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2009 1040

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2009 1040

2009 1040 4. 2009 1040   Special Situations Table of Contents Condominiums CooperativesDepreciation Property Changed to Rental UseBasis of Property Changed to Rental Use Figuring the Depreciation Deduction Renting Part of Property Not Rented for ProfitPostponing decision. 2009 1040 Example—Property Changed to Rental Use This chapter discusses some rental real estate activities that are subject to additional rules. 2009 1040 Condominiums A condominium is most often a dwelling unit in a multi-unit building, but can also take other forms, such as a townhouse or garden apartment. 2009 1040 If you own a condominium, you also own a share of the common elements, such as land, lobbies, elevators, and service areas. 2009 1040 You and the other condominium owners may pay dues or assessments to a special corporation that is organized to take care of the common elements. 2009 1040 Special rules apply if you rent your condominium to others. 2009 1040 You can deduct as rental expenses all the expenses discussed in chapters 1 and 2. 2009 1040 In addition, you can deduct any dues or assessments paid for maintenance of the common elements. 2009 1040 You cannot deduct special assessments you pay to a condominium management corporation for improvements. 2009 1040 However, you may be able to recover your share of the cost of any improvement by taking depreciation. 2009 1040 Cooperatives If you live in a cooperative, you do not own your apartment. 2009 1040 Instead, a corporation owns the apartments and you are a tenant-stockholder in the cooperative housing corporation. 2009 1040 If you rent your apartment to others, you usually can deduct, as a rental expense, all the maintenance fees you pay to the cooperative housing corporation. 2009 1040 In addition to the maintenance fees paid to the cooperative housing corporation, you can deduct your direct payments for repairs, upkeep, and other rental expenses, including interest paid on a loan used to buy your stock in the corporation. 2009 1040 Depreciation You will be depreciating your stock in the corporation rather than the apartment itself. 2009 1040 Figure your depreciation deduction as follows. 2009 1040 Figure the depreciation for all the depreciable real property owned by the corporation. 2009 1040 (Depreciation methods are discussed in chapter 2 of this publication and Publication 946. 2009 1040 ) If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. 2009 1040 Multiply your cost per share by the total number of outstanding shares. 2009 1040 Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock. 2009 1040 Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land. 2009 1040 Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant-stockholders. 2009 1040 Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. 2009 1040 Multiply the result of (2) by the percentage you figured in (3). 2009 1040 This is your depreciation on the stock. 2009 1040 Your depreciation deduction for the year cannot be more than the part of your adjusted basis (defined in chapter 2) in the stock of the corporation that is allocable to your rental property. 2009 1040 Payments added to capital account. 2009 1040   Payments earmarked for a capital asset or improvement, or otherwise charged to the corporation's capital account are added to the basis of your stock in the corporation. 2009 1040 For example, you cannot deduct a payment used to pave a community parking lot, install a new roof, or pay the principal of the corporation's mortgage. 2009 1040   Treat as a capital cost the amount you were assessed for capital items. 2009 1040 This cannot be more than the amount by which your payments to the corporation exceeded your share of the corporation's mortgage interest and real estate taxes. 2009 1040   Your share of interest and taxes is the amount the corporation elected to allocate to you, if it reasonably reflects those expenses for your apartment. 2009 1040 Otherwise, figure your share in the following manner. 2009 1040 Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. 2009 1040 Multiply the corporation's deductible interest by the number you figured in (1). 2009 1040 This is your share of the interest. 2009 1040 Multiply the corporation's deductible taxes by the number you figured in (1). 2009 1040 This is your share of the taxes. 2009 1040 Property Changed to Rental Use If you change your home or other property (or a part of it) to rental use at any time other than the beginning of your tax year, you must divide yearly expenses, such as taxes and insurance, between rental use and personal use. 2009 1040 You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes. 2009 1040 You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. 2009 1040 However, you can include the home mortgage interest, qualified mortgage insurance premiums, and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A (Form 1040). 2009 1040 Example. 2009 1040 Your tax year is the calendar year. 2009 1040 You moved from your home in May and started renting it out on June 1. 2009 1040 You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. 2009 1040 Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. 2009 1040 When figuring depreciation, treat the property as placed in service on June 1. 2009 1040 Basis of Property Changed to Rental Use When you change property you held for personal use to rental use (for example, you rent your former home), the basis for depreciation will be the lesser of fair market value or adjusted basis on the date of conversion. 2009 1040 Fair market value. 2009 1040   This is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. 2009 1040 Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property. 2009 1040 Figuring the basis. 2009 1040   The basis for depreciation is the lesser of: The fair market value of the property on the date you changed it to rental use, or Your adjusted basis on the date of the change—that is, your original cost or other basis of the property, plus the cost of permanent additions or improvements since you acquired it, minus deductions for any casualty or theft losses claimed on earlier years' income tax returns and other decreases to basis. 2009 1040 For other increases and decreases to basis, see Adjusted Basis in chapter 2. 2009 1040 Example. 2009 1040 Several years ago you built your home for $140,000 on a lot that cost you $14,000. 2009 1040 Before changing the property to rental use this year, you added $28,000 of permanent improvements to the house and claimed a $3,500 casualty loss deduction for damage to the house. 2009 1040 Part of the improvements qualified for a $500 residential energy credit, which you claimed on your 2010 tax return. 2009 1040 Because land is not depreciable, you can only include the cost of the house when figuring the basis for depreciation. 2009 1040 The adjusted basis of the house at the time of the change in its use was $164,000 ($140,000 + $28,000 − $3,500 − $500). 2009 1040 On the date of the change in use, your property had a fair market value of $168,000, of which $21,000 was for the land and $147,000 was for the house. 2009 1040 The basis for depreciation on the house is the fair market value on the date of the change ($147,000), because it is less than your adjusted basis ($164,000). 2009 1040 Cooperatives If you change your cooperative apartment to rental use, figure your allowable depreciation as explained earlier. 2009 1040 (Depreciation methods are discussed in chapter 2 of this publication and Publication 946. 2009 1040 ) The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts. 2009 1040 The fair market value of the property on the date you change your apartment to rental use. 2009 1040 This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic. 2009 1040 The corporation's adjusted basis in the property on that date. 2009 1040 Do not subtract depreciation when figuring the corporation's adjusted basis. 2009 1040 If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1) under Depreciation (under Cooperatives, near the beginning of this chapter). 2009 1040 The fair market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic. 2009 1040 Figuring the Depreciation Deduction To figure the deduction, use the depreciation system in effect when you convert your residence to rental use. 2009 1040 Generally, that will be MACRS for any conversion after 1986. 2009 1040 Treat the property as placed in service on the conversion date. 2009 1040 Example. 2009 1040 Your converted residence (see previous example under Figuring the basis) was available for rent on August 1. 2009 1040 Using Table 2-2d (see chapter 2), the percentage for Year 1 beginning in August is 1. 