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2012 Income Tax Booklet

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2012 Income Tax Booklet

2012 income tax booklet 4. 2012 income tax booklet   Tax Withholding and Estimated Tax Table of Contents What's New for 2014 Reminders Introduction Useful Items - You may want to see: Tax Withholding for 2014Salaries and Wages Tips Taxable Fringe Benefits Sick Pay Pensions and Annuities Gambling Winnings Unemployment Compensation Federal Payments Backup Withholding Estimated Tax for 2014Who Does Not Have To Pay Estimated Tax Who Must Pay Estimated Tax How To Figure Estimated Tax When To Pay Estimated Tax How To Figure Each Payment How To Pay Estimated Tax Credit for Withholding and Estimated Tax for 2013Withholding Estimated Tax Underpayment Penalty for 2013 What's New for 2014 Tax law changes for 2014. 2012 income tax booklet  When you figure how much income tax you want withheld from your pay and when you figure your estimated tax, consider tax law changes effective in 2014. 2012 income tax booklet For more information, see Publication 505. 2012 income tax booklet Reminders Estimated tax safe harbor for higher income taxpayers. 2012 income tax booklet  If your 2013 adjusted gross income was more than $150,000 ($75,000 if you are married filing a separate return), you must pay the smaller of 90% of your expected tax for 2014 or 110% of the tax shown on your 2013 return to avoid an estimated tax penalty. 2012 income tax booklet Introduction This chapter discusses how to pay your tax as you earn or receive income during the year. 2012 income tax booklet In general, the federal income tax is a pay-as-you-go tax. 2012 income tax booklet There are two ways to pay as you go. 2012 income tax booklet Withholding. 2012 income tax booklet If you are an employee, your employer probably withholds income tax from your pay. 2012 income tax booklet Tax also may be withheld from certain other income, such as pensions, bonuses, commissions, and gambling winnings. 2012 income tax booklet The amount withheld is paid to the IRS in your name. 2012 income tax booklet Estimated tax. 2012 income tax booklet If you do not pay your tax through withholding, or do not pay enough tax that way, you may have to pay estimated tax. 2012 income tax booklet People who are in business for themselves generally will have to pay their tax this way. 2012 income tax booklet Also, you may have to pay estimated tax if you receive income such as dividends, interest, capital gains, rent, and royalties. 2012 income tax booklet Estimated tax is used to pay not only income tax, but self-employment tax and alternative minimum tax as well. 2012 income tax booklet This chapter explains these methods. 2012 income tax booklet In addition, it also explains the following. 2012 income tax booklet Credit for withholding and estimated tax. 2012 income tax booklet When you file your 2013 income tax return, take credit for all the income tax withheld from your salary, wages, pensions, etc. 2012 income tax booklet , and for the estimated tax you paid for 2013. 2012 income tax booklet Also take credit for any excess social security or railroad retirement tax withheld (discussed in chapter 37). 2012 income tax booklet Underpayment penalty. 2012 income tax booklet If you did not pay enough tax during the year, either through withholding or by making estimated tax payments, you may have to pay a penalty. 2012 income tax booklet In most cases, the IRS can figure this penalty for you. 2012 income tax booklet See Underpayment Penalty for 2013 at the end of this chapter. 2012 income tax booklet Useful Items - You may want to see: Publication 505 Tax Withholding and Estimated Tax Form (and Instructions) W-4 Employee's Withholding Allowance Certificate W-4P Withholding Certificate for Pension or Annuity Payments W-4S Request for Federal Income Tax Withholding From Sick Pay W-4V Voluntary Withholding Request 1040-ES Estimated Tax for Individuals 2210 Underpayment of Estimated Tax by Individuals, Estates, and Trusts 2210-F Underpayment of Estimated Tax by Farmers and Fishermen Tax Withholding for 2014 This section discusses income tax withholding on: Salaries and wages, Tips, Taxable fringe benefits, Sick pay, Pensions and annuities, Gambling winnings, Unemployment compensation, and Certain federal payments. 2012 income tax booklet This section explains the rules for withholding tax from each of these types of income. 2012 income tax booklet This section also covers backup withholding on interest, dividends, and other payments. 2012 income tax booklet Salaries and Wages Income tax is withheld from the pay of most employees. 2012 income tax booklet Your pay includes your regular pay, bonuses, commissions, and vacation allowances. 2012 income tax booklet It also includes reimbursements and other expense allowances paid under a nonaccountable plan. 2012 income tax booklet See Supplemental Wages , later, for more information about reimbursements and allowances paid under a nonaccountable plan. 2012 income tax booklet If your income is low enough that you will not have to pay income tax for the year, you may be exempt from withholding. 2012 income tax booklet This is explained under Exemption From Withholding , later. 2012 income tax booklet You can ask your employer to withhold income tax from noncash wages and other wages not subject to withholding. 2012 income tax booklet If your employer does not agree to withhold tax, or if not enough is withheld, you may have to pay estimated tax, as discussed later under Estimated Tax for 2014 . 2012 income tax booklet Military retirees. 2012 income tax booklet   Military retirement pay is treated in the same manner as regular pay for income tax withholding purposes, even though it is treated as a pension or annuity for other tax purposes. 2012 income tax booklet Household workers. 2012 income tax booklet   If you are a household worker, you can ask your employer to withhold income tax from your pay. 2012 income tax booklet A household worker is an employee who performs household work in a private home, local college club, or local fraternity or sorority chapter. 2012 income tax booklet   Tax is withheld only if you want it withheld and your employer agrees to withhold it. 2012 income tax booklet If you do not have enough income tax withheld, you may have to pay estimated tax, as discussed later under Estimated Tax for 2014 . 2012 income tax booklet Farmworkers. 2012 income tax booklet   Generally, income tax is withheld from your cash wages for work on a farm unless your employer does both of these: Pays you cash wages of less than $150 during the year, and Has expenditures for agricultural labor totaling less than $2,500 during the year. 2012 income tax booklet Differential wage payments. 2012 income tax booklet    When employees are on leave from employment for military duty, some employers make up the difference between the military pay and civilian pay. 2012 income tax booklet Payments to an employee who is on active duty for a period of more than 30 days will be subject to income tax withholding, but not subject to social security or Medicare taxes. 2012 income tax booklet The wages and withholding will be reported on Form W-2, Wage and Tax Statement. 2012 income tax booklet   The credit employers can claim for differential wages paid to activated military reservists is scheduled to expire for wages paid after December 31, 2013. 2012 income tax booklet Determining Amount of Tax Withheld Using Form W-4 The amount of income tax your employer withholds from your regular pay depends on two things. 2012 income tax booklet The amount you earn in each payroll period. 2012 income tax booklet The information you give your employer on Form W-4. 2012 income tax booklet Form W-4 includes four types of information that your employer will use to figure your withholding. 2012 income tax booklet Whether to withhold at the single rate or at the lower married rate. 2012 income tax booklet How many withholding allowances you claim (each allowance reduces the amount withheld). 2012 income tax booklet Whether you want an additional amount withheld. 2012 income tax booklet Whether you are claiming an exemption from withholding in 2014. 2012 income tax booklet See Exemption From Withholding , later. 2012 income tax booklet Note. 2012 income tax booklet You must specify a filing status and a number of withholding allowances on Form W-4. 2012 income tax booklet You cannot specify only a dollar amount of withholding. 2012 income tax booklet New Job When you start a new job, you must fill out Form W-4 and give it to your employer. 2012 income tax booklet Your employer should have copies of the form. 2012 income tax booklet If you need to change the information later, you must fill out a new form. 2012 income tax booklet If you work only part of the year (for example, you start working after the beginning of the year), too much tax may be withheld. 2012 income tax booklet You may be able to avoid overwithholding if your employer agrees to use the part-year method. 2012 income tax booklet See Part-Year Method in chapter 1 of Publication 505 for more information. 2012 income tax booklet Employee also receiving pension income. 2012 income tax booklet   If you receive pension or annuity income and begin a new job, you will need to file Form W-4 with your new employer. 2012 income tax booklet However, you can choose to split your withholding allowances between your pension and job in any manner. 2012 income tax booklet Changing Your Withholding During the year changes may occur to your marital status, exemptions, adjustments, deductions, or credits you expect to claim on your tax return. 2012 income tax booklet When this happens, you may need to give your employer a new Form W-4 to change your withholding status or your number of allowances. 2012 income tax booklet If the changes reduce the number of allowances you are claiming or changes your marital status from married to single, you must give your employer a new Form W-4 within 10 days. 2012 income tax booklet Generally, you can submit a new Form W-4 whenever you wish to change the number of your withholding allowances for any other reason. 2012 income tax booklet Changing your withholding for 2015. 2012 income tax booklet   If events in 2014 will decrease the number of your withholding allowances for 2015, you must give your employer a new Form W-4 by December 1, 2014. 2012 income tax booklet If the event occurs in December 2014, submit a new Form W-4 within 10 days. 2012 income tax booklet Checking Your Withholding After you have given your employer a Form W-4, you can check to see whether the amount of tax withheld from your pay is too little or too much. 2012 income tax booklet If too much or too little tax is being withheld, you should give your employer a new Form W-4 to change your withholding. 2012 income tax booklet You should try to have your withholding match your actual tax liability. 2012 income tax booklet If not enough tax is withheld, you will owe tax at the end of the year and may have to pay interest and a penalty. 2012 income tax booklet If too much tax is withheld, you will lose the use of that money until you get your refund. 2012 income tax booklet Always check your withholding if there are personal or financial changes in your life or changes in the law that might change your tax liability. 