Coverdell ESA as if she were the original owner. 1040x 2010 form Distributions The designated beneficiary of a Coverdell ESA can take a distribution at any time. 1040x 2010 form 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. 1040x 2010 form See Table 7-3, Coverdell ESA Distributions at a Glance, for highlights. 1040x 2010 form Table 7-3. 1040x 2010 form Coverdell ESA Distributions at a Glance Do not rely on this table alone. 1040x 2010 form It provides only general highlights. 1040x 2010 form See the text for definitions of terms in bold type and for more complete explanations. 1040x 2010 form 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. 1040x 2010 form After the designated beneficiary completes his or her education at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed? Yes. 1040x 2010 form Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. 1040x 2010 form Also, certain transfers to members of the beneficiary's family are permitted. 1040x 2010 form Does the designated beneficiary need to be enrolled for a minimum number of courses to take a tax-free distribution? No. 1040x 2010 form Adjusted qualified education expenses. 1040x 2010 form   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. 1040x 2010 form 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. 1040x 2010 form The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses. 1040x 2010 form Tax-Free Distributions Generally, distributions are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year. 1040x 2010 form Do not report tax-free distributions (including qualifying rollovers) on your tax return. 1040x 2010 form 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. 1040x 2010 form Excess distribution. 1040x 2010 form   This is the part of the total distribution that is more than the beneficiary's adjusted qualified education expenses for the year. 1040x 2010 form Earnings and basis. 1040x 2010 form   You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2013. 1040x 2010 form The amount of your gross distribution will be shown in box 1. 1040x 2010 form 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. 1040x 2010 form This will be shown in the blank box below boxes 5 and 6. 1040x 2010 form   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. 1040x 2010 form 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. 1040x 2010 form Figure the taxable portion for 2013 as shown in the following steps. 1040x 2010 form Multiply the total amount distributed by a fraction. 1040x 2010 form 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. 1040x 2010 form Subtract the amount figured in (1) from the total amount distributed during 2013. 1040x 2010 form The result is the amount of earnings included in the distribution(s). 1040x 2010 form Multiply the amount of earnings figured in (2) by a fraction. 1040x 2010 form The numerator is the adjusted qualified education expenses paid during 2013 and the denominator is the total amount distributed during 2013. 1040x 2010 form Subtract the amount figured in (3) from the amount figured in (2). 1040x 2010 form The result is the amount the beneficiary must include in income. 1040x 2010 form The taxable amount must be reported on Form 1040 or Form 1040NR, line 21. 1040x 2010 form Example. 1040x 2010 form You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2013. 1040x 2010 form There were no contributions in 2013. 1040x 2010 form This is your first distribution from the account, so your basis in the account on December 31, 2012, was $1,500. 1040x 2010 form The value (balance) of your account on December 31, 2013, was $950. 1040x 2010 form You had $700 of adjusted qualified education expenses (AQEE) for the year. 1040x 2010 form Using the steps in Figuring the Taxable Portion of a Distribution , earlier, figure the taxable portion of your distribution as follows. 1040x 2010 form   1. 1040x 2010 form $850 (distribution) × $1,500 basis + $0 contributions  $950 value + $850 distribution       =$708 (basis portion of distribution)     2. 1040x 2010 form $850 (distribution)−$708 (basis portion of distribution)     =$142 (earnings included in distribution)   3. 1040x 2010 form $142 (earnings) × $700 AQEE  $850 distribution           =$117 (tax-free earnings)     4. 1040x 2010 form $142 (earnings)−$117 (tax-free earnings)=$25 (taxable earnings)                 You must include $25 in income as distributed earnings not used for qualified education expenses. 1040x 2010 form Report this amount on Form 1040, line 21, listing the type and amount of income on the dotted line. 1040x 2010 form 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). 1040x 2010 form 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. 1040x 2010 form 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. 1040x 2010 form Example. 1040x 2010 form Derek Green had $5,800 of qualified higher education expenses for 2013, his first year in college. 1040x 2010 form He paid his college expenses from the following sources. 1040x 2010 form     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. 1040x 2010 form Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. 1040x 2010 form Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses. 1040x 2010 form     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. 1040x 2010 form The balance in Derek's account was $1,800 on December 31, 2013. 1040x 2010 form Prior to 2013, $2,100 had been contributed to this account. 1040x 2010 form Contributions for 2013 totaled $400. 1040x 2010 form Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below. 1040x 2010 form   1. 1040x 2010 form $1,000 (distribution) × $2,100 basis + $400 contributions  $1,800 value + $1,000 distribution           =$893 (basis portion of distribution)     2. 1040x 2010 form $1,000 (distribution)−$893 (basis portion of distribution)     = $107 (earnings included in distribution)   3. 1040x 2010 form $107 (earnings) × $300 AQHEE  $1,000 distribution       =$32 (tax-free earnings)     4. 1040x 2010 form $107 (earnings)−$32 (tax-free earnings)=$75 (taxable earnings)                 Derek must include $75 in income (Form 1040, line 21). 