2009 1040 364% and the depreciation deduction for Year 1 is $2,005 ($147,000 × . 2009 1040 01364). 2009 1040 Renting Part of Property If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property. 2009 1040 You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest, qualified mortgage insurance premiums, and real estate taxes, as rental expenses on Schedule E (Form 1040). 2009 1040 You can also deduct as rental expenses a portion of other expenses that normally are nondeductible personal expenses, such as expenses for electricity, or painting the outside of the house. 2009 1040 There is no change in the types of expenses deductible for the personal-use part of your property. 2009 1040 Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). 2009 1040 You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. 2009 1040 You do not have to divide the expenses that belong only to the rental part of your property. 2009 1040 For example, if you paint a room that you rent, or if you pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense. 2009 1040 If you install a second phone line strictly for your tenant's use, all of the cost of the second line is deductible as a rental expense. 2009 1040 You can deduct depreciation on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes. 2009 1040 How to divide expenses. 2009 1040   If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between rental use and personal use. 2009 1040 You can use any reasonable method for dividing the expense. 2009 1040 It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. 2009 1040 The two most common methods for dividing an expense are (1) the number of rooms in your home, and (2) the square footage of your home. 2009 1040 Example. 2009 1040 You rent a room in your house. 2009 1040 The room is 12 × 15 feet, or 180 square feet. 2009 1040 Your entire house has 1,800 square feet of floor space. 2009 1040 You can deduct as a rental expense 10% of any expense that must be divided between rental use and personal use. 2009 1040 If your heating bill for the year for the entire house was $600, $60 ($600 × . 2009 1040 10) is a rental expense. 2009 1040 The balance, $540, is a personal expense that you cannot deduct. 2009 1040 Duplex. 2009 1040   A common situation is the duplex where you live in one unit and rent out the other. 2009 1040 Certain expenses apply to the entire property, such as mortgage interest and real estate taxes, and must be split to determine rental and personal expenses. 2009 1040 Example. 2009 1040 You own a duplex and live in one half, renting the other half. 2009 1040 Both units are approximately the same size. 2009 1040 Last year, you paid a total of $10,000 mortgage interest and $2,000 real estate taxes for the entire property. 2009 1040 You can deduct $5,000 mortgage interest and $1,000 real estate taxes on Schedule E (Form 1040), and if you itemize your deductions, you can deduct the other $5,000 mortgage interest and $1,000 real estate taxes on Schedule A (Form 1040). 2009 1040 Not Rented for Profit If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. 2009 1040 You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. 2009 1040 Where to report. 2009 1040   Report your not-for-profit rental income on Form 1040 or 1040NR, line 21. 2009 1040 For example, if you are filing Form 1040, you can include your mortgage interest and any qualified mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses on the appropriate lines of Schedule A (Form 1040) if you itemize your deductions. 2009 1040   If you itemize your deductions, claim your other rental expenses, subject to the rules explained in chapter 1 of Publication 535, as miscellaneous itemized deductions on Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 9. 2009 1040 You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. 2009 1040 Presumption of profit. 2009 1040   If your rental income is more than your rental expenses for at least 3 years out of a period of 5 consecutive years, you are presumed to be renting your property to make a profit. 2009 1040 Postponing decision. 2009 1040   If you are starting your rental activity and do not have 3 years showing a profit, you can elect to have the presumption made after you have the 5 years of experience required by the test. 2009 1040 You may choose to postpone the decision of whether the rental is for profit by filing Form 5213. 2009 1040 You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. 2009 1040 More information. 2009 1040   For more information about the rules for an activity not engaged in for profit, see Not-for-Profit Activities in chapter 1 of Publication 535. 2009 1040 Example—Property Changed to Rental Use In January, Eileen Johnson bought a condominium apartment to live in. 2009 1040 Instead of selling the house she had been living in, she decided to change it to rental property. 2009 1040 Eileen selected a tenant and started renting the house on February 1. 2009 1040 Eileen charges $750 a month for rent and collects it herself. 2009 1040 Eileen also received a $750 security deposit from her tenant. 2009 1040 Because she plans to return it to her tenant at the end of the lease, she does not include it in her income. 2009 1040 Her rental expenses for the year are as follows. 2009 1040   Mortgage interest $1,800     Fire insurance (1-year policy) 100     Miscellaneous repairs (after renting) 297     Real estate taxes imposed and paid 1,200   Eileen must divide the real estate taxes, mortgage interest, and fire insurance between the personal use of the property and the rental use of the property. 2009 1040 She can deduct eleven-twelfths of these expenses as rental expenses. 2009 1040 She can include the balance of the allowable taxes and mortgage interest on Schedule A (Form 1040) if she itemizes. 2009 1040 She cannot deduct the balance of the fire insurance because it is a personal expense. 2009 1040 Eileen bought this house in 1984 for $35,000. 2009 1040 Her property tax was based on assessed values of $10,000 for the land and $25,000 for the house. 2009 1040 Before changing it to rental property, Eileen added several improvements to the house. 2009 1040 She figures her adjusted basis as follows:   Improvements Cost     House $25,000     Remodeled kitchen 4,200     Recreation room 5,800     New roof 1,600     Patio and deck 2,400     Adjusted basis $39,000   On February 1, when Eileen changed her house to rental property, the property had a fair market value of $152,000. 2009 1040 Of this amount, $35,000 was for the land and $117,000 was for the house. 2009 1040 Because Eileen's adjusted basis is less than the fair market value on the date of the change, Eileen uses $39,000 as her basis for depreciation. 2009 1040 As specified for residential rental property, Eileen must use the straight line method of depreciation over the GDS or ADS recovery period. 2009 1040 She chooses the GDS recovery period of 27. 2009 1040 5 years. 2009 1040 She uses Table 2-2d to find her depreciation percentage. 2009 1040 Since she placed the property in service in February, the percentage is 3. 2009 1040 182%. 2009 1040 On April 1, Eileen bought a new dishwasher for the rental property at a cost of $425. 2009 1040 The dishwasher is personal property used in a rental real estate activity, which has a 5-year recovery period. 2009 1040 She uses Table 2-2a to find the percentage for Year 1 under “Half-year convention” (20%) to figure her depreciation deduction. 2009 1040 On May 1, Eileen paid $4,000 to have a furnace installed in the house. 2009 1040 The furnace is residential rental property. 2009 1040 Because she placed the property in service in May, the percentage from Table 2-2d is 2. 2009 1040 273%. 2009 1040 Eileen figures her net rental income or loss for the house as follows: Total rental income received  ($750 × 11) $8,250 Minus: Expenses     Mortgage interest ($1,800 × 11/12) $1,650   Fire insurance ($100 × 11/12) 92   Miscellaneous repairs 297   Real estate taxes ($1,200 × 11/12) 1,100   Total expenses 3,139 Balance $5,111 Minus: Depreciation     House ($39,000 × . 2009 1040 03182) $1,241   Dishwasher ($425 × . 2009 1040 20) 85   Furnace ($4,000 × . 2009 1040 02273) 91   Total depreciation 1,417 Net rental income for house   $3,694       Eileen uses Schedule E, Part I, to report her rental income and expenses. 2009 1040 She enters her income, expenses, and depreciation for the house in the column for Property A. 2009 1040 Since all property was placed in service this year, Eileen must use Form 4562 to figure the depreciation. 2009 1040 See the Instructions for Form 4562 for more information on preparing the form. 2009 1040 Prev  Up  Next   Home   More Online Publications
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Contact My Local Office in Nevada