2012 income tax booklet Note. 2012 income tax booklet You cannot give your employer a payment to cover withholding on salaries and wages for past pay periods or a payment for estimated tax. 2012 income tax booklet Completing Form W-4 and Worksheets Form W-4 has worksheets to help you figure how many withholding allowances you can claim. 2012 income tax booklet The worksheets are for your own records. 2012 income tax booklet Do not give them to your employer. 2012 income tax booklet Multiple jobs. 2012 income tax booklet   If you have income from more than one job at the same time, complete only one set of Form W-4 worksheets. 2012 income tax booklet Then split your allowances between the Forms W-4 for each job. 2012 income tax booklet You cannot claim the same allowances with more than one employer at the same time. 2012 income tax booklet You can claim all your allowances with one employer and none with the other(s), or divide them any other way. 2012 income tax booklet Married individuals. 2012 income tax booklet   If both you and your spouse are employed and expect to file a joint return, figure your withholding allowances using your combined income, adjustments, deductions, exemptions, and credits. 2012 income tax booklet Use only one set of worksheets. 2012 income tax booklet You can divide your total allowances any way, but you cannot claim an allowance that your spouse also claims. 2012 income tax booklet   If you and your spouse expect to file separate returns, figure your allowances using separate worksheets based on your own individual income, adjustments, deductions, exemptions, and credits. 2012 income tax booklet Alternative method of figuring withholding allowances. 2012 income tax booklet   You do not have to use the Form W-4 worksheets if you use a more accurate method of figuring the number of withholding allowances. 2012 income tax booklet For more information, see Alternative method of figuring withholding allowances under Completing Form W-4 and Worksheets in Publication 505, chapter 1. 2012 income tax booklet Personal Allowances Worksheet. 2012 income tax booklet   Use the Personal Allowances Worksheet on Form W-4 to figure your withholding allowances based on exemptions and any special allowances that apply. 2012 income tax booklet Deduction and Adjustments Worksheet. 2012 income tax booklet   Use the Deduction and Adjustments Worksheet on Form W-4 if you plan to itemize your deductions, claim certain credits, or claim adjustments to the income on your 2014 tax return and you want to reduce your withholding. 2012 income tax booklet Also, complete this worksheet when you have changes to these items to see if you need to change your withholding. 2012 income tax booklet Two-Earners/Multiple Jobs Worksheet. 2012 income tax booklet   You may need to complete the Two-Earners/Multiple Jobs Worksheet on Form W-4 if you have more than one job, a working spouse, or are also receiving a pension. 2012 income tax booklet Also, on this worksheet you can add any additional withholding necessary to cover any amount you expect to owe other than income tax, such as self-employment tax. 2012 income tax booklet Getting the Right Amount of Tax Withheld In most situations, the tax withheld from your pay will be close to the tax you figure on your return if you follow these two rules. 2012 income tax booklet You accurately complete all the Form W-4 worksheets that apply to you. 2012 income tax booklet You give your employer a new Form W-4 when changes occur. 2012 income tax booklet But because the worksheets and withholding methods do not account for all possible situations, you may not be getting the right amount withheld. 2012 income tax booklet This is most likely to happen in the following situations. 2012 income tax booklet You are married and both you and your spouse work. 2012 income tax booklet You have more than one job at a time. 2012 income tax booklet You have nonwage income, such as interest, dividends, alimony, unemployment compensation, or self-employment income. 2012 income tax booklet You will owe additional amounts with your return, such as self-employment tax. 2012 income tax booklet Your withholding is based on obsolete Form W-4 information for a substantial part of the year. 2012 income tax booklet Your earnings are more than the amount shown under Check your withholding in the instructions at the top of page 1 of Form W-4. 2012 income tax booklet You work only part of the year. 2012 income tax booklet You change the number of your withholding allowances during the year. 2012 income tax booklet Cumulative wage method. 2012 income tax booklet   If you change the number of your withholding allowances during the year, too much or too little tax may have been withheld for the period before you made the change. 2012 income tax booklet You may be able to compensate for this if your employer agrees to use the cumulative wage withholding method for the rest of the year. 2012 income tax booklet You must ask your employer in writing to use this method. 2012 income tax booklet   To be eligible, you must have been paid for the same kind of payroll period (weekly, biweekly, etc. 2012 income tax booklet ) since the beginning of the year. 2012 income tax booklet Publication 505 To make sure you are getting the right amount of tax withheld, get Publication 505. 2012 income tax booklet It will help you compare the total tax to be withheld during the year with the tax you can expect to figure on your return. 2012 income tax booklet It also will help you determine how much, if any, additional withholding is needed each payday to avoid owing tax when you file your return. 2012 income tax booklet If you do not have enough tax withheld, you may have to pay estimated tax, as explained under Estimated Tax for 2014 , later. 2012 income tax booklet You can use the IRS Withholding Calculator at www. 2012 income tax booklet irs. 2012 income tax booklet gov/Individuals, instead of Publication 505 or the worksheets included with Form W-4, to determine whether you need to have your withholding increased or decreased. 2012 income tax booklet Rules Your Employer Must Follow It may be helpful for you to know some of the withholding rules your employer must follow. 2012 income tax booklet These rules can affect how to fill out your Form W-4 and how to handle problems that may arise. 2012 income tax booklet New Form W-4. 2012 income tax booklet   When you start a new job, your employer should have you complete a Form W-4. 2012 income tax booklet Beginning with your first payday, your employer will use the information you give on the form to figure your withholding. 2012 income tax booklet   If you later fill out a new Form W-4, your employer can put it into effect as soon as possible. 2012 income tax booklet The deadline for putting it into effect is the start of the first payroll period ending 30 or more days after you turn it in. 2012 income tax booklet No Form W-4. 2012 income tax booklet   If you do not give your employer a completed Form W-4, your employer must withhold at the highest rate, as if you were single and claimed no withholding allowances. 2012 income tax booklet Repaying withheld tax. 2012 income tax booklet   If you find you are having too much tax withheld because you did not claim all the withholding allowances you are entitled to, you should give your employer a new Form W-4. 2012 income tax booklet Your employer cannot repay any of the tax previously withheld. 2012 income tax booklet Instead, claim the full amount withheld when you file your tax return. 2012 income tax booklet   However, if your employer has withheld more than the correct amount of tax for the Form W-4 you have in effect, you do not have to fill out a new Form W-4 to have your withholding lowered to the correct amount. 2012 income tax booklet Your employer can repay the amount that was withheld incorrectly. 2012 income tax booklet If you are not repaid, your Form W-2 will reflect the full amount actually withheld, which you would claim when you file your tax return. 2012 income tax booklet Exemption From Withholding If you claim exemption from withholding, your employer will not withhold federal income tax from your wages. 2012 income tax booklet The exemption applies only to income tax, not to social security or Medicare tax. 2012 income tax booklet You can claim exemption from withholding for 2014 only if both of the following situations apply. 2012 income tax booklet For 2013 you had a right to a refund of all federal income tax withheld because you had no tax liability. 2012 income tax booklet For 2014 you expect a refund of all federal income tax withheld because you expect to have no tax liability. 2012 income tax booklet Students. 2012 income tax booklet   If you are a student, you are not automatically exempt. 2012 income tax booklet See chapter 1 to find out if you must file a return. 2012 income tax booklet If you work only part time or only during the summer, you may qualify for exemption from withholding. 2012 income tax booklet Age 65 or older or blind. 2012 income tax booklet   If you are 65 or older or blind, use Worksheet 1-3 or 1-4 in chapter 1 of Publication 505, to help you decide if you qualify for exemption from withholding. 2012 income tax booklet Do not use either worksheet if you will itemize deductions, claim exemptions for dependents, or claim tax credits on your 2014 return. 2012 income tax booklet Instead, see Itemizing deductions or claiming exemptions or credits in chapter 1 of Publication 505. 2012 income tax booklet Claiming exemption from withholding. 2012 income tax booklet   To claim exemption, you must give your employer a Form W-4. 2012 income tax booklet Do not complete lines 5 and 6. 2012 income tax booklet Enter “Exempt” on line 7. 2012 income tax booklet   If you claim exemption, but later your situation changes so that you will have to pay income tax after all, you must file a new Form W-4 within 10 days after the change. 2012 income tax booklet If you claim exemption in 2014, but you expect to owe income tax for 2015, you must file a new Form W-4 by December 1, 2014. 2012 income tax booklet   Your claim of exempt status may be reviewed by the IRS. 2012 income tax booklet An exemption is good for only 1 year. 2012 income tax booklet   You must give your employer a new Form W-4 by February 15 each year to continue your exemption. 2012 income tax booklet Supplemental Wages Supplemental wages include bonuses, commissions, overtime pay, vacation allowances, certain sick pay, and expense allowances under certain plans. 2012 income tax booklet The payer can figure withholding on supplemental wages using the same method used for your regular wages. 2012 income tax booklet However, if these payments are identified separately from your regular wages, your employer or other payer of supplemental wages can withhold income tax from these wages at a flat rate. 2012 income tax booklet Expense allowances. 2012 income tax booklet   Reimbursements or other expense allowances paid by your employer under a nonaccountable plan are treated as supplemental wages. 2012 income tax booklet   Reimbursements or other expense allowances paid under an accountable plan that are more than your proven expenses are treated as paid under a nonaccountable plan if you do not return the excess payments within a reasonable period of time. 2012 income tax booklet   For more information about accountable and nonaccountable expense allowance plans, see Reimbursements in chapter 26. 2012 income tax booklet Penalties You may have to pay a penalty of $500 if both of the following apply. 2012 income tax booklet You make statements or claim withholding allowances on your Form W-4 that reduce the amount of tax withheld. 