1040x 2010 form This is the amount of distributed earnings not used for adjusted qualified higher education expenses. 1040x 2010 form 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. 1040x 2010 form The following two examples illustrate possible allocations. 1040x 2010 form Example 1. 1040x 2010 form In 2013, Beatrice graduated from high school and began her first semester of college. 1040x 2010 form 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. 1040x 2010 form To pay these expenses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. 1040x 2010 form No one claimed Beatrice as a dependent, nor was she eligible for an education credit. 1040x 2010 form She did not receive any tax-free educational assistance in 2013. 1040x 2010 form Beatrice must allocate her total qualified education expenses between the two distributions. 1040x 2010 form 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. 1040x 2010 form The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free. 1040x 2010 form 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). 1040x 2010 form 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. 1040x 2010 form Finally, Beatrice figures the taxable and tax-free portions of her QTP distribution based on her $3,000 of QHEE. 1040x 2010 form (See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program for more information. 1040x 2010 form ) Example 2. 1040x 2010 form Assume the same facts as in Example 1 , except that Beatrice withdrew $1,800 from her Coverdell ESA and $3,200 from her QTP. 1040x 2010 form In this case, she allocates her qualified education expenses as follows. 1040x 2010 form 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. 1040x 2010 form 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). 1040x 2010 form   $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). 1040x 2010 form See Figuring the Taxable Portion of a Distribution , earlier, in this chapter. 1040x 2010 form   QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program). 1040x 2010 form The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. 1040x 2010 form However, you do not have to allocate your expenses in the same way. 1040x 2010 form You can use any reasonable method. 1040x 2010 form 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. 1040x 2010 form 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. 1040x 2010 form Your basis is the total amount of contributions to that Coverdell ESA. 1040x 2010 form 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. 1040x 2010 form If you have distributions from more than one Coverdell ESA account during a year, you must combine the information (amount of distribution, basis, etc. 1040x 2010 form ) from all such accounts in order to determine your taxable earnings for the year. 1040x 2010 form By doing this, the loss from one ESA account reduces the distributed earnings (if any) from any other ESA account. 1040x 2010 form For examples of the calculation, see Losses on QTP Investments in chapter 8, Qualified Tuition Program. 1040x 2010 form 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. 1040x 2010 form Exceptions. 1040x 2010 form   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. 1040x 2010 form Made because the designated beneficiary is disabled. 1040x 2010 form 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. 1040x 2010 form 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. 1040x 2010 form 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. 1040x 2010 form Made on account of the attendance of the designated beneficiary at a U. 1040x 2010 form S. 1040x 2010 form military academy (such as the USMA at West Point). 1040x 2010 form 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. 1040x 2010 form S. 1040x 2010 form Code) attributable to such attendance. 1040x 2010 form 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). 1040x 2010 form Made before June 1, 2014, of an excess 2013 contribution (and any earnings on it). 1040x 2010 form The distributed earnings must be included in gross income for the year in which the excess contribution was made. 1040x 2010 form Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. 1040x 2010 form Figuring the additional tax. 1040x 2010 form    Use Part II of Form 5329, to figure any additional tax. 1040x 2010 form Report the amount on Form 1040, line 58, or Form 1040NR, line 56. 1040x 2010 form When Assets Must Be Distributed Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs. 1040x 2010 form The designated beneficiary reaches age 30. 1040x 2010 form In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. 1040x 2010 form However, this rule does not apply if the beneficiary is a special needs beneficiary. 1040x 2010 form The designated beneficiary dies before reaching age 30. 1040x 2010 form In this case, the remaining assets must generally be distributed within 30 days after the date of death. 1040x 2010 form 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. 1040x 2010 form (“Family member” was defined earlier under Rollovers . 1040x 2010 form ) 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. 1040x 2010 form This age limitation does not apply if the new beneficiary is a special needs beneficiary. 1040x 2010 form There are no tax consequences as a result of the transfer. 1040x 2010 form 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. 1040x 2010 form You determine these earnings as shown in the following two steps. 1040x 2010 form Multiply the amount distributed by a fraction. 1040x 2010 form 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. 1040x 2010 form Subtract the amount figured in (1) from the total amount distributed during 2013. 1040x 2010 form The result is the amount of earnings included in the distribution. 1040x 2010 form For an example, see steps (1) and (2) of the Example under Figuring the Taxable Portion of a Distribution, earlier. 1040x 2010 form 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. 1040x 2010 form Worksheet 7-3 Instructions. 