Face-to-face Tax Help

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

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

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

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

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

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

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

City  Street Address  Days/Hours of Service  Telephone* 
Las Vegas  110 City Parkway
Las Vegas, NV 89106 

Monday - Friday 8:30 a.m. -4:30 p.m.

 

**This office will be open until 6:00 p.m. on 4/14 & 4/15**

 

Services Provided

(702) 868-5005 
Reno  200 S. Virginia St.
Reno, NV 89501 

Monday-Friday 8:30 a.m.- 4:30 p.m.

 

Services Provided

(775) 824-2218

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

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

The Taxpayer Advocate Service: Call 702-868-5179 in the Las Vegas area or 1-877-777-4778 elsewhere, or see  Publication 1546, The Taxpayer Advocate Service of the IRS. For further information, see  Tax Topic 104

Partnerships

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

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

Internal Revenue Service
110 City Parkway, Ste. 201
MS 4040LV
Las Vegas, NV 89106

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

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

Page Last Reviewed or Updated: 28-Mar-2014

The 2009 1040

2009 1040 1. 2009 1040   Investment Income Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: General InformationSSN for joint account. 2009 1040 Custodian account for your child. 2009 1040 Penalty for failure to supply SSN. 2009 1040 Certification. 2009 1040 Underreported interest and dividends. 2009 1040 How to stop backup withholding due to underreporting. 2009 1040 How to stop backup withholding due to an incorrect identification number. 2009 1040 Reporting backup withholding. 2009 1040 Nonresident aliens. 2009 1040 Penalties. 2009 1040 Savings account with parent as trustee. 2009 1040 Interest IncomeInterest not reported on Form 1099-INT. 2009 1040 Nominees. 2009 1040 Incorrect amount. 2009 1040 Information reporting requirement. 2009 1040 Taxable Interest — General Below-Market Loans U. 2009 1040 S. 2009 1040 Savings Bonds U. 2009 1040 S. 2009 1040 Treasury Bills, Notes, and Bonds Bonds Sold Between Interest Dates Insurance State or Local Government Obligations Discount on Debt InstrumentsOriginal Issue Discount (OID) Market Discount Bonds Discount on Short-Term Obligations Election To Report All Interest as OID When To Report Interest IncomeConstructive receipt. 2009 1040 How To Report Interest IncomeSchedule B (Form 1040A or 1040). 2009 1040 Worksheet for savings bonds distributed from a retirement or profit-sharing plan. 2009 1040 File Form 1099-INT with the IRS. 2009 1040 Dividends and Other DistributionsDividends not reported on Form 1099-DIV. 2009 1040 Nominees. 2009 1040 Ordinary Dividends Capital Gain Distributions Nondividend Distributions Liquidating Distributions Distributions of Stock and Stock Rights Other Distributions How To Report Dividend IncomeElection. 2009 1040 Independent contractor. 2009 1040 Investment interest deducted. 2009 1040 Exception 1. 2009 1040 Exception 2. 2009 1040 Undistributed capital gains. 2009 1040 File Form 1099-DIV with the IRS. 2009 1040 Stripped Preferred Stock REMICs, FASITs, and Other CDOsREMICs Collateralized Debt Obligations (CDOs) FASITs S CorporationsLimit on losses and deductions. 2009 1040 Passive activity losses. 2009 1040 Form 8582. 2009 1040 Investment ClubsInvestments in name of member. 2009 1040 Tax Treatment of the Club Topics - This chapter discusses: Interest Income , Discount on Debt Instruments , When To Report Interest Income , How To Report Interest Income , Dividends and Other Distributions , How To Report Dividend Income , Stripped Preferred Stock , Real estate mortgage investment conduits (REMICs), financial asset securitization investment trusts (FASITs), and other collateralized debt obligations (CDOs) , S Corporations , and Investment Clubs . 2009 1040 Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 537 Installment Sales 590 Individual Retirement Arrangements (IRAs) 925 Passive Activity and At-Risk Rules 1212 Guide to Original Issue Discount (OID) Instruments Form (and Instructions) Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends Schedule D (Form 1040) Capital Gains and Losses 1040 U. 2009 1040 S. 2009 1040 Individual Income Tax Return 1040A U. 2009 1040 S. 2009 1040 Individual Income Tax Return 1040EZ Income Tax Return for Single and Joint Filers With No Dependents 1099 General Instructions for Certain Information Returns 2439 Notice to Shareholder of Undistributed Long-Term Capital Gains 3115 Application for Change in Accounting Method 6251 Alternative Minimum Tax — Individuals 8582 Passive Activity Loss Limitations 8615 Tax for Certain Children Who Have Unearned Income 8814 Parents' Election To Report Child's Interest and Dividends 8815 Exclusion of Interest From Series EE and I U. 2009 1040 S. 2009 1040 Savings Bonds Issued After 1989 8818 Optional Form To Record Redemption of Series EE and I U. 2009 1040 S. 2009 1040 Savings Bonds Issued After 1989 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets 8960 Net Investment Income Tax—Individuals, Estates, and Trusts See chapter 5, How To Get Tax Help , for information about getting these publications and forms. 2009 1040 General Information A few items of general interest are covered here. 2009 1040 Recordkeeping. 2009 1040 You should keep a list showing sources and investment income amounts you receive during the year. 2009 1040 Also keep the forms you receive showing your investment income (Forms 1099-INT, Interest Income, and 1099-DIV, Dividends and Distributions, for example) as an important part of your records. 2009 1040 Net investment income tax (NIIT). 2009 1040   Beginning in 2013, you may be subject to the NIIT. 2009 1040 The NIIT is a 3. 2009 1040 8% tax on the lesser of your net investment income or the amount of your modified adjusted gross income (MAGI) that is over a threshold amount based on your filing status. 2009 1040    Filing Status Threshold Amount Married filing jointly $250,000 Married filing separately $125,000 Single $200,000 Head of household (with qualifying person) $200,000 Qualifying Widow(er) with dependent child $250,000    For more information, see Form 8960 and Instructions for Form 8960. 2009 1040 Tax on unearned income of certain children. 2009 1040   Part of a child's 2013 unearned income may be taxed at the parent's tax rate. 2009 1040 This may happen if all of the following are true. 2009 1040 The child had more than $2,000 of unearned income. 2009 1040 The child is required to file a tax return. 2009 1040 The child was: Under age 18 at the end of 2013, Age 18 at the end of 2013 and did not have earned income that was more than half of the child's support, or A full-time student over age 18 and under age 24 at the end of 2013 and did not have earned income that was more than half of the child's support. 2009 1040 At least one of the child's parents was alive at the end of 2013. 2009 1040 The child does not file a joint return for 2013. 2009 1040 A child born on January 1, 1996, is considered to be age 18 at the end of 2013; a child born on January 1, 1995, is considered to be age 19 at the end of 2013; a child born on January 1, 1990, is considered to be age 24 at the end of 2013. 2009 1040   If all of these statements are true, Form 8615 must be completed and attached to the child's tax return. 2009 1040 If any of these statements is not true, Form 8615 is not required and the child's income is taxed at his or her own tax rate. 2009 1040    However, the parent can choose to include the child's interest and dividends on the parent's return if certain requirements are met. 2009 1040 Use Form 8814 for this purpose. 2009 1040   For more information about the tax on unearned income of children and the parents' election, see Publication 929, Tax Rules for Children and Dependents. 2009 1040 Beneficiary of an estate or trust. 2009 1040   Interest, dividends, and other investment income you receive as a beneficiary of an estate or trust is generally taxable income. 2009 1040 You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. 2009 1040 , from the fiduciary. 2009 1040 Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040. 2009 1040 Social security number (SSN). 2009 1040   You must give your name and SSN or individual tax identification number (ITIN) to any person required by federal tax law to make a return, statement, or other document that relates to you. 2009 1040 This includes payers of interest and dividends. 2009 1040 If you do not give your SSN or ITIN to the payer of interest, you may have to pay a penalty. 2009 1040 SSN for joint account. 2009 1040   If the funds in a joint account belong to one person, list that person's name first on the account and give that person's SSN to the payer. 2009 1040 (For information on who owns the funds in a joint account, see Joint accounts , later. 2009 1040 ) If the joint account contains combined funds, give the SSN of the person whose name is listed first on the account. 2009 1040 This is because only one name and SSN can be shown on Form 1099. 2009 1040   These rules apply both to joint ownership by a married couple and to joint ownership by other individuals. 2009 1040 For example, if you open a joint savings account with your child using funds belonging to the child, list the child's name first on the account and give the child's SSN. 2009 1040 Custodian account for your child. 2009 1040   If your child is the actual owner of an account that is recorded in your name as custodian for the child, give the child's SSN to the payer. 2009 1040 For example, you must give your child's SSN to the payer of dividends on stock owned by your child, even though the dividends are paid to you as custodian. 2009 1040 Penalty for failure to supply SSN. 2009 1040   You will be subject to a penalty if, when required, you fail to: Include your SSN on any return, statement, or other document, Give your SSN to another person who must include it on any return, statement, or other document, or Include the SSN of another person on any return, statement, or other document. 2009 1040 The penalty is $50 for each failure up to a maximum penalty of $100,000 for any calendar year. 2009 1040   You will not be subject to this penalty if you can show that your failure to provide the SSN was due to reasonable cause and not to willful neglect. 2009 1040   If you fail to supply an SSN, you may also be subject to backup withholding. 2009 1040 Backup withholding. 2009 1040   Your investment income is generally not subject to regular withholding. 2009 1040 However, it may be subject to backup withholding to ensure that income tax is collected on the income. 2009 1040 Under backup withholding, the bank, broker, or other payer of interest, original issue discount (OID), dividends, cash patronage dividends, or royalties must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate. 2009 1040   Backup withholding applies if: You do not give the payer your identification number (either a social security number or an employer identification number) in the required manner, The IRS notifies the payer that you gave an incorrect identification number, The IRS notifies the payer that you are subject to backup withholding on interest or dividends because you have underreported interest or dividends on your income tax return, or You are required, but fail, to certify that you are not subject to backup withholding for the reason described in (3). 