2012 income tax booklet You have no reasonable basis for those statements or allowances at the time you prepare your Form W-4. 2012 income tax booklet There is also a criminal penalty for willfully supplying false or fraudulent information on your Form W-4 or for willfully failing to supply information that would increase the amount withheld. 2012 income tax booklet The penalty upon conviction can be either a fine of up to $1,000 or imprisonment for up to 1 year, or both. 2012 income tax booklet These penalties will apply if you deliberately and knowingly falsify your Form W-4 in an attempt to reduce or eliminate the proper withholding of taxes. 2012 income tax booklet A simple error or an honest mistake will not result in one of these penalties. 2012 income tax booklet For example, a person who has tried to figure the number of withholding allowances correctly, but claims seven when the proper number is six, will not be charged a W-4 penalty. 2012 income tax booklet Tips The tips you receive while working on your job are considered part of your pay. 2012 income tax booklet You must include your tips on your tax return on the same line as your regular pay. 2012 income tax booklet However, tax is not withheld directly from tip income, as it is from your regular pay. 2012 income tax booklet Nevertheless, your employer will take into account the tips you report when figuring how much to withhold from your regular pay. 2012 income tax booklet See chapter 6 for information on reporting your tips to your employer. 2012 income tax booklet For more information on the withholding rules for tip income, see Publication 531, Reporting Tip Income. 2012 income tax booklet How employer figures amount to withhold. 2012 income tax booklet   The tips you report to your employer are counted as part of your income for the month you report them. 2012 income tax booklet Your employer can figure your withholding in either of two ways. 2012 income tax booklet By withholding at the regular rate on the sum of your pay plus your reported tips. 2012 income tax booklet By withholding at the regular rate on your pay plus a percentage of your reported tips. 2012 income tax booklet Not enough pay to cover taxes. 2012 income tax booklet   If your regular pay is not enough for your employer to withhold all the tax (including income tax and social security and Medicare taxes (or the equivalent railroad retirement tax)) due on your pay plus your tips, you can give your employer money to cover the shortage. 2012 income tax booklet See Giving your employer money for taxes in chapter 6. 2012 income tax booklet Allocated tips. 2012 income tax booklet   Your employer should not withhold income tax, Medicare tax, social security tax, or railroad retirement tax on any allocated tips. 2012 income tax booklet Withholding is based only on your pay plus your reported tips. 2012 income tax booklet Your employer should refund to you any incorrectly withheld tax. 2012 income tax booklet See Allocated Tips in chapter 6 for more information. 2012 income tax booklet Taxable Fringe Benefits The value of certain noncash fringe benefits you receive from your employer is considered part of your pay. 2012 income tax booklet Your employer generally must withhold income tax on these benefits from your regular pay. 2012 income tax booklet For information on fringe benefits, see Fringe Benefits under Employee Compensation in chapter 5. 2012 income tax booklet Although the value of your personal use of an employer-provided car, truck, or other highway motor vehicle is taxable, your employer can choose not to withhold income tax on that amount. 2012 income tax booklet Your employer must notify you if this choice is made. 2012 income tax booklet For more information on withholding on taxable fringe benefits, see chapter 1 of Publication 505. 2012 income tax booklet Sick Pay Sick pay is a payment to you to replace your regular wages while you are temporarily absent from work due to sickness or personal injury. 2012 income tax booklet To qualify as sick pay, it must be paid under a plan to which your employer is a party. 2012 income tax booklet If you receive sick pay from your employer or an agent of your employer, income tax must be withheld. 2012 income tax booklet An agent who does not pay regular wages to you may choose to withhold income tax at a flat rate. 2012 income tax booklet However, if you receive sick pay from a third party who is not acting as an agent of your employer, income tax will be withheld only if you choose to have it withheld. 2012 income tax booklet See Form W-4S , later. 2012 income tax booklet If you receive payments under a plan in which your employer does not participate (such as an accident or health plan where you paid all the premiums), the payments are not sick pay and usually are not taxable. 2012 income tax booklet Union agreements. 2012 income tax booklet   If you receive sick pay under a collective bargaining agreement between your union and your employer, the agreement may determine the amount of income tax withholding. 2012 income tax booklet See your union representative or your employer for more information. 2012 income tax booklet Form W-4S. 2012 income tax booklet   If you choose to have income tax withheld from sick pay paid by a third party, such as an insurance company, you must fill out Form W-4S. 2012 income tax booklet Its instructions contain a worksheet you can use to figure the amount you want withheld. 2012 income tax booklet They also explain restrictions that may apply. 2012 income tax booklet   Give the completed form to the payer of your sick pay. 2012 income tax booklet The payer must withhold according to your directions on the form. 2012 income tax booklet Estimated tax. 2012 income tax booklet   If you do not request withholding on Form W-4S, or if you do not have enough tax withheld, you may have to make estimated tax payments. 2012 income tax booklet If you do not pay enough tax, either through estimated tax or withholding, or a combination of both, you may have to pay a penalty. 2012 income tax booklet See Underpayment Penalty for 2013 at the end of this chapter. 2012 income tax booklet Pensions and Annuities Income tax usually will be withheld from your pension or annuity distributions unless you choose not to have it withheld. 2012 income tax booklet This rule applies to distributions from: A traditional individual retirement arrangement (IRA); A life insurance company under an endowment, annuity, or life insurance contract; A pension, annuity, or profit-sharing plan; A stock bonus plan; and Any other plan that defers the time you receive compensation. 2012 income tax booklet The amount withheld depends on whether you receive payments spread out over more than 1 year (periodic payments), within 1 year (nonperiodic payments), or as an eligible rollover distribution (ERD). 2012 income tax booklet Income tax withholding from an ERD is mandatory. 2012 income tax booklet More information. 2012 income tax booklet   For more information on taxation of annuities and distributions (including ERDs) from qualified retirement plans, see chapter 10. 2012 income tax booklet For information on IRAs, see chapter 17. 2012 income tax booklet For more information on withholding on pensions and annuities, including a discussion of Form W-4P, see Pensions and Annuities in chapter 1 of Publication 505. 2012 income tax booklet Gambling Winnings Income tax is withheld at a flat 25% rate from certain kinds of gambling winnings. 2012 income tax booklet Gambling winnings of more than $5,000 from the following sources are subject to income tax withholding. 2012 income tax booklet Any sweepstakes; wagering pool, including payments made to winners of poker tournaments; or lottery. 2012 income tax booklet Any other wager, if the proceeds are at least 300 times the amount of the bet. 2012 income tax booklet It does not matter whether your winnings are paid in cash, in property, or as an annuity. 2012 income tax booklet Winnings not paid in cash are taken into account at their fair market value. 2012 income tax booklet Exception. 2012 income tax booklet   Gambling winnings from bingo, keno, and slot machines generally are not subject to income tax withholding. 2012 income tax booklet However, you may need to provide the payer with a social security number to avoid withholding. 2012 income tax booklet See Backup withholding on gambling winnings in chapter 1 of Publication 505. 2012 income tax booklet If you receive gambling winnings not subject to withholding, you may need to pay estimated tax. 2012 income tax booklet See Estimated Tax for 2014 , later. 2012 income tax booklet If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty. 2012 income tax booklet See Underpayment Penalty for 2013 at the end of this chapter. 2012 income tax booklet Form W-2G. 2012 income tax booklet   If a payer withholds income tax from your gambling winnings, you should receive a Form W-2G, Certain Gambling Winnings, showing the amount you won and the amount withheld. 2012 income tax booklet Report the tax withheld on line 62 of Form 1040. 2012 income tax booklet Unemployment Compensation You can choose to have income tax withheld from unemployment compensation. 2012 income tax booklet To make this choice, fill out Form W-4V (or a similar form provided by the payer) and give it to the payer. 2012 income tax booklet All unemployment compensation is taxable. 2012 income tax booklet So, if you do not have income tax withheld, you may have to pay estimated tax. 2012 income tax booklet See Estimated Tax for 2014 , later. 2012 income tax booklet If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty. 2012 income tax booklet For information, see Underpayment Penalty for 2013 at the end of this chapter. 2012 income tax booklet Federal Payments You can choose to have income tax withheld from certain federal payments you receive. 2012 income tax booklet These payments are: Social security benefits, Tier 1 railroad retirement benefits, Commodity credit corporation loans you choose to include in your gross income, Payments under the Agricultural Act of 1949 (7 U. 2012 income tax booklet S. 2012 income tax booklet C. 2012 income tax booklet 1421 et. 2012 income tax booklet seq. 2012 income tax booklet ), as amended, or title II of the Disaster Assistance Act of 1988, that are treated as insurance proceeds and that you receive because: Your crops were destroyed or damaged by drought, flood, or any other natural disaster, or You were unable to plant crops because of a natural disaster described in (a), and Any other payment under Federal law as determined by the Secretary. 2012 income tax booklet To make this choice, fill out Form W-4V (or a similar form provided by the payer) and give it to the payer. 2012 income tax booklet If you do not choose to have income tax withheld, you may have to pay estimated tax. 2012 income tax booklet See Estimated Tax for 2014 , later. 2012 income tax booklet If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty. 2012 income tax booklet For information, see Underpayment Penalty for 2013 at the end of this chapter. 2012 income tax booklet More information. 2012 income tax booklet   For more information about the tax treatment of social security and railroad retirement benefits, see chapter 11. 2012 income tax booklet Get Publication 225, Farmer's Tax Guide, for information about the tax treatment of commodity credit corporation loans or crop disaster payments. 