1040x 2010 form Coverdell ESA—Taxable Distributions and Basis Line G. 1040x 2010 form Enter the total distributions received from all Coverdell ESAs during 2013. 1040x 2010 form Do not include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). 1040x 2010 form 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. 1040x 2010 form Line 2. 1040x 2010 form 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. 1040x 2010 form   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. 1040x 2010 form 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. 1040x 2010 form For years after 2001, you can find that amount by using the ending basis from the worksheet in Publication 970 for that year. 1040x 2010 form 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. 1040x 2010 form Line 4. 1040x 2010 form Enter the total distributions received from this Coverdell ESA in 2013. 1040x 2010 form Do not include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). 1040x 2010 form   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. 1040x 2010 form Line 7. 1040x 2010 form 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. 1040x 2010 form A statement should be sent to you by January 31, 2014, for this Coverdell ESA showing the value on December 31, 2013. 1040x 2010 form   A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. 1040x 2010 form 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. 1040x 2010 form Worksheet 7-3. 1040x 2010 form Coverdell ESA—Taxable Distributions and Basis How to complete this worksheet. 1040x 2010 form • • • Complete Part I, lines A through H, on only one worksheet. 1040x 2010 form  Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs. 1040x 2010 form  Complete Part III, the Summary (line 16), on only one worksheet. 1040x 2010 form Part I. 1040x 2010 form Qualified Education Expenses (Complete for total expenses)       A. 1040x 2010 form Enter your total qualified education expenses for 2013   A. 1040x 2010 form   B. 1040x 2010 form 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. 1040x 2010 form         C. 1040x 2010 form Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040). 1040x 2010 form Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040 or 1040NR)   C. 1040x 2010 form         D. 1040x 2010 form Enter those qualified higher education expenses on which  an American opportunity or lifetime learning credit was based   D. 1040x 2010 form         E. 1040x 2010 form Add lines B, C, and D   D. 1040x 2010 form   F. 1040x 2010 form Subtract line E from line A. 1040x 2010 form This is your adjusted qualified education expense for 2013   E. 1040x 2010 form   G. 1040x 2010 form Enter your total distributions from all Coverdell ESAs during 2013. 1040x 2010 form Do not include rollovers  or the return of excess contributions (see instructions)   F. 1040x 2010 form   H. 1040x 2010 form Divide line F by line G. 1040x 2010 form Enter the result as a decimal (rounded to at least 3 places). 1040x 2010 form If the  result is 1. 1040x 2010 form 000 or more, enter 1. 1040x 2010 form 000   G. 1040x 2010 form . 1040x 2010 form Part II. 1040x 2010 form Taxable Distributions and Basis (Complete separately for each account) 1. 1040x 2010 form Enter the amount contributed to this Coverdell ESA for 2013, including contributions made for 2013 from January 1, 2014, through April 15, 2014. 1040x 2010 form Do not include rollovers or the return of excess contributions   1. 1040x 2010 form   2. 1040x 2010 form Enter your basis in this Coverdell ESA as of December 31, 2012 (see instructions)   2. 1040x 2010 form   3. 1040x 2010 form Add lines 1 and 2   3. 1040x 2010 form   4. 1040x 2010 form Enter the total distributions from this Coverdell ESA during 2013. 1040x 2010 form Do not include rollovers  or the return of excess contributions (see instructions)   4. 1040x 2010 form   5. 1040x 2010 form Multiply line 4 by line H. 1040x 2010 form This is the amount of adjusted qualified  education expense attributable to this Coverdell ESA   5. 1040x 2010 form         6. 1040x 2010 form Subtract line 5 from line 4   6. 1040x 2010 form         7. 1040x 2010 form Enter the total value of this Coverdell ESA as of December 31, 2013,  plus any outstanding rollovers (see instructions)   7. 1040x 2010 form         8. 1040x 2010 form Add lines 4 and 7   8. 1040x 2010 form         9. 1040x 2010 form Divide line 3 by line 8. 1040x 2010 form Enter the result as a decimal (rounded to  at least 3 places). 1040x 2010 form If the result is 1. 1040x 2010 form 000 or more, enter 1. 1040x 2010 form 000   9. 1040x 2010 form . 1040x 2010 form       10. 1040x 2010 form Multiply line 4 by line 9. 1040x 2010 form This is the amount of basis allocated to your  distributions, and is tax free   10. 1040x 2010 form     Note. 1040x 2010 form If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15. 1040x 2010 form       11. 1040x 2010 form Subtract line 10 from line 4   11. 1040x 2010 form   12. 1040x 2010 form Divide line 5 by line 4. 1040x 2010 form Enter the result as a decimal (rounded to  at least 3 places). 1040x 2010 form If the result is 1. 1040x 2010 form 000 or more, enter 1. 1040x 2010 form 000   12. 1040x 2010 form . 1040x 2010 form       13. 1040x 2010 form Multiply line 11 by line 12. 1040x 2010 form This is the amount of qualified education  expenses allocated to your distributions, and is tax free   13. 1040x 2010 form   14. 1040x 2010 form Subtract line 13 from line 11. 1040x 2010 form This is the portion of the distributions from this  Coverdell ESA in 2013 that you must include in income   14. 1040x 2010 form   15. 1040x 2010 form Subtract line 10 from line 3. 1040x 2010 form This is your basis in this Coverdell ESA as of December 31, 2013   15. 1040x 2010 form   Part III. 1040x 2010 form Summary (Complete only once)       16. 1040x 2010 form Taxable amount. 1040x 2010 form Add together all amounts on line 14 for all your Coverdell ESAs. 1040x 2010 form 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. 1040x 2010 form   Prev  Up  Next   Home   More Online Publications