2009 1040 Certification. 2009 1040   For new accounts paying interest or dividends, you must certify under penalties of perjury that your SSN is correct and that you are not subject to backup withholding. 2009 1040 Your payer will give you a Form W-9, Request for Taxpayer Identification Number and Certification, or similar form, to make this certification. 2009 1040 If you fail to make this certification, backup withholding may begin immediately on your new account or investment. 2009 1040 Underreported interest and dividends. 2009 1040   You will be considered to have underreported your interest and dividends if the IRS has determined for a tax year that: You failed to include any part of a reportable interest or dividend payment required to be shown on your return, or You were required to file a return and to include a reportable interest or dividend payment on that return, but you failed to file the return. 2009 1040 How to stop backup withholding due to underreporting. 2009 1040   If you have been notified that you underreported interest or dividends, you can request a determination from the IRS to prevent backup withholding from starting or to stop backup withholding once it has begun. 2009 1040 You must show that at least one of the following situations applies. 2009 1040 No underreporting occurred. 2009 1040 You have a bona fide dispute with the IRS about whether underreporting occurred. 2009 1040 Backup withholding will cause or is causing an undue hardship, and it is unlikely that you will underreport interest and dividends in the future. 2009 1040 You have corrected the underreporting by filing a return if you did not previously file one and by paying all taxes, penalties, and interest due for any underreported interest or dividend payments. 2009 1040   If the IRS determines that backup withholding should stop, it will provide you with a certification and will notify the payers who were sent notices earlier. 2009 1040 How to stop backup withholding due to an incorrect identification number. 2009 1040   If you have been notified by a payer that you are subject to backup withholding because you have provided an incorrect SSN or employer identification number, you can stop it by following the instructions the payer gives you. 2009 1040 Reporting backup withholding. 2009 1040   If backup withholding is deducted from your interest or dividend income or other reportable payment, the bank or other business must give you an information return for the year (for example, a Form 1099-INT) indicating the amount withheld. 2009 1040 The information return will show any backup withholding as “Federal income tax withheld. 2009 1040 ” Nonresident aliens. 2009 1040    Generally, payments made to nonresident aliens are not subject to backup withholding. 2009 1040 You can use Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to certify exempt status. 2009 1040 However, this does not exempt you from the 30% (or lower treaty) withholding rate that may apply to your investment income. 2009 1040 For information on the 30% rate, see Publication 519, U. 2009 1040 S. 2009 1040 Tax Guide for Aliens. 2009 1040 Penalties. 2009 1040   There are civil and criminal penalties for giving false information to avoid backup withholding. 2009 1040 The civil penalty is $500. 2009 1040 The criminal penalty, upon conviction, is a fine of up to $1,000, or imprisonment of up to 1 year, or both. 2009 1040 Where to report investment income. 2009 1040   Table 1-1 gives an overview of the forms and schedules to use to report some common types of investment income. 2009 1040 But see the rest of this publication for detailed information about reporting investment income. 2009 1040 Joint accounts. 2009 1040   If two or more persons hold property (such as a savings account, bond, or stock) as joint tenants, tenants by the entirety, or tenants in common, each person's share of any interest or dividends from the property is determined by local law. 2009 1040 Community property states. 2009 1040   If you are married and receive a distribution that is community income, one-half of the distribution is generally considered to be received by each spouse. 2009 1040 If you file separate returns, you must each report one-half of any taxable distribution. 2009 1040 See Publication 555, Community Property, for more information on community income. 2009 1040   If the distribution is not considered community property and you and your spouse file separate returns, each of you must report your separate taxable distributions. 2009 1040 Example. 2009 1040 You and your spouse have a joint money market account. 2009 1040 Under state law, half the income from the account belongs to you, and half belongs to your spouse. 2009 1040 If you file separate returns, you each report half the income. 2009 1040 Income from property given to a child. 2009 1040   Property you give as a parent to your child under the Model Gifts of Securities to Minors Act, the Uniform Gifts to Minors Act, or any similar law becomes the child's property. 2009 1040   Income from the property is taxable to the child, except that any part used to satisfy a legal obligation to support the child is taxable to the parent or guardian having that legal obligation. 2009 1040 Savings account with parent as trustee. 2009 1040   Interest income from a savings account opened for a minor child, but placed in the name and subject to the order of the parents as trustees, is taxable to the child if, under the law of the state in which the child resides, both of the following are true. 2009 1040 The savings account legally belongs to the child. 2009 1040 The parents are not legally permitted to use any of the funds to support the child. 2009 1040 Table 1-1. 2009 1040 Where To Report Common Types of Investment Income (For detailed information about reporting investment income, see the rest of this publication, especially How To Report Interest Income and How To Report Dividend Income in chapter 1. 2009 1040 ) Type of Income If you file Form 1040, report on . 2009 1040 . 2009 1040 . 2009 1040 If you can file Form 1040A, report on . 2009 1040 . 2009 1040 . 2009 1040 If you can file Form 1040EZ, report on . 2009 1040 . 2009 1040 . 2009 1040 Tax-exempt interest (Form 1099-INT, box 8) Line 8b Line 8b Space to the left of line 2 (enter “TEI” and the amount) Taxable interest that totals $1,500 or less Line 8a (You may need to file Schedule B as well. 2009 1040 ) Line 8a (You may need to file Schedule B as well. 2009 1040 ) Line 2 Taxable interest that totals more than $1,500 Line 8a; also use Schedule B, line 1 Line 8a; also use Schedule B, line 1   Savings bond interest you will exclude because of higher education expenses Schedule B; also use Form 8815 Schedule B; also use Form 8815   Ordinary dividends that total $1,500 or less Line 9a (You may need to file Schedule B as well. 2009 1040 ) Line 9a (You may need to file Schedule B as well. 2009 1040 )   Ordinary dividends that total more than $1,500 Line 9a; also use Schedule B, line 5 Line 9a; also use Schedule B, line 5   Qualified dividends (if you do not have to file Schedule D) Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 2 Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 2   Qualified dividends (if you have to file Schedule D) Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet, line 2 You cannot use Form 1040A    You cannot use Form 1040EZ Capital gain distributions (if you do not have to file Schedule D) Line 13; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 3 Line 10; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 3   Capital gain distributions (if you have to file Schedule D) Schedule D, line 13; also use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet     Section 1250, 1202, or collectibles gain (Form 1099-DIV, box 2b, 2c, or 2d) Form 8949 and Schedule D     Nondividend distributions (Form 1099-DIV, box 3) Generally not reported*     Undistributed capital gains (Form 2439, boxes 1a - 1d) Schedule D     Gain or loss from sales of stocks or bonds Line 13; also use Form 8949, Schedule D, and the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet You cannot use Form 1040A   Gain or loss from exchanges of like-kind investment property Line 13; also use Schedule D, Form 8824, and the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet     *Report any amounts in excess of your basis in your mutual fund shares on Form 8949. 2009 1040 Use Part II if you held the shares more than 1 year. 2009 1040 Use Part I if you held your mutual fund shares 1 year or less. 2009 1040 For details on Form 8949, see Reporting Capital Gains and Losses in chapter 4, and the Instructions for Form 8949. 2009 1040 Accuracy-related penalty. 2009 1040   An accuracy-related penalty of 20% can be charged for underpayments of tax due to negligence or disregard of rules or regulations or substantial understatement of tax. 2009 1040 For information on the penalty and any interest that applies, see Penalties in chapter 2. 2009 1040 Interest Income This section discusses the tax treatment of different types of interest income. 2009 1040 In general, any interest that you receive or that is credited to your account and can be withdrawn is taxable income. 2009 1040 (It does not have to be entered in your passbook. 2009 1040 ) Exceptions to this rule are discussed later. 2009 1040 Form 1099-INT. 2009 1040   Interest income is generally reported to you on Form 1099-INT, or a similar statement, by banks, savings and loans, and other payers of interest. 2009 1040 This form shows you the interest you received during the year. 2009 1040 Keep this form for your records. 2009 1040 You do not have to attach it to your tax return. 2009 1040   Report on your tax return the total interest income you receive for the tax year. 2009 1040 Interest not reported on Form 1099-INT. 2009 1040   Even if you do not receive Form 1099-INT, you must still report all of your interest income. 2009 1040 For example, you may receive distributive shares of interest from partnerships or S corporations. 2009 1040 This interest is reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. 2009 1040 , and Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. 2009 1040 Nominees. 2009 1040   Generally, if someone receives interest as a nominee for you, that person must give you a Form 1099-INT showing the interest received on your behalf. 2009 1040   If you receive a Form 1099-INT that includes amounts belonging to another person, see the discussion on Nominee distributions , later, under How To Report Interest Income. 2009 1040 Incorrect amount. 2009 1040   If you receive a Form 1099-INT that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. 2009 1040 The new Form 1099-INT you receive will be marked “Corrected. 2009 1040 ” Form 1099-OID. 2009 1040   Reportable interest income also may be shown on Form 1099-OID, Original Issue Discount. 2009 1040 For more information about amounts shown on this form, see Original Issue Discount (OID) , later in this chapter. 2009 1040 Exempt-interest dividends. 2009 1040   Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. 2009 1040 (However, see Information reporting requirement , next. 2009 1040 ) Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. 2009 1040 You do not reduce your basis for distributions that are exempt-interest dividends. 2009 1040 Information reporting requirement. 