2012 income tax booklet Backup Withholding Banks or other businesses that pay you certain kinds of income must file an information return (Form 1099) with the IRS. 2012 income tax booklet The information return shows how much you were paid during the year. 2012 income tax booklet It also includes your name and taxpayer identification number (TIN). 2012 income tax booklet TINs are explained in chapter 1 under Social Security Number (SSN) . 2012 income tax booklet These payments generally are not subject to withholding. 2012 income tax booklet However, “backup” withholding is required in certain situations. 2012 income tax booklet Backup withholding can apply to most kinds of payments that are reported on Form 1099. 2012 income tax booklet The payer must withhold at a flat 28% rate in the following situations. 2012 income tax booklet You do not give the payer your TIN in the required manner. 2012 income tax booklet The IRS notifies the payer that the TIN you gave is incorrect. 2012 income tax booklet You are required, but fail, to certify that you are not subject to backup withholding. 2012 income tax booklet The IRS notifies the payer to start withholding on interest or dividends because you have underreported interest or dividends on your income tax return. 2012 income tax booklet The IRS will do this only after it has mailed you four notices over at least a 210-day period. 2012 income tax booklet See Backup Withholding in chapter 1 of Publication 505 for more information. 2012 income tax booklet Penalties. 2012 income tax booklet   There are civil and criminal penalties for giving false information to avoid backup withholding. 2012 income tax booklet The civil penalty is $500. 2012 income tax booklet The criminal penalty, upon conviction, is a fine of up to $1,000 or imprisonment of up to 1 year, or both. 2012 income tax booklet Estimated Tax for 2014 Estimated tax is the method used to pay tax on income that is not subject to withholding. 2012 income tax booklet This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. 2012 income tax booklet You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough. 2012 income tax booklet Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. 2012 income tax booklet If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty. 2012 income tax booklet If you do not pay enough by the due date of each payment period (see When To Pay Estimated Tax , later), you may be charged a penalty even if you are due a refund when you file your tax return. 2012 income tax booklet For information on when the penalty applies, see Underpayment Penalty for 2013 at the end of this chapter. 2012 income tax booklet Who Does Not Have To Pay Estimated Tax If you receive salaries or wages, you can avoid having to pay estimated tax by asking your employer to take more tax out of your earnings. 2012 income tax booklet To do this, give a new Form W-4 to your employer. 2012 income tax booklet See chapter 1 of Publication 505. 2012 income tax booklet Estimated tax not required. 2012 income tax booklet   You do not have to pay estimated tax for 2014 if you meet all three of the following conditions. 2012 income tax booklet You had no tax liability for 2013. 2012 income tax booklet You were a U. 2012 income tax booklet S. 2012 income tax booklet citizen or resident alien for the whole year. 2012 income tax booklet Your 2013 tax year covered a 12-month period. 2012 income tax booklet   You had no tax liability for 2013 if your total tax was zero or you did not have to file an income tax return. 2012 income tax booklet For the definition of “total tax” for 2013, see Publication 505, chapter 2. 2012 income tax booklet Who Must Pay Estimated Tax If you owe additional tax for 2013, you may have to pay estimated tax for 2014. 2012 income tax booklet You can use the following general rule as a guide during the year to see if you will have enough withholding, or if you should increase your withholding or make estimated tax payments. 2012 income tax booklet General rule. 2012 income tax booklet   In most cases, you must pay estimated tax for 2014 if both of the following apply. 2012 income tax booklet You expect to owe at least $1,000 in tax for 2014, after subtracting your withholding and refundable credits. 2012 income tax booklet You expect your withholding plus your refundable credits to be less than the smaller of: 90% of the tax to be shown on your 2014 tax return, or 100% of the tax shown on your 2013 tax return (but see Special rules for farmers, fishermen, and higher income taxpayers, later). 2012 income tax booklet Your 2013 tax return must cover all 12 months. 2012 income tax booklet    If the result from using the general rule above suggests that you will not have enough withholding, complete the 2014 Estimated Tax Worksheet in Publication 505 for a more accurate calculation. 2012 income tax booklet Special rules for farmers, fishermen, and higher income taxpayers. 2012 income tax booklet   If at least two-thirds of your gross income for tax year 2013 or 2014 is from farming or fishing, substitute 662/3% for 90% in (2a) under the General rule, earlier. 2012 income tax booklet If your AGI for 2013 was more than $150,000 ($75,000 if your filing status for 2014 is married filing a separate return), substitute 110% for 100% in (2b) under General rule , earlier. 2012 income tax booklet See Figure 4-A and Publication 505, chapter 2 for more information. 2012 income tax booklet Figure 4-A. 2012 income tax booklet Do You Have To Pay Estimated Tax? Please click here for the text description of the image. 2012 income tax booklet Figure 4-A Do You Have To Pay Estimated Tax? Aliens. 2012 income tax booklet   Resident and nonresident aliens also may have to pay estimated tax. 2012 income tax booklet Resident aliens should follow the rules in this chapter unless noted otherwise. 2012 income tax booklet Nonresident aliens should get Form 1040-ES (NR), U. 2012 income tax booklet S. 2012 income tax booklet Estimated Tax for Nonresident Alien Individuals. 2012 income tax booklet   You are an alien if you are not a citizen or national of the United States. 2012 income tax booklet You are a resident alien if you either have a green card or meet the substantial presence test. 2012 income tax booklet For more information about the substantial presence test, see Publication 519, U. 2012 income tax booklet S. 2012 income tax booklet Tax Guide for Aliens. 2012 income tax booklet Married taxpayers. 2012 income tax booklet   If you qualify to make joint estimated tax payments, apply the rules discussed here to your joint estimated income. 2012 income tax booklet   You and your spouse can make joint estimated tax payments even if you are not living together. 2012 income tax booklet   However, you and your spouse cannot make joint estimated tax payments if:  You are legally separated under a decree of divorce or separate maintenance, You and your spouse have different tax years, or Either spouse is a nonresident alien (unless that spouse elected to be treated as a resident alien for tax purposes (see chapter 1 of Publication 519)). 2012 income tax booklet   If you do not qualify to make joint estimated tax payments, apply these rules to your separate estimated income. 2012 income tax booklet Making joint or separate estimated tax payments will not affect your choice of filing a joint tax return or separate returns for 2014. 2012 income tax booklet 2013 separate returns and 2014 joint return. 2012 income tax booklet   If you plan to file a joint return with your spouse for 2014, but you filed separate returns for 2013, your 2013 tax is the total of the tax shown on your separate returns. 2012 income tax booklet You filed a separate return if you filed as single, head of household, or married filing separately. 2012 income tax booklet 2013 joint return and 2014 separate returns. 2012 income tax booklet   If you plan to file a separate return for 2014 but you filed a joint return for 2013, your 2013 tax is your share of the tax on the joint return. 2012 income tax booklet You file a separate return if you file as single, head of household, or married filing separately. 2012 income tax booklet   To figure your share of the tax on the joint return, first figure the tax both you and your spouse would have paid had you filed separate returns for 2013 using the same filing status as for 2014. 2012 income tax booklet Then multiply the tax on the joint return by the following fraction. 2012 income tax booklet     The tax you would have paid had you filed a separate return   The total tax you and your spouse would have paid had you filed separate returns Example. 2012 income tax booklet Joe and Heather filed a joint return for 2013 showing taxable income of $48,500 and a tax of $6,386. 2012 income tax booklet Of the $48,500 taxable income, $40,100 was Joe's and the rest was Heather's. 2012 income tax booklet For 2014, they plan to file married filing separately. 2012 income tax booklet Joe figures his share of the tax on the 2013 joint return as follows. 2012 income tax booklet   Tax on $40,100 based on a separate return $5,960     Tax on $8,400 based on a separate return 843     Total $6,803     Joe's percentage of total ($5,960 ÷ $6,803) 87. 2012 income tax booklet 6%     Joe's share of tax on joint return  ($6,386 × 87. 2012 income tax booklet 6%) $5,594   How To Figure Estimated Tax To figure your estimated tax, you must figure your expected adjusted gross income (AGI), taxable income, taxes, deductions, and credits for the year. 2012 income tax booklet When figuring your 2014 estimated tax, it may be helpful to use your income, deductions, and credits for 2013 as a starting point. 2012 income tax booklet Use your 2013 federal tax return as a guide. 2012 income tax booklet You can use Form 1040-ES and Publication 505 to figure your estimated tax. 2012 income tax booklet Nonresident aliens use Form 1040-ES (NR) and Publication 505 to figure estimated tax (see chapter 8 of Publication 519 for more information). 2012 income tax booklet You must make adjustments both for changes in your own situation and for recent changes in the tax law. 2012 income tax booklet For a discussion of these changes, visit IRS. 2012 income tax booklet gov. 2012 income tax booklet For more complete information on how to figure your estimated tax for 2014, see chapter 2 of Publication 505. 2012 income tax booklet When To Pay Estimated Tax For estimated tax purposes, the tax year is divided into four payment periods. 2012 income tax booklet Each period has a specific payment due date. 2012 income tax booklet If you do not pay enough tax by the due date of each payment period, you may be charged a penalty even if you are due a refund when you file your income tax return. 2012 income tax booklet The payment periods and due dates for estimated tax payments are shown next. 2012 income tax booklet   For the period: Due date:*     Jan. 2012 income tax booklet 1 – March 31 April 15     April 1 – May 31 June 16     June 1 – August 31 Sept. 2012 income tax booklet 15     Sept. 2012 income tax booklet 1– Dec. 2012 income tax booklet 31 Jan. 2012 income tax booklet 15, next year     *See Saturday, Sunday, holiday rule and January payment . 2012 income tax booklet Saturday, Sunday, holiday rule. 2012 income tax booklet   If the due date for an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that is not a Saturday, Sunday, or legal holiday. 2012 income tax booklet January payment. 2012 income tax booklet   If you file your 2014 Form 1040 or Form 1040A by January 31, 2015, and pay the rest of the tax you owe, you do not need to make the payment due on January 15, 2015. 