2009 1040   Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file. 2009 1040 This is an information reporting requirement and does not change the exempt-interest dividends into taxable income. 2009 1040 See How To Report Interest Income , later. 2009 1040 Note. 2009 1040 Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. 2009 1040 The exempt-interest dividends subject to the alternative minimum tax are shown in box 11 of Form 1099-DIV. 2009 1040 See Form 6251 and its instructions for more information about this tax. 2009 1040 Private activity bonds are discussed later under State or Local Government Obligations. 2009 1040 Interest on VA dividends. 2009 1040   Interest on insurance dividends left on deposit with the Department of Veterans Affairs (VA) is not taxable. 2009 1040 This includes interest paid on dividends on converted United States Government Life Insurance policies and on National Service Life Insurance policies. 2009 1040 Individual retirement arrangements (IRAs). 2009 1040   Interest on a Roth IRA generally is not taxable. 2009 1040 Interest on a traditional IRA is tax deferred. 2009 1040 You generally do not include it in your income until you make withdrawals from the IRA. 2009 1040 See Publication 590 for more information. 2009 1040 Taxable Interest — General Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. 2009 1040 The following are some sources of taxable interest. 2009 1040 Dividends that are actually interest. 2009 1040   Certain distributions commonly called dividends are actually interest. 2009 1040 You must report as interest so-called “dividends” on deposits or on share accounts in: Cooperative banks, Credit unions, Domestic building and loan associations, Domestic savings and loan associations, Federal savings and loan associations, and Mutual savings banks. 2009 1040  The “dividends” will be shown as interest income on Form 1099-INT. 2009 1040 Money market funds. 2009 1040   Money market funds are offered by nonbank financial institutions such as mutual funds and stock brokerage houses, and pay dividends. 2009 1040 Generally, amounts you receive from money market funds should be reported as dividends, not as interest. 2009 1040 Certificates of deposit and other deferred interest accounts. 2009 1040   If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the account. 2009 1040 You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. 2009 1040 The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. 2009 1040 If interest is deferred for more than 1 year, see Original Issue Discount (OID) , later. 2009 1040 Interest subject to penalty for early withdrawal. 2009 1040   If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. 2009 1040 You must report the total amount of interest paid or credited to your account during the year, without subtracting the penalty. 2009 1040 See Penalty on early withdrawal of savings under How To Report Interest Income, later, for more information on how to report the interest and deduct the penalty. 2009 1040 Money borrowed to invest in certificate of deposit. 2009 1040   The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. 2009 1040 You must report the total interest you earn on the certificate in your income. 2009 1040 If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income. 2009 1040 See Interest Expenses in chapter 3. 2009 1040 Example. 2009 1040 You deposited $5,000 with a bank and borrowed $5,000 from the bank to make up the $10,000 minimum deposit required to buy a 6-month certificate of deposit. 2009 1040 The certificate earned $575 at maturity in 2013, but you received only $265, which represented the $575 you earned minus $310 interest charged on your $5,000 loan. 2009 1040 The bank gives you a Form 1099-INT for 2013 showing the $575 interest you earned. 2009 1040 The bank also gives you a statement showing that you paid $310 interest for 2013. 2009 1040 You must include the $575 in your income. 2009 1040 If you itemize your deductions on Schedule A (Form 1040), Itemized Deductions, you can deduct $310, subject to the net investment income limit. 2009 1040 Gift for opening account. 2009 1040   If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest. 2009 1040   For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. 2009 1040 For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. 2009 1040 The value is determined by the cost to the financial institution. 2009 1040 Example. 2009 1040 You open a savings account at your local bank and deposit $800. 2009 1040 The account earns $20 interest. 2009 1040 You also receive a $15 calculator. 2009 1040 If no other interest is credited to your account during the year, the Form 1099-INT you receive will show $35 interest for the year. 2009 1040 You must report $35 interest income on your tax return. 2009 1040 Interest on insurance dividends. 2009 1040   Interest on insurance dividends left on deposit with an insurance company that can be withdrawn annually is taxable to you in the year it is credited to your account. 2009 1040 However, if you can withdraw it only on the anniversary date of the policy (or other specified date), the interest is taxable in the year that date occurs. 2009 1040 Prepaid insurance premiums. 2009 1040   Any increase in the value of prepaid insurance premiums, advance premiums, or premium deposit funds is interest if it is applied to the payment of premiums due on insurance policies or made available for you to withdraw. 2009 1040 U. 2009 1040 S. 2009 1040 obligations. 2009 1040   Interest on U. 2009 1040 S. 2009 1040 obligations, such as U. 2009 1040 S. 2009 1040 Treasury bills, notes, and bonds, issued by any agency or instrumentality of the United States is taxable for federal income tax purposes. 2009 1040 Interest on tax refunds. 2009 1040   Interest you receive on tax refunds is taxable income. 2009 1040 Interest on condemnation award. 2009 1040   If the condemning authority pays you interest to compensate you for a delay in payment of an award, the interest is taxable. 2009 1040 Installment sale payments. 2009 1040   If a contract for the sale or exchange of property provides for deferred payments, it also usually provides for interest payable with the deferred payments. 2009 1040 That interest is taxable when you receive it. 2009 1040 If little or no interest is provided for in a deferred payment contract, part of each payment may be treated as interest. 2009 1040 See Unstated Interest and Original Issue Discount (OID) in Publication 537. 2009 1040 Interest on annuity contract. 2009 1040   Accumulated interest on an annuity contract you sell before its maturity date is taxable. 2009 1040 Usurious interest. 2009 1040   Usurious interest is interest charged at an illegal rate. 2009 1040 This is taxable as interest unless state law automatically changes it to a payment on the principal. 2009 1040 Interest income on frozen deposits. 2009 1040   Exclude from your gross income interest on frozen deposits. 2009 1040 A deposit is frozen if, at the end of the year, you cannot withdraw any part of the deposit because: The financial institution is bankrupt or insolvent, or The state in which the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt or insolvent. 2009 1040   The amount of interest you must exclude is the interest that was credited on the frozen deposits minus the sum of: The net amount you withdrew from these deposits during the year, and The amount you could have withdrawn as of the end of the year (not reduced by any penalty for premature withdrawals of a time deposit). 2009 1040 If you receive a Form 1099-INT for interest income on deposits that were frozen at the end of 2013, see Frozen deposits under How To Report Interest Income for information about reporting this interest income exclusion on your tax return. 2009 1040   The interest you exclude is treated as credited to your account in the following year. 2009 1040 You must include it in income in the year you can withdraw it. 2009 1040 Example. 2009 1040 $100 of interest was credited on your frozen deposit during the year. 2009 1040 You withdrew $80 but could not withdraw any more as of the end of the year. 2009 1040 You must include $80 in your income and exclude $20 from your income for the year. 2009 1040 You must include the $20 in your income for the year you can withdraw it. 2009 1040 Bonds traded flat. 2009 1040    If you buy a bond at a discount when interest has been defaulted or when the interest has accrued but has not been paid, the transaction is described as trading a bond flat. 2009 1040 The defaulted or unpaid interest is not income and is not taxable as interest if paid later. 2009 1040 When you receive a payment of that interest, it is a return of capital that reduces the remaining cost basis of your bond. 2009 1040 Interest that accrues after the date of purchase, however, is taxable interest income for the year received or accrued. 2009 1040 See Bonds Sold Between Interest Dates , later in this chapter. 2009 1040 Below-Market Loans If you make a below-market gift or demand loan, you must report as interest income any forgone interest (defined later) from that loan. 2009 1040 The below-market loan rules and exceptions are described in this section. 2009 1040 For more information, see section 7872 of the Internal Revenue Code and its regulations. 2009 1040 If you receive a below-market loan, you may be able to deduct the forgone interest as well as any interest you actually paid, but not if it is personal interest. 2009 1040 Loans subject to the rules. 2009 1040   The rules for below-market loans apply to: Gift loans, Pay-related loans, Corporation-shareholder loans, Tax avoidance loans, and Certain loans made to qualified continuing care facilities under a continuing care contract. 2009 1040 A pay-related loan is any below-market loan between an employer and an employee or between an independent contractor and a person for whom the contractor provides services. 2009 1040 A tax avoidance loan is any below-market loan where the avoidance of federal tax is one of the main purposes of the interest arrangement. 2009 1040 Forgone interest. 2009 1040   For any period, forgone interest is: The amount of interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. 2009 1040 Applicable federal rate. 2009 1040   Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. 2009 1040 Some IRS offices have these bulletins available for research. 2009 1040 See chapter 5, How To Get Tax Help , for other ways to get this information. 2009 1040 Rules for below-market loans. 2009 1040   The rules that apply to a below-market loan depend on whether the loan is a gift loan, demand loan, or term loan. 2009 1040 Gift and demand loans. 2009 1040   A gift loan is any below-market loan where the forgone interest is in the nature of a gift. 2009 1040   A demand loan is a loan payable in full at any time upon demand by the lender. 2009 1040 A demand loan is a below-market loan if no interest is charged or if interest is charged at a rate below the applicable federal rate. 2009 1040   A demand loan or gift loan that is a below-market loan is generally treated as an arm's-length transaction in which the lender is treated as having made: A loan to the borrower in exchange for a note that requires the payment of interest at the applicable federal rate, and An additional payment to the borrower in an amount equal to the forgone interest. 2009 1040 The borrower is generally treated as transferring the additional payment back to the lender as interest. 2009 1040 The lender must report that amount as interest income. 2009 1040   The lender's additional payment to the borrower is treated as a gift, dividend, contribution to capital, pay for services, or other payment, depending on the substance of the transaction. 2009 1040 The borrower may have to report this payment as taxable income, depending on its classification. 2009 1040 These transfers are considered to occur annually, generally on December 31. 2009 1040 Term loans. 2009 1040   A term loan is any loan that is not a demand loan. 2009 1040 A term loan is a below-market loan if the amount of the loan is more than the present value of all payments due under the loan. 2009 1040   A lender who makes a below-market term loan other than a gift loan is treated as transferring an additional lump-sum cash payment to the borrower (as a dividend, contribution to capital, etc. 2009 1040 ) on the date the loan is made. 2009 1040 The amount of this payment is the amount of the loan minus the present value, at the applicable federal rate, of all payments due under the loan. 2009 1040 An equal amount is treated as original issue discount (OID). 2009 1040 The lender must report the annual part of the OID as interest income. 2009 1040 The borrower may be able to deduct the OID as interest expense. 2009 1040 See Original Issue Discount (OID) , later. 2009 1040 Exceptions to the below-market loan rules. 2009 1040   Exceptions to the below-market loan rules are discussed here. 2009 1040 Exception for loans of $10,000 or less. 2009 1040   The rules for below-market loans do not apply to any day on which the total outstanding amount of loans between the borrower and lender is $10,000 or less. 2009 1040 This exception applies only to: Gift loans between individuals if the gift loan is not directly used to buy or carry income-producing assets, and Pay-related loans or corporation-shareholder loans if the avoidance of federal tax is not a principal purpose of the interest arrangement. 2009 1040 This exception does not apply to a term loan described in (2) earlier that previously has been subject to the below-market loan rules. 2009 1040 Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. 2009 1040 Exception for loans to continuing care facilities. 2009 1040   Loans to qualified continuing care facilities under continuing care contracts are not subject to the rules for below-market loans for the calendar year if the lender or the lender's spouse is age 62 or older at the end of the year. 2009 1040 For the definitions of qualified continuing care facility and continuing care contract, see Internal Revenue Code section 7872(h). 2009 1040 Exception for loans without significant tax effect. 2009 1040   Loans are excluded from the below-market loan rules if their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. 2009 1040 These loans include: Loans made available by the lender to the general public on the same terms and conditions that are consistent with the lender's customary business practice; Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public; Certain employee-relocation loans; Certain loans from a foreign person, unless the interest income would be effectively connected with the conduct of a U. 2009 1040 S. 2009 1040 trade or business and would not be exempt from U. 2009 1040 S. 2009 1040 tax under an income tax treaty; Gift loans to a charitable organization, contributions to which are deductible, if the total outstanding amount of loans between the organization and lender is $250,000 or less at all times during the tax year; and Other loans on which the interest arrangement can be shown to have no significant effect on the federal tax liability of the lender or the borrower. 2009 1040 For a loan described in (6) above, all the facts and circumstances are used to determine if the interest arrangement has a significant effect on the federal tax liability of the lender or borrower. 2009 1040 Some factors to be considered are: Whether items of income and deduction generated by the loan offset each other; The amount of these items; The cost to you of complying with the below-market loan rules, if they were to apply; and Any reasons other than taxes for structuring the transaction as a below-market loan. 2009 1040 If you structure a transaction to meet this exception and one of the principal purposes of that structure is the avoidance of federal tax, the loan will be considered a tax-avoidance loan, and this exception will not apply. 2009 1040 Limit on forgone interest for gift loans of $100,000 or less. 2009 1040   For gift loans between individuals, if the outstanding loans between the lender and borrower total $100,000 or less, the forgone interest to be included in income by the lender and deducted by the borrower is limited to the amount of the borrower's net investment income for the year. 2009 1040 If the borrower's net investment income is $1,000 or less, it is treated as zero. 2009 1040 This limit does not apply to a loan if the avoidance of federal tax is one of the main purposes of the interest arrangement. 2009 1040 Effective dates. 2009 1040    These rules apply to term loans made after June 6, 1984, and to demand loans outstanding after that date. 2009 1040 U. 2009 1040 S. 2009 1040 Savings Bonds This section provides tax information on U. 2009 1040 S. 2009 1040 savings bonds. 2009 1040 It explains how to report the interest income on these bonds and how to treat transfers of these bonds. 2009 1040 U. 2009 1040 S. 2009 1040 savings bonds currently offered to individuals include Series EE bonds and Series I bonds. 2009 1040 For other information on U. 2009 1040 S. 2009 1040 savings bonds, write to:  For Series HH/H: Bureau of the Fiscal Service Division of Customer Assistance P. 2009 1040 O. 2009 1040 Box 2186 Parkersburg, WV 26106-2186  For Series EE and I paper savings bonds: Bureau of the Fiscal Service Division of Customer Assistance P. 2009 1040 O. 2009 1040 Box 7012 Parkersburg, WV 26106-7012  For Series EE and I electronic bonds: Bureau of the Fiscal Service  Division of Customer Assistance P. 2009 1040 O. 2009 1040 Box 7015 Parkersburg, WV 26106-7015 Or, on the Internet, visit: www. 2009 1040 treasurydirect. 2009 1040 gov/indiv/indiv. 2009 1040 htm. 2009 1040 Accrual method taxpayers. 2009 1040   If you use an accrual method of accounting, you must report interest on U. 2009 1040 S. 2009 1040 savings bonds each year as it accrues. 2009 1040 You cannot postpone reporting interest until you receive it or until the bonds mature. 2009 1040 Cash method taxpayers. 2009 1040   If you use the cash method of accounting, as most individual taxpayers do, you generally report the interest on U. 2009 1040 S. 2009 1040 savings bonds when you receive it. 2009 1040 But see Reporting options for cash method taxpayers , later. 2009 1040 Series HH bonds. 2009 1040   These bonds were issued at face value. 2009 1040 Interest is paid twice a year by direct deposit to your bank account. 2009 1040 If you are a cash method taxpayer, you must report interest on these bonds as income in the year you receive it. 2009 1040   Series HH bonds were first offered in 1980 and last offered in August 2004. 2009 1040 Before 1980, series H bonds were issued. 2009 1040 Series H bonds are treated the same as series HH bonds. 2009 1040 If you are a cash method taxpayer, you must report the interest when you receive it. 2009 1040   Series H bonds have a maturity period of 30 years. 2009 1040 Series HH bonds mature in 20 years. 2009 1040 The last series H bonds matured in 2009. 2009 1040 The last series HH bonds will mature in 2024. 2009 1040 Series EE and series I bonds. 2009 1040   Interest on these bonds is payable when you redeem the bonds. 2009 1040 The difference between the purchase price and the redemption value is taxable interest. 2009 1040 Series EE bonds. 2009 1040   Series EE bonds were first offered in January 1980 and have a maturity period of 30 years. 2009 1040 Before July 1980, series E bonds were issued. 2009 1040 The original 10-year maturity period of series E bonds has been extended to 40 years for bonds issued before December 1965 and 30 years for bonds issued after November 1965. 2009 1040 Paper series EE and series E bonds are issued at a discount. 2009 1040 The face value is payable to you at maturity. 2009 1040 Electronic series EE bonds are issued at their face value. 2009 1040 The face value plus accrued interest is payable to you at maturity. 2009 1040 As of January 1, 2012, paper savings bonds were no longer sold at financial institutions. 2009 1040    Owners of paper series EE bonds can convert them to electronic bonds. 2009 1040 These converted bonds do not retain the denomination listed on the paper certificate but are posted at their purchase price (with accrued interest). 2009 1040 Series I bonds. 2009 1040   Series I bonds were first offered in 1998. 2009 1040 These are inflation-indexed bonds issued at their face amount with a maturity period of 30 years. 2009 1040 The face value plus all accrued interest is payable to you at maturity. 2009 1040 Reporting options for cash method taxpayers. 2009 1040   If you use the cash method of reporting income, you can report the interest on series EE, series E, and series I bonds in either of the following ways. 2009 1040 Method 1. 2009 1040 Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year in which they mature. 2009 1040 (However, see Savings bonds traded , later. 2009 1040 )  Note. 2009 1040 Series EE bonds issued in 1983 matured in 2013. 2009 1040 If you have used method 1, you generally must report the interest on these bonds on your 2013 return. 2009 1040 The last series E bonds were issued in 1980 and matured in 2010. 2009 1040 If you used method 1, you generally should have reported the interest on these bonds on your 2010 return. 2009 1040 Method 2. 2009 1040 Choose to report the increase in redemption value as interest each year. 2009 1040  You must use the same method for all series EE, series E, and series I bonds you own. 2009 1040 If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1. 2009 1040 If you plan to cash your bonds in the same year you will pay for higher educational expenses, you may want to use method 1 because you may be able to exclude the interest from your income. 2009 1040 To learn how, see Education Savings Bond Program, later. 2009 1040 Change from method 1. 2009 1040   If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission from the IRS. 2009 1040 In the year of change, you must report all interest accrued to date and not previously reported for all your bonds. 2009 1040   Once you choose to report the interest each year, you must continue to do so for all series EE, series E, and series I bonds you own and for any you get later, unless you request permission to change, as explained next. 2009 1040 Change from method 2. 2009 1040   To change from method 2 to method 1, you must request permission from the IRS. 2009 1040 Permission for the change is automatically granted if you send the IRS a statement that meets all the following requirements. 2009 1040 You have typed or printed the following number at the top: “131. 2009 1040 ” It includes your name and social security number under “131. 2009 1040 ” It includes the year of change (both the beginning and ending dates). 2009 1040 It identifies the savings bonds for which you are requesting this change. 2009 1040 It includes your agreement to: Report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest; and Report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years. 2009 1040   You must attach this statement to your tax return for the year of change, which you must file by the due date (including extensions). 