2012 income tax booklet Fiscal year taxpayers. 2012 income tax booklet   If your tax year does not start on January 1, see the Form 1040-ES instructions for your payment due dates. 2012 income tax booklet When To Start You do not have to make estimated tax payments until you have income on which you will owe income tax. 2012 income tax booklet If you have income subject to estimated tax during the first payment period, you must make your first payment by the due date for the first payment period. 2012 income tax booklet You can pay all your estimated tax at that time, or you can pay it in installments. 2012 income tax booklet If you choose to pay in installments, make your first payment by the due date for the first payment period. 2012 income tax booklet Make your remaining installment payments by the due dates for the later periods. 2012 income tax booklet No income subject to estimated tax during first period. 2012 income tax booklet    If you do not have income subject to estimated tax until a later payment period, you must make your first payment by the due date for that period. 2012 income tax booklet You can pay your entire estimated tax by the due date for that period or you can pay it in installments by the due date for that period and the due dates for the remaining periods. 2012 income tax booklet The following chart shows when to make installment payments. 2012 income tax booklet If you first have income on which you must pay estimated tax: Make a payment  by:* Make later installments by:* Before April 1 April 15 June 16 Sept. 2012 income tax booklet 15 Jan. 2012 income tax booklet 15 next year April 1–May 31 June 16 Sept. 2012 income tax booklet 15 Jan. 2012 income tax booklet 15 next year June 1–Aug. 2012 income tax booklet 31 Sept. 2012 income tax booklet 15 Jan. 2012 income tax booklet 15 next year After Aug. 2012 income tax booklet 31 Jan. 2012 income tax booklet 15 next year (None) *See Saturday, Sunday, holiday rule and January payment . 2012 income tax booklet How much to pay to avoid a penalty. 2012 income tax booklet   To determine how much you should pay by each payment due date, see How To Figure Each Payment, next. 2012 income tax booklet How To Figure Each Payment You should pay enough estimated tax by the due date of each payment period to avoid a penalty for that period. 2012 income tax booklet You can figure your required payment for each period by using either the regular installment method or the annualized income installment method. 2012 income tax booklet These methods are described in chapter 2 of Publication 505. 2012 income tax booklet If you do not pay enough during each payment period, you may be charged a penalty even if you are due a refund when you file your tax return. 2012 income tax booklet If the earlier discussion of No income subject to estimated tax during first period or the later discussion of Change in estimated tax applies to you, you may benefit from reading Annualized Income Installment Method in chapter 2 of Publication 505 for information on how to avoid a penalty. 2012 income tax booklet Underpayment penalty. 2012 income tax booklet   Under the regular installment method, if your estimated tax payment for any period is less than one-fourth of your estimated tax, you may be charged a penalty for underpayment of estimated tax for that period when you file your tax return. 2012 income tax booklet Under the annualized income installment method, your estimated tax payments vary with your income, but the amount required must be paid each period. 2012 income tax booklet See chapter 4 of Publication 505 for more information. 2012 income tax booklet Change in estimated tax. 2012 income tax booklet   After you make an estimated tax payment, changes in your income, adjustments, deductions, credits, or exemptions may make it necessary for you to refigure your estimated tax. 2012 income tax booklet Pay the unpaid balance of your amended estimated tax by the next payment due date after the change or in installments by that date and the due dates for the remaining payment periods. 2012 income tax booklet Estimated Tax Payments Not Required You do not have to pay estimated tax if your withholding in each payment period is at least as much as: One-fourth of your required annual payment, or Your required annualized income installment for that period. 2012 income tax booklet You also do not have to pay estimated tax if you will pay enough through withholding to keep the amount you owe with your return under $1,000. 2012 income tax booklet How To Pay Estimated Tax There are several ways to pay estimated tax. 2012 income tax booklet Credit an overpayment on your 2013 return to your 2014 estimated tax. 2012 income tax booklet Pay by direct transfer from your bank account, or pay by credit or debit card using a pay-by-phone system or the Internet. 2012 income tax booklet Send in your payment (check or money order) with a payment voucher from Form 1040-ES. 2012 income tax booklet Credit an Overpayment If you show an overpayment of tax after completing your Form 1040 or Form 1040A for 2013, you can apply part or all of it to your estimated tax for 2014. 2012 income tax booklet On line 75 of Form 1040, or line 44 of Form 1040A, enter the amount you want credited to your estimated tax rather than refunded. 2012 income tax booklet Take the amount you have credited into account when figuring your estimated tax payments. 2012 income tax booklet You cannot have any of the amount you credited to your estimated tax refunded to you until you file your tax return for the following year. 2012 income tax booklet You also cannot use that overpayment in any other way. 2012 income tax booklet Pay Online Paying online is convenient and secure and helps make sure we get your payments on time. 2012 income tax booklet You can pay using either of the following electronic payment methods. 2012 income tax booklet Direct transfer from your bank account. 2012 income tax booklet Credit or debit card. 2012 income tax booklet To pay your taxes online or for more information, go to www. 2012 income tax booklet irs. 2012 income tax booklet gov/e-pay. 2012 income tax booklet Pay by Phone Paying by phone is another safe and secure method of paying electronically. 2012 income tax booklet Use one of the following methods. 2012 income tax booklet Direct transfer from your bank account. 2012 income tax booklet Credit or debit card. 2012 income tax booklet To pay by direct transfer from your bank account, call 1-800-555-4477 (English), 1-800-244-4829 (Espanol). 2012 income tax booklet People who are deaf, hard of hearing, or have a speech disability and who have access to TTY/TDD can call 1-800-733-4829. 2012 income tax booklet To pay using a credit or debit card, you can call one of the following service providers. 2012 income tax booklet There is a convenience fee charged by these providers that varies by provider, card type, and payment amount. 2012 income tax booklet WorldPay 1-888-9-PAY-TAXTM(1-888-972-9829) www. 2012 income tax booklet payUSAtax. 2012 income tax booklet com Official Payments Corporation 1-888-UPAY-TAXTM (1-888-872-9829) www. 2012 income tax booklet officialpayments. 2012 income tax booklet com Link2Gov Corporation 1-888-PAY-1040TM (1-888-729-1040) www. 2012 income tax booklet PAY1040. 2012 income tax booklet com For the latest details on how to pay by phone, go to www. 2012 income tax booklet irs. 2012 income tax booklet gov/e-pay. 2012 income tax booklet Pay by Check or Money Order Using the Estimated Tax Payment Voucher Each payment of estimated tax by check or money order must be accompanied by a payment voucher from Form 1040-ES. 2012 income tax booklet During 2013, if you: made at least one estimated tax payment but not by electronic means, did not use software or a paid preparer to prepare or file your return,  then you should receive a copy of the 2014 Form 1040-ES/V. 2012 income tax booklet The enclosed payment vouchers will be preprinted with your name, address, and social security number. 2012 income tax booklet Using the preprinted vouchers will speed processing, reduce the chance of error, and help save processing costs. 2012 income tax booklet Use the window envelopes that came with your Form 1040-ES package. 2012 income tax booklet If you use your own envelopes, make sure you mail your payment vouchers to the address shown in the Form 1040-ES instructions for the place where you live. 2012 income tax booklet Note. 2012 income tax booklet These criteria can change without notice. 2012 income tax booklet If you do not receive a Form 1040-ES/V package and you are required to make an estimated tax payment, you should go to www. 2012 income tax booklet irs. 2012 income tax booklet gov and print a copy of Form 1040-ES which includes four blank payment vouchers. 2012 income tax booklet Complete one of these and make your payment timely to avoid penalties for paying late. 2012 income tax booklet Do not use the address shown in the Form 1040 or Form 1040A instructions for your estimated tax payments. 2012 income tax booklet If you did not pay estimated tax last year, you can order Form 1040-ES from the IRS (see inside back cover of this publication) or download it from IRS. 2012 income tax booklet gov. 2012 income tax booklet Follow the instructions to make sure you use the vouchers correctly. 2012 income tax booklet Joint estimated tax payments. 2012 income tax booklet   If you file a joint return and are making joint estimated tax payments, enter the names and social security numbers on the payment voucher in the same order as they will appear on the joint return. 2012 income tax booklet Change of address. 2012 income tax booklet   You must notify the IRS if you are making estimated tax payments and you changed your address during the year. 2012 income tax booklet Complete Form 8822, Change of Address, and mail it to the address shown in the instructions for that form. 2012 income tax booklet Credit for Withholding and Estimated Tax for 2013 When you file your 2013 income tax return, take credit for all the income tax and excess social security or railroad retirement tax withheld from your salary, wages, pensions, etc. 2012 income tax booklet Also take credit for the estimated tax you paid for 2013. 2012 income tax booklet These credits are subtracted from your total tax. 2012 income tax booklet Because these credits are refundable, you should file a return and claim these credits, even if you do not owe tax. 2012 income tax booklet Two or more employers. 2012 income tax booklet   If you had two or more employers in 2013 and were paid wages of more than $113,700, too much social security or tier 1 railroad retirement tax may have been withheld from your pay. 2012 income tax booklet You may be able to claim the excess as a credit against your income tax when you file your return. 2012 income tax booklet See Credit for Excess Social Security Tax or Railroad Retirement Tax Withheld in chapter 37. 2012 income tax booklet Withholding If you had income tax withheld during 2013, you should be sent a statement by January 31, 2014, showing your income and the tax withheld. 2012 income tax booklet Depending on the source of your income, you should receive: Form W-2, Wage and Tax Statement, Form W-2G, Certain Gambling Winnings, or A form in the 1099 series. 2012 income tax booklet Forms W-2 and W-2G. 2012 income tax booklet   If you file a paper return, always file Form W-2 with your income tax return. 2012 income tax booklet File Form W-2G with your return only if it shows any federal income tax withheld from your winnings. 