2009 1040   You can have an automatic extension of 6 months from the due date of your return for the year of change (excluding extensions) to file the statement with an amended return. 2009 1040 On the statement, type or print “Filed pursuant to section 301. 2009 1040 9100-2. 2009 1040 ” To get this extension, you must have filed your original return for the year of the change by the due date (including extensions). 2009 1040    By the date you file the original statement with your return, you must also send a signed copy to the address below. 2009 1040    Internal Revenue Service Attention: CC:IT&A (Automatic Rulings Branch) P. 2009 1040 O. 2009 1040 Box 7604 Benjamin Franklin Station Washington, DC 20044   If you use a private delivery service, send the signed copy to the address below. 2009 1040 Internal Revenue Service Attention: CC:IT&A  (Automatic Rulings Branch) Room 5336 1111 Constitution Avenue, NW Washington, DC 20224    Instead of filing this statement, you can request permission to change from method 2 to method 1 by filing Form 3115. 2009 1040 In that case, follow the form instructions for an automatic change. 2009 1040 No user fee is required. 2009 1040 Co-owners. 2009 1040   If a U. 2009 1040 S. 2009 1040 savings bond is issued in the names of co-owners, such as you and your child or you and your spouse, interest on the bond is generally taxable to the co-owner who bought the bond. 2009 1040 One co-owner's funds used. 2009 1040   If you used your funds to buy the bond, you must pay the tax on the interest. 2009 1040 This is true even if you let the other co-owner redeem the bond and keep all the proceeds. 2009 1040 Under these circumstances, the co-owner who redeemed the bond will receive a Form 1099-INT at the time of redemption and must provide you with another Form 1099-INT showing the amount of interest from the bond taxable to you. 2009 1040 The co-owner who redeemed the bond is a “nominee. 2009 1040 ” See Nominee distributions under How To Report Interest Income, later, for more information about how a person who is a nominee reports interest income belonging to another person. 2009 1040 Both co-owners' funds used. 2009 1040   If you and the other co-owner each contribute part of the bond's purchase price, the interest is generally taxable to each of you, in proportion to the amount each of you paid. 2009 1040 Community property. 2009 1040   If you and your spouse live in a community property state and hold bonds as community property, one-half of the interest is considered received by each of you. 2009 1040 If you file separate returns, each of you generally must report one-half of the bond interest. 2009 1040 For more information about community property, see Publication 555. 2009 1040 Table 1-2. 2009 1040   These rules are also shown in Table 1-2. 2009 1040 Child as only owner. 2009 1040   Interest on U. 2009 1040 S. 2009 1040 savings bonds bought for and registered only in the name of your child is income to your child, even if you paid for the bonds and are named as beneficiary. 2009 1040 If the bonds are series EE, series E, or series I bonds, the interest on the bonds is income to your child in the earlier of the year the bonds are cashed or disposed of or the year the bonds mature, unless your child chooses to report the interest income each year. 2009 1040 Choice to report interest each year. 2009 1040   The choice to report the accrued interest each year can be made either by your child or by you for your child. 2009 1040 This choice is made by filing an income tax return that shows all the interest earned to date, and by stating on the return that your child chooses to report the interest each year. 2009 1040 Either you or your child should keep a copy of this return. 2009 1040   Unless your child is otherwise required to file a tax return for any year after making this choice, your child does not have to file a return only to report the annual accrual of U. 2009 1040 S. 2009 1040 savings bond interest under this choice. 2009 1040 However, see Tax on unearned income of certain children , earlier, under General Information. 2009 1040 Neither you nor your child can change the way you report the interest unless you request permission from the IRS, as discussed earlier under Change from method 2 . 2009 1040 Ownership transferred. 2009 1040   If you bought series E, series EE, or series I bonds entirely with your own funds and had them reissued in your co-owner's name or beneficiary's name alone, you must include in your gross income for the year of reissue all interest that you earned on these bonds and have not previously reported. 2009 1040 But, if the bonds were reissued in your name alone, you do not have to report the interest accrued at that time. 2009 1040   This same rule applies when bonds (other than bonds held as community property) are transferred between spouses or incident to divorce. 2009 1040 Example. 2009 1040 You bought series EE bonds entirely with your own funds. 2009 1040 You did not choose to report the accrued interest each year. 2009 1040 Later, you transfer the bonds to your former spouse under a divorce agreement. 2009 1040 You must include the deferred accrued interest, from the date of the original issue of the bonds to the date of transfer, in your income in the year of transfer. 2009 1040 Your former spouse includes in income the interest on the bonds from the date of transfer to the date of redemption. 2009 1040 Table 1-2. 2009 1040 Who Pays the Tax on U. 2009 1040 S. 2009 1040 Savings Bond Interest IF . 2009 1040 . 2009 1040 . 2009 1040 THEN the interest must be reported by . 2009 1040 . 2009 1040 . 2009 1040 you buy a bond in your name and the name of another person as co-owners, using only your own funds you. 2009 1040 you buy a bond in the name of another person, who is the sole owner of the bond the person for whom you bought the bond. 2009 1040 you and another person buy a bond as co-owners, each contributing part of the purchase price both you and the other co-owner, in proportion to the amount each paid for the bond. 2009 1040 you and your spouse, who live in a community property state, buy a bond that is community property you and your spouse. 2009 1040 If you file separate returns, both you and your spouse generally report one-half of the interest. 2009 1040 Purchased jointly. 2009 1040   If you and a co-owner each contributed funds to buy series E, series EE, or series I bonds jointly and later have the bonds reissued in the co-owner's name alone, you must include in your gross income for the year of reissue your share of all the interest earned on the bonds that you have not previously reported. 2009 1040 The former co-owner does not have to include in gross income at the time of reissue his or her share of the interest earned that was not reported before the transfer. 2009 1040 This interest, however, as well as all interest earned after the reissue, is income to the former co-owner. 2009 1040   This income-reporting rule also applies when the bonds are reissued in the name of your former co-owner and a new co-owner. 2009 1040 But the new co-owner will report only his or her share of the interest earned after the transfer. 2009 1040   If bonds that you and a co-owner bought jointly are reissued to each of you separately in the same proportion as your contribution to the purchase price, neither you nor your co-owner has to report at that time the interest earned before the bonds were reissued. 2009 1040 Example 1. 2009 1040 You and your spouse each spent an equal amount to buy a $1,000 series EE savings bond. 2009 1040 The bond was issued to you and your spouse as co-owners. 2009 1040 You both postpone reporting interest on the bond. 2009 1040 You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. 2009 1040 At that time neither you nor your spouse has to report the interest earned to the date of reissue. 2009 1040 Example 2. 2009 1040 You bought a $1,000 series EE savings bond entirely with your own funds. 2009 1040 The bond was issued to you and your spouse as co-owners. 2009 1040 You both postponed reporting interest on the bond. 2009 1040 You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. 2009 1040 You must report half the interest earned to the date of reissue. 2009 1040 Transfer to a trust. 2009 1040   If you own series E, series EE, or series I bonds and transfer them to a trust, giving up all rights of ownership, you must include in your income for that year the interest earned to the date of transfer if you have not already reported it. 2009 1040 However, if you are considered the owner of the trust and if the increase in value both before and after the transfer continues to be taxable to you, you can continue to defer reporting the interest earned each year. 2009 1040 You must include the total interest in your income in the year you cash or dispose of the bonds or the year the bonds finally mature, whichever is earlier. 2009 1040   The same rules apply to previously unreported interest on series EE or series E bonds if the transfer to a trust consisted of series HH or series H bonds you acquired in a trade for the series EE or series E bonds. 2009 1040 See Savings bonds traded , later. 2009 1040 Decedents. 2009 1040   The manner of reporting interest income on series E, series EE, or series I bonds, after the death of the owner (decedent), depends on the accounting and income-reporting methods previously used by the decedent. 2009 1040 Decedent who reported interest each year. 2009 1040   If the bonds transferred because of death were owned by a person who used an accrual method, or who used the cash method and had chosen to report the interest each year, the interest earned in the year of death up to the date of death must be reported on that person's final return. 2009 1040 The person who acquires the bonds includes in income only interest earned after the date of death. 2009 1040 Decedent who postponed reporting interest. 2009 1040   If the transferred bonds were owned by a decedent who had used the cash method and had not chosen to report the interest each year, and who had bought the bonds entirely with his or her own funds, all interest earned before death must be reported in one of the following ways. 2009 1040 The surviving spouse or personal representative (executor, administrator, etc. 2009 1040 ) who files the final income tax return of the decedent can choose to include on that return all interest earned on the bonds before the decedent's death. 2009 1040 The person who acquires the bonds then includes in income only interest earned after the date of death. 2009 1040 If the choice in (1) is not made, the interest earned up to the date of death is income in respect of the decedent and should not be included in the decedent's final return. 2009 1040 All interest earned both before and after the decedent's death (except any part reported by the estate on its income tax return) is income to the person who acquires the bonds. 2009 1040 If that person uses the cash method and does not choose to report the interest each year, he or she can postpone reporting it until the year the bonds are cashed or disposed of or the year they mature, whichever is earlier. 2009 1040 In the year that person reports the interest, he or she can claim a deduction for any federal estate tax paid on the part of the interest included in the decedent's estate. 2009 1040 For more information on income in respect of a decedent, see Publication 559, Survivors, Executors, and Administrators. 2009 1040 Example 1. 2009 1040 Your uncle, a cash method taxpayer, died and left you a $1,000 series EE bond. 2009 1040 He had bought the bond for $500 and had not chosen to report the interest each year. 2009 1040 At the date of death, interest of $200 had accrued on the bond, and its value of $700 was included in your uncle's estate. 2009 1040 Your uncle's executor chose not to include the $200 accrued interest in your uncle's final income tax return. 2009 1040 The $200 is income in respect of the decedent. 2009 1040 You are a cash method taxpayer and do not choose to report the interest each year as it is earned. 2009 1040 If you cash the bond when it reaches maturity value of $1,000, you report $500 interest income—the difference between maturity value of $1,000 and the original cost of $500. 2009 1040 For that year, you can deduct (as a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit) any federal estate tax paid because the $200 interest was included in your uncle's estate. 2009 1040 Example 2. 2009 1040 If, in Example 1 , the executor had chosen to include the $200 accrued interest in your uncle's final return, you would report only $300 as interest when you cashed the bond at maturity. 2009 1040 $300 is the interest earned after your uncle's death. 2009 1040 Example 3. 2009 1040 If, in Example 1 , you make or have made the choice to report the increase in redemption value as interest each year, you include in gross income for the year you acquire the bond all of the unreported increase in value of all series E, series EE, and series I bonds you hold, including the $200 on the bond you inherited from your uncle. 2009 1040 Example 4. 2009 1040 When your aunt died, she owned series HH bonds that she had acquired in a trade for series EE bonds. 2009 1040 You were the beneficiary of these bonds. 2009 1040 Your aunt used the cash method and did not choose to report the interest on the series EE bonds each year as it accrued. 2009 1040 Your aunt's executor chose not to include any interest earned before your aunt's death on her final return. 2009 1040 The income in respect of the decedent is the sum of the unreported interest on the series EE bonds and the interest, if any, payable on the series HH bonds but not received as of the date of your aunt's death. 2009 1040 You must report any interest received during the year as income on your return. 2009 1040 The part of the interest payable but not received before your aunt's death is income in respect of the decedent and may qualify for the estate tax deduction. 2009 1040 For information on when to report the interest on the series EE bonds traded, see Savings bonds traded , later. 2009 1040 Savings bonds distributed from a retirement or profit-sharing plan. 2009 1040   If you acquire a U. 2009 1040 S. 2009 1040 savings bond in a taxable distribution from a retirement or profit-sharing plan, your income for the year of distribution includes the bond's redemption value (its cost plus the interest accrued before the distribution). 2009 1040 When you redeem the bond (whether in the year of distribution or later), your interest income includes only the interest accrued after the bond was distributed. 2009 1040 To figure the interest reported as a taxable distribution and your interest income when you redeem the bond, see Worksheet for savings bonds distributed from a retirement or profit-sharing plan under How To Report Interest Income, later. 2009 1040 Savings bonds traded. 2009 1040   If you postponed reporting the interest on your series EE or series E bonds, you did not recognize taxable income when you traded the bonds for series HH or series H bonds, unless you received cash in the trade. 2009 1040 (You cannot trade series I bonds for series HH bonds. 2009 1040 After August 31, 2004, you cannot trade any other series of bonds for series HH bonds. 2009 1040 ) Any cash you received is income up to the amount of the interest earned on the bonds traded. 2009 1040 When your series HH or series H bonds mature, or if you dispose of them before maturity, you report as interest the difference between their redemption value and your cost. 2009 1040 Your cost is the sum of the amount you paid for the traded series EE or series E bonds plus any amount you had to pay at the time of the trade. 2009 1040 Example. 2009 1040 You traded series EE bonds (on which you postponed reporting the interest) for $2,500 in series HH bonds and $223 in cash. 2009 1040 You reported the $223 as taxable income on your tax return. 2009 1040 At the time of the trade, the series EE bonds had accrued interest of $523 and a redemption value of $2,723. 2009 1040 You hold the series HH bonds until maturity, when you receive $2,500. 2009 1040 You must report $300 as interest income in the year of maturity. 2009 1040 This is the difference between their redemption value, $2,500, and your cost, $2,200 (the amount you paid for the series EE bonds). 2009 1040 (It is also the difference between the accrued interest of $523 on the series EE bonds and the $223 cash received on the trade. 2009 1040 ) Choice to report interest in year of trade. 2009 1040   You could have chosen to treat all of the previously unreported accrued interest on series EE or series E bonds traded for series HH bonds as income in the year of the trade. 2009 1040 If you made this choice, it is treated as a change from method 1. 2009 1040 See Change from method 1 under Series EE and series I bonds, earlier. 2009 1040 Form 1099-INT for U. 2009 1040 S. 2009 1040 savings bond interest. 2009 1040   When you cash a bond, the bank or other payer that redeems it must give you a Form 1099-INT if the interest part of the payment you receive is $10 or more. 2009 1040 Box 3 of your Form 1099-INT should show the interest as the difference between the amount you received and the amount paid for the bond. 2009 1040 However, your Form 1099-INT may show more interest than you have to include on your income tax return. 2009 1040 For example, this may happen if any of the following are true. 2009 1040 You chose to report the increase in the redemption value of the bond each year. 2009 1040 The interest shown on your Form 1099-INT will not be reduced by amounts previously included in income. 2009 1040 You received the bond from a decedent. 2009 1040 The interest shown on your Form 1099-INT will not be reduced by any interest reported by the decedent before death, or on the decedent's final return, or by the estate on the estate's income tax return. 2009 1040 Ownership of the bond was transferred. 2009 1040 The interest shown on your Form 1099-INT will not be reduced by interest that accrued before the transfer. 2009 1040 You were named as a co-owner, and the other co-owner contributed funds to buy the bond. 2009 1040 The interest shown on your Form 1099-INT will not be reduced by the amount you received as nominee for the other co-owner. 2009 1040 (See Co-owners , earlier in this section, for more information about the reporting requirements. 2009 1040 ) You received the bond in a taxable distribution from a retirement or profit-sharing plan. 2009 1040 The interest shown on your Form 1099-INT will not be reduced by the interest portion of the amount taxable as a distribution from the plan and not taxable as interest. 2009 1040 (This amount is generally shown on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. 2009 1040 , for the year of distribution. 2009 1040 )   For more information on including the correct amount of interest on your return, see U. 2009 1040 S. 2009 1040 savings bond interest previously reported or Nominee distributions under How To Report Interest Income, later. 2009 1040    Interest on U. 2009 1040 S. 2009 1040 savings bonds is exempt from state and local taxes. 2009 1040 The Form 1099-INT you receive will indicate the amount that is for U. 2009 1040 S. 2009 1040 savings bonds interest in box 3. 2009 1040 Do not include this income on your state or local income tax return. 2009 1040 Education Savings Bond Program You may be able to exclude from income all or part of the interest you receive on the redemption of qualified U. 2009 1040 S. 2009 1040 savings bonds during the year if you pay qualified higher educational expenses during the same year. 2009 1040 This exclusion is known as the Education Savings Bond Program. 2009 1040 You do not qualify for this exclusion if your filing status is married filing separately. 2009 1040 Form 8815. 2009 1040   Use Form 8815 to figure your exclusion. 2009 1040 Attach the form to your Form 1040 or Form 1040A. 2009 1040 Qualified U. 2009 1040 S. 2009 1040 savings bonds. 2009 1040   A qualified U. 2009 1040 S. 2009 1040 savings bond is a series EE bond issued after 1989 or a series I bond. 2009 1040 The bond must be issued either in your name (sole owner) or in your and your spouse's names (co-owners). 2009 1040 You must be at least 24 years old before the bond's issue date. 2009 1040 For example, a bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or child. 2009 1040    The issue date of a bond may be earlier than the date the bond is purchased because the issue date assigned to a bond is the first day of the month in which it is purchased. 2009 1040 Beneficiary. 2009 1040   You can designate any individual (including a child) as a beneficiary of the bond. 2009 1040 Verification by IRS. 2009 1040   If you claim the exclusion, the IRS will check it by using bond redemption information from the Department of Treasury. 2009 1040 Qualified expenses. 2009 1040   Qualified higher educational expenses are tuition and fees required for you, your spouse, or your dependent (for whom you claim an exemption) to attend an eligible educational institution. 2009 1040   Qualified expenses include any contribution you make to a qualified tuition program or to a Coverdell education savings account. 2009 1040 For information about these programs, see Publication 970, Tax Benefits for Education. 2009 1040   Qualified expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program. 2009 1040 Eligible educational institutions. 2009 1040   These institutions include most public, private, and nonprofit universities, colleges, and vocational schools that are accredited and eligible to participate in student aid programs run by the Department of Education. 2009 1040 Reduction for certain benefits. 2009 1040   You must reduce your qualified higher educational expenses by all of the following tax-free benefits. 2009 1040 Tax-free part of scholarships and fellowships. 2009 1040 Expenses used to figure the tax-free portion of distributions from a Coverdell ESA. 2009 1040 Expenses used to figure the tax-free portion of distributions from a qualified tuition program. 2009 1040 Any tax-free payments (other than gifts or inheritances) received as educational assistance, such as: Veterans' educational assistance benefits, Qualified tuition reductions, or Employer-provided educational assistance. 2009 1040 Any expense used in figuring the American Opportunity and lifetime learning credits. 2009 1040 For information about these benefits, see Publication 970. 2009 1040 Amount excludable. 2009 1040   If the total proceeds (interest and principal) from the qualified U. 2009 1040 S. 2009 1040 savings bonds you redeem during the year are not more than your adjusted qualified higher educational expenses for the year, you may be able to exclude all of the interest. 2009 1040 If the proceeds are more than the expenses, you may be able to exclude only part of the interest. 2009 1040   To determine the excludable amount, multiply the interest part of the proceeds by a fraction. 2009 1040 The numer