2012 income tax booklet   You should get at least two copies of each form. 2012 income tax booklet If you file a paper return, attach one copy to the front of your federal income tax return. 2012 income tax booklet Keep one copy for your records. 2012 income tax booklet You also should receive copies to file with your state and local returns. 2012 income tax booklet Form W-2 Your employer is required to provide or send Form W-2 to you no later than January 31, 2014. 2012 income tax booklet You should receive a separate Form W-2 from each employer you worked for. 2012 income tax booklet If you stopped working before the end of 2013, your employer could have given you your Form W-2 at any time after you stopped working. 2012 income tax booklet However, your employer must provide or send it to you by January 31, 2014. 2012 income tax booklet If you ask for the form, your employer must send it to you within 30 days after receiving your written request or within 30 days after your final wage payment, whichever is later. 2012 income tax booklet If you have not received your Form W-2 by January 31, you should ask your employer for it. 2012 income tax booklet If you do not receive it by February 15, call the IRS. 2012 income tax booklet Form W-2 shows your total pay and other compensation and the income tax, social security tax, and Medicare tax that was withheld during the year. 2012 income tax booklet Include the federal income tax withheld (as shown in box 2 of Form W-2) on: Line 62 if you file Form 1040, Line 36 if you file Form 1040A, or Line 7 if you file Form 1040EZ. 2012 income tax booklet In addition, Form W-2 is used to report any taxable sick pay you received and any income tax withheld from your sick pay. 2012 income tax booklet Form W-2G If you had gambling winnings in 2013, the payer may have withheld income tax. 2012 income tax booklet If tax was withheld, the payer will give you a Form W-2G showing the amount you won and the amount of tax withheld. 2012 income tax booklet Report the amounts you won on line 21 of Form 1040. 2012 income tax booklet Take credit for the tax withheld on line 62 of Form 1040. 2012 income tax booklet If you had gambling winnings, you must use Form 1040; you cannot use Form 1040A or Form 1040EZ. 2012 income tax booklet The 1099 Series Most forms in the 1099 series are not filed with your return. 2012 income tax booklet These forms should be furnished to you by January 31, 2014 (or, for Forms 1099-B, 1099-S, and certain Forms 1099-MISC, by February 15, 2014). 2012 income tax booklet Unless instructed to file any of these forms with your return, keep them for your records. 2012 income tax booklet There are several different forms in this series, including: Form 1099-B, Proceeds From Broker and Barter Exchange Transactions; Form 1099-DIV, Dividends and Distributions; Form 1099-G, Certain Government Payments; Form 1099-INT, Interest Income; Form 1099-K, Payment Card and Third Party Network Transactions; Form 1099-MISC, Miscellaneous Income; Form 1099-OID, Original Issue Discount; Form 1099-PATR, Taxable Distributions Received from Cooperatives; Form 1099-Q, Payments From Qualified Education Programs; Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. 2012 income tax booklet ; Form 1099-S, Proceeds From Real Estate Transactions; Form RRB-1099, Payments by the Railroad Retirement Board. 2012 income tax booklet If you received the types of income reported on some forms in the 1099 series, you may not be able to use Form 1040A or Form 1040EZ. 2012 income tax booklet See the instructions to these forms for details. 2012 income tax booklet Form 1099-R. 2012 income tax booklet   Attach Form 1099-R to your paper return if box 4 shows federal income tax withheld. 2012 income tax booklet Include the amount withheld in the total on line 62 of Form 1040 or line 36 of Form 1040A. 2012 income tax booklet You cannot use Form 1040EZ if you received payments reported on Form 1099-R. 2012 income tax booklet Backup withholding. 2012 income tax booklet   If you were subject to backup withholding on income you received during 2013, include the amount withheld, as shown on your Form 1099, in the total on line 62 of Form 1040, line 36 of Form 1040A, or line 7 of Form 1040EZ. 2012 income tax booklet Form Not Correct If you receive a form with incorrect information on it, you should ask the payer for a corrected form. 2012 income tax booklet Call the telephone number or write to the address given for the payer on the form. 2012 income tax booklet The corrected Form W-2G or Form 1099 you receive will have an “X” in the “CORRECTED” box at the top of the form. 2012 income tax booklet A special form, Form W-2c, Corrected Wage and Tax Statement, is used to correct a Form W-2. 2012 income tax booklet In certain situations, you will receive two forms in place of the original incorrect form. 2012 income tax booklet This will happen when your taxpayer identification number is wrong or missing, your name and address are wrong, or you received the wrong type of form (for example, a Form 1099-DIV instead of a Form 1099-INT). 2012 income tax booklet One new form you receive will be the same incorrect form or have the same incorrect information, but all money amounts will be zero. 2012 income tax booklet This form will have an “X” in the “CORRECTED” box at the top of the form. 2012 income tax booklet The second new form should have all the correct information, prepared as though it is the original (the “CORRECTED” box will not be checked). 2012 income tax booklet Form Received After Filing If you file your return and you later receive a form for income that you did not include on your return, you should report the income and take credit for any income tax withheld by filing Form 1040X, Amended U. 2012 income tax booklet S. 2012 income tax booklet Individual Income Tax Return. 2012 income tax booklet Separate Returns If you are married but file a separate return, you can take credit only for the tax withheld from your own income. 2012 income tax booklet Do not include any amount withheld from your spouse's income. 2012 income tax booklet However, different rules may apply if you live in a community property state. 2012 income tax booklet Community property states are listed in chapter 2. 2012 income tax booklet For more information on these rules, and some exceptions, see Publication 555, Community Property. 2012 income tax booklet Fiscal Years If you file your tax return on the basis of a fiscal year (a 12-month period ending on the last day of any month except December), you must follow special rules to determine your credit for federal income tax withholding. 2012 income tax booklet For a discussion of how to take credit for withholding on a fiscal year return, see Fiscal Years (FY) in chapter 3 of Publication 505. 2012 income tax booklet Estimated Tax Take credit for all your estimated tax payments for 2013 on line 63 of Form 1040 or line 37 of Form 1040A. 2012 income tax booklet Include any overpayment from 2012 that you had credited to your 2013 estimated tax. 2012 income tax booklet You must use Form 1040 or Form 1040A if you paid estimated tax. 2012 income tax booklet You cannot use Form 1040EZ. 2012 income tax booklet Name changed. 2012 income tax booklet   If you changed your name, and you made estimated tax payments using your old name, attach a brief statement to the front of your paper tax return indicating: When you made the payments, The amount of each payment, Your name when you made the payments, and Your social security number. 2012 income tax booklet The statement should cover payments you made jointly with your spouse as well as any you made separately. 2012 income tax booklet   Be sure to report the change to the Social Security Administration. 2012 income tax booklet This prevents delays in processing your return and issuing any refunds. 2012 income tax booklet Separate Returns If you and your spouse made separate estimated tax payments for 2013 and you file separate returns, you can take credit only for your own payments. 2012 income tax booklet If you made joint estimated tax payments, you must decide how to divide the payments between your returns. 2012 income tax booklet One of you can claim all of the estimated tax paid and the other none, or you can divide it in any other way you agree on. 2012 income tax booklet If you cannot agree, you must divide the payments in proportion to each spouse's individual tax as shown on your separate returns for 2013. 2012 income tax booklet Divorced Taxpayers If you made joint estimated tax payments for 2013, and you were divorced during the year, either you or your former spouse can claim all of the joint payments, or you each can claim part of them. 2012 income tax booklet If you cannot agree on how to divide the payments, you must divide them in proportion to each spouse's individual tax as shown on your separate returns for 2013. 2012 income tax booklet If you claim any of the joint payments on your tax return, enter your former spouse's social security number (SSN) in the space provided on the front of Form 1040 or Form 1040A. 2012 income tax booklet If you divorced and remarried in 2013, enter your present spouse's SSN in that space and write your former spouse's SSN, followed by “DIV,” to the left of Form 1040, line 63, or Form 1040A, line 37. 2012 income tax booklet Underpayment Penalty for 2013 If you did not pay enough tax, either through withholding or by making timely estimated tax payments, you will have an underpayment of estimated tax and you may have to pay a penalty. 2012 income tax booklet Generally, you will not have to pay a penalty for 2013 if any of the following apply. 2012 income tax booklet The total of your withholding and estimated tax payments was at least as much as your 2012 tax (or 110% of your 2012 tax if your AGI was more than $150,000, $75,000 if your 2013 filing status is married filing separately) and you paid all required estimated tax payments on time. 2012 income tax booklet The tax balance due on your 2013 return is no more than 10% of your total 2013 tax, and you paid all required estimated tax payments on time. 2012 income tax booklet Your total 2013 tax minus your withholding and refundable credits is less than $1,000. 2012 income tax booklet You did not have a tax liability for 2012 and your 2012 tax year was 12 months, or You did not have any withholding taxes and your current year tax less any household employment taxes is less than $1,000. 2012 income tax booklet See Publication 505, chapter 4, for a definition of “total tax” for 2012 and 2013. 2012 income tax booklet Farmers and fishermen. 2012 income tax booklet   Special rules apply if you are a farmer or fisherman. 2012 income tax booklet See Farmers and Fishermen in chapter 4 of Publication 505 for more information. 2012 income tax booklet IRS can figure the penalty for you. 2012 income tax booklet   If you think you owe the penalty but you do not want to figure it yourself when you file your tax return, you may not have to. 2012 income tax booklet Generally, the IRS will figure the penalty for you and send you a bill. 2012 income tax booklet However, if you think you are able to lower or eliminate your penalty, you must complete Form 2210 or Form 2210-F and attach it to your paper return. 2012 income tax booklet See chapter 4 of Publication 505. 2012 income tax booklet Prev  Up  Next   Home   More Online Publications
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Online Ordering for Information Returns and Employer Returns

Online Ordering for Information Returns and Employer Returns

 

Place your order below for information returns and employer products. Your request for products for 2014 will be held until they become available. Please do not reorder these products as they will be automatically shipped and may arrive in multiple shipments.

Specify the quantity needed, by tax year, in the corresponding fill-in space. Quantities are limited to 1,000 each for forms and 25 each for instructions and publications. One copy of the corresponding instruction is automatically included with your order. Some employer forms are printed 2 or 3 to a sheet; order the number of forms needed, not the number of sheets.

File Forms W-2/W-2c and W-3/W-3c electronically by visiting the Social Security Administration's Employer Reporting Instructions and Information website to create and file electronic "fill-in" versions of Forms W-2 and W-3.

Caution: Forms W-2, W-3, 1096, 1097, 1098, 1099, and 5498 Series are non-continuous feed, carbonless, non-laser forms.

Information Returns

Tax Year 2013
Quantity
Tax Year 2014
Quantity
Product Title
Form W-2 Wage and Tax Statement
Form W-3 Transmittal of Wage and Tax Statements
Instruction W-2 & W-3 General Instructions for Forms W-2 and W-3
Form W-2AS American Samoa Wage and Tax Statement
Form W-2G Certain Gambling Winnings
Instruction W-2G & 5754 Instructions for Forms W-2G and 5754
Form W-2GU Guam Wage and Tax Statement
Form W-2VI U.S. Virgin Islands Wage and Tax Statement
Form W-3SS Transmittal of Wage and Tax Statements
Form 1096 Annual Summary and Transmittal of U.S. Information Returns
Form 1097-BTC Bond Tax Credit
Instruction 1097-BTC Instructions for Form 1097-BTC
Form 1098 Mortgage Interest Statement
Instruction 1098 Instructions for Form 1098
Form 1098-C Contributions of Motor Vehicles, Boats, and Airplanes
Instruction 1098-C Instructions for Form 1098-C
Form 1098-E Student Loan Interest Statement
Form 1098-MA Mortgage Assistance Payments
Form 1098-T Tuition Statement
Instruction 1098-E & 1098-T Instructions for Forms 1098-E and 1098-T
Instruction 1099-GENERAL General Instructions for Certain Information Returns (Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G)
Form 1099-A Acquisition or Abandonment of Secured Property
Instruction 1099-A & C Instructions for Forms 1099-A and 1099-C
Form 1099-B Proceeds from Broker and Barter Exchange Transactions
Instruction 1099-B Instructions for Form 1099-B
Form 1099-C Cancellation of Debt
Form 1099-CAP Changes in Corporate Control and Capital Structure
Instruction 1099-CAP Instructions for Form 1099-CAP
Form 1099-DIV Dividends and Distributions
Instruction 1099-DIV Instructions for Form 1099-DIV
Form 1099-G Certain Government Payments
Instruction 1099-G Instructions for Form 1099-G
Form 1099-INT Interest Income
Instruction 1099-INT & OID Instructions for Forms 1099-INT and 1099-OID
Form 1099-K Payment Card and Third Party Network Transactions
Instruction 1099-K Instructions for Form 1099-K
Form 1099-LTC Long Term Care and Accelerated Death Benefits
Instruction 1099-LTC Instructions for Form 1099-LTC
Form 1099-MISC Miscellaneous Income
Instruction 1099-MISC Instructions for Form 1099-MISC
Form 1099-OID Original Issue Discount
Form 1099-PATR Taxable Distributions Received From Cooperatives
Instruction 1099-PATR Instructions for Form 1099-PATR
Form 1099-Q Payments From Qualified Education Programs (Under Sections 529 and 530)
Instruction 1099-Q Instructions for Form 1099-Q
Form 1099-R Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
Instruction 1099-R & 5498 Instructions for Forms 1099-R and 5498
Form 1099-S Proceeds from Real Estate Transactions
Instruction 1099-S Instructions for Form 1099-S
Form 1099-SA Distributions from an HSA, Archer MSA, or Medicare Advantage MSA
Instruction 1099-SA & 5498-SA Instructions for Forms 1099-SA and 5498-SA
Form 5498 IRA Contribution Information
Form 5498-ESA Coverdell ESA Contribution Information
Instruction 5498-ESA Instructions for Form 5498 ESA
Form 5498-SA HSA, Archer MSA, or Medicare Advantage MSA Information

 

Employer Products

Quantity Product Title
Form W-2c Corrected Wage and Tax Statement
Form W-3c Transmittal of Corrected Wage and Tax Statements
Form W-4 Employee's Withholding Allowance Certificate
Form W-4P Withholding Certificate for Pension or Annuity Payments
Form W-4S Request for Federal Income Tax Withholding From Sick Pay
Form W-4(SP) Employee's Withholding Allowance Certificate (Spanish version)
Form W-4V Voluntary Withholding Request
Form 940 Employer's Annual Federal Unemployment (FUTA) Tax Return
Instruction 940 Instructions for Form 940
Form 940 Sch A Multi-State Employer and Credit Reduction Information
Form 941 Employer's QUARTERLY Federal Tax Return
Instruction 941 Instructions for Form 941
Form 941 Sch B Report of Tax Liability for Semiweekly Schedule Depositors
Instruction 941 Sch B Instructions for Schedule B (Form 941)
Form 941 Sch D Report of Discrepancies Caused by Acquisitions, Statutory Mergers, or Consolidations
Instruction 941 Sch D Instructions for Schedule D (Form 941)
Form 941 Sch R Allocation Schedule for Aggregate Form 941 Filers
Form 941-SS Employer's QUARTERLY Federal Tax Return (American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, and the U.S. Virgin Islands)
Instruction 941-SS Instructions for Form 941-SS
Form 941-X Adjusted Employer's QUARTERLY Federal Tax Return or Claim for Refund
Instruction 941-X Instructions for Form 941-X
Form 943 Employer's Annual Federal Tax Return for Agricultural Employees
Instruction 943 Instructions for Form 943
Form 943-A Agricultural Employer's Record of Federal Tax Liability
Form 943-X Adjusted Employer's Annual Federal Tax Return for Agricultural Employees or Claim for Refund
Instruction 943-X Instructions for Form 943-X
Form 944 Employer's ANNUAL Federal Tax Return
Instruction 944 Instructions for Form 944
Form 944-X Adjusted Employer's ANNUAL Federal Tax Return or Claim for Refund
Instruction 944-X Instructions for Form 944-X
Form 945 Annual Return of Withheld Federal Income Tax
Instruction 945 Instructions for Form 945
Form 945-A Annual Record of Federal Tax Liability
Form 945-X Adjusted Annual Return of Withheld Federal Income Tax or Claim for Refund
Instruction 945-X Instructions for Form 945-X
Form 3921 Exercise of an Incentive Stock Option Under Section 422(b)
Form 3922 Transfer of Stock Acquired Through An Employee Stock Purchase Plan Under Section 423(c)
Instruction 3921 & 3922 Instructions for Forms 3921 and 3922
Form 5754 Statement by Person(s) Receiving Gambling Winnings
Publication 15 (Circular E), Employer's Tax Guide
Publication 15-A Employer's Supplemental Tax Guide
Publication 15-B Employer's Tax Guide to Fringe Benefits
Publication 51 (Circular A), Agricultural Employer's Tax Guide
Publication 80 (Circular SS), Federal Tax Guide for Employers in the U.S. Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands
Publication 1244 Employee's Daily Record of Tips and Report to Employer
Publication 1494 Tables for Figuring Amount Exempt from Levy on Wages, Salary, and Other Income (Forms 668-W(ACS), 668-W(c)(DO) and 668-W(ICS))

Page Last Reviewed or Updated: 23-Jan-2014

The 2012 Income Tax Booklet

2012 income tax booklet 4. 2012 income tax booklet   Interest Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Allocation of InterestOrder of funds spent. 2012 income tax booklet Payments from checking accounts. 2012 income tax booklet Amounts paid within 30 days. 2012 income tax booklet Optional method for determining date of reallocation. 2012 income tax booklet Interest on a segregated account. 2012 income tax booklet How to report. 2012 income tax booklet Interest You Can DeductStatement. 2012 income tax booklet Expenses paid to obtain a mortgage. 2012 income tax booklet Prepayment penalty. 2012 income tax booklet De minimis OID. 2012 income tax booklet Constant-yield method. 2012 income tax booklet Loan or mortgage ends. 2012 income tax booklet Interest You Cannot DeductPenalties. 2012 income tax booklet Who is a key person? Exceptions for pre-June 1997 contracts. 2012 income tax booklet Interest allocated to unborrowed policy cash value. 2012 income tax booklet Capitalization of Interest When To Deduct InterestPrepaid interest. 2012 income tax booklet Discounted loan. 2012 income tax booklet Refunds of interest. 2012 income tax booklet Prepaid interest. 2012 income tax booklet Discounted loan. 2012 income tax booklet Tax deficiency. 2012 income tax booklet Related person. 2012 income tax booklet Below-Market LoansLimit on forgone interest for gift loans of $100,000 or less. 2012 income tax booklet Introduction This chapter discusses the tax treatment of business interest expense. 2012 income tax booklet Business interest expense is an amount charged for the use of money you borrowed for business activities. 2012 income tax booklet Topics - This chapter discusses: Allocation of interest Interest you can deduct Interest you cannot deduct Capitalization of interest When to deduct interest Below-market loans Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch E (Form 1040) Supplemental Income and Loss Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. 2012 income tax booklet Sch K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. 2012 income tax booklet 1098 Mortgage Interest Statement 3115 Application for Change in Accounting Method 4952 Investment Interest Expense Deduction 8582 Passive Activity Loss Limitations See chapter 12 for information about getting publications and forms. 2012 income tax booklet Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. 2012 income tax booklet If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds. 2012 income tax booklet Allocate your interest expense to the following categories. 2012 income tax booklet Nonpassive trade or business activity interest Passive trade or business activity interest Investment interest Portfolio interest Personal interest In general, you allocate interest on a loan the same way you allocate the loan proceeds. 2012 income tax booklet You allocate loan proceeds by tracing disbursements to specific uses. 2012 income tax booklet The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. 2012 income tax booklet Secured loan. 2012 income tax booklet   The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. 2012 income tax booklet Example. 2012 income tax booklet You secure a loan with property used in your business. 2012 income tax booklet You use the loan proceeds to buy an automobile for personal use. 2012 income tax booklet You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property. 2012 income tax booklet    If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. 2012 income tax booklet The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. 2012 income tax booklet For more information, see Publication 936. 2012 income tax booklet Allocation period. 2012 income tax booklet   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. 2012 income tax booklet The date the loan is repaid. 2012 income tax booklet The date the loan is reallocated to another use. 2012 income tax booklet Proceeds not disbursed to borrower. 2012 income tax booklet   Even if the lender disburses the loan proceeds to a third party, the allocation of the loan is still based on your use of the funds. 2012 income tax booklet This applies whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt. 2012 income tax booklet Proceeds deposited in borrower's account. 2012 income tax booklet   Treat loan proceeds deposited in an account as property held for investment. 2012 income tax booklet It does not matter whether the account pays interest. 2012 income tax booklet Any interest you pay on the loan is investment interest expense. 2012 income tax booklet If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. 2012 income tax booklet Example. 2012 income tax booklet Celina, a calendar-year taxpayer, borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. 2012 income tax booklet No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. 2012 income tax booklet On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. 2012 income tax booklet On September 4, Celina uses an additional $40,000 from the account for personal purposes. 2012 income tax booklet Under the interest allocation rules, the entire $100,000 loan is treated as property held for investment for the period from January 4 through April 1. 2012 income tax booklet From April 2 through September 3, Celina must treat $20,000 of the loan as used in the passive activity and $80,000 of the loan as property held for investment. 2012 income tax booklet From September 4 through December 31, she must treat $40,000 of the loan as used for personal purposes, $20,000 as used in the passive activity, and $40,000 as property held for investment. 2012 income tax booklet Order of funds spent. 2012 income tax booklet   Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. 2012 income tax booklet Any unborrowed amounts held in the same account. 2012 income tax booklet Any amounts deposited after these loan proceeds. 2012 income tax booklet Example. 2012 income tax booklet On January 9, Olena opened a checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed funds. 2012 income tax booklet The following table shows the transactions in her account during the tax year. 2012 income tax booklet Date Transaction January 9 $500 proceeds of Loan A and $1,000 unborrowed funds deposited January 14 $500 proceeds of Loan B  deposited February 19 $800 used for personal purposes February 27 $700 used for passive activity June 19 $1,000 proceeds of Loan C  deposited November 20 $800 used for an investment December 18 $600 used for personal purposes Olena treats the $800 used for personal purposes as made from the $500 proceeds of Loan A and $300 of the proceeds of Loan B. 2012 income tax booklet She treats the $700 used for a passive activity as made from the remaining $200 proceeds of Loan B and $500 of unborrowed funds. 2012 income tax booklet She treats the $800 used for an investment as made entirely from the proceeds of Loan C. 2012 income tax booklet She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. 2012 income tax booklet For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. 2012 income tax booklet Payments from checking accounts. 2012 income tax booklet   Generally, you treat a payment from a checking or similar account as made at the time the check is written if you mail or deliver it to the payee within a reasonable period after you write it. 2012 income tax booklet You can treat checks written on the same day as written in any order. 2012 income tax booklet Amounts paid within 30 days. 2012 income tax booklet   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. 2012 income tax booklet This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. 2012 income tax booklet   If the loan proceeds are deposited in an account, you can apply this rule even if the rules stated earlier under Order of funds spent would otherwise require you to treat the proceeds as used for other purposes. 2012 income tax booklet If you apply this rule to any payments, disregard those payments (and the proceeds from which they are made) when applying the rules stated under Order of funds spent. 2012 income tax booklet   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. 2012 income tax booklet Example. 2012 income tax booklet Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. 2012 income tax booklet Giovanni deposits $1,500 in an account on August 18 and on August 28 writes a check on the account for a passive activity expense. 2012 income tax booklet Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. 2012 income tax booklet Regardless of these other transactions, Giovanni can treat $1,000 of the deposit he made on August 18 as being paid on August 4 from the loan proceeds. 2012 income tax booklet In addition, Giovanni can treat the passive activity expense he paid on August 28 as made from the $1,000 loan proceeds treated as deposited in the account. 2012 income tax booklet Optional method for determining date of reallocation. 2012 income tax booklet   You can use the following method to determine the date loan proceeds are reallocated to another use. 2012 income tax booklet You can treat all payments from loan proceeds in the account during any month as taking place on the later of the following dates. 2012 income tax booklet The first day of that month. 2012 income tax booklet The date the loan proceeds are deposited in the account. 2012 income tax booklet However, you can use this optional method only if you treat all payments from the account during the same calendar month in the same way. 2012 income tax booklet Interest on a segregated account. 2012 income tax booklet   If you have an account that contains only loan proceeds and interest earned on the account, you can treat any payment from that account as being made first from the interest. 2012 income tax booklet When the interest earned is used up, any remaining payments are from loan proceeds. 2012 income tax booklet Example. 2012 income tax booklet You borrowed $20,000 and used the proceeds of this loan to open a new savings account. 2012 income tax booklet When the account had earned interest of $867, you withdrew $20,000 for personal purposes. 2012 income tax booklet You can treat the withdrawal as coming first from the interest earned on the account, $867, and then from the loan proceeds, $19,133 ($20,000 − $867). 2012 income tax booklet All the interest charged on the loan from the time it was deposited in the account until the time of the withdrawal is investment interest expense. 2012 income tax booklet The interest charged on the part of the proceeds used for personal purposes ($19,133) from the time you withdrew it until you either repay it or reallocate it to another use is personal interest expense. 2012 income tax booklet The interest charged on the loan proceeds you left in the account ($867) continues to be investment interest expense until you either repay it or reallocate it to another use. 2012 income tax booklet Loan repayment. 2012 income tax booklet   When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. 2012 income tax booklet Personal use. 2012 income tax booklet Investments and passive activities (other than those included in (3)). 2012 income tax booklet Passive activities in connection with a rental real estate activity in which you actively participate. 2012 income tax booklet Former passive activities. 2012 income tax booklet Trade or business use and expenses for certain low-income housing projects. 2012 income tax booklet Line of credit (continuous borrowings). 2012 income tax booklet   The following rules apply if you have a line of credit or similar arrangement. 2012 income tax booklet Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. 2012 income tax booklet Treat borrowed funds or parts of borrowed funds on which interest accrues at different fixed or variable rates as different loans. 2012 income tax booklet Treat these loans as repaid in the order shown on the loan agreement. 2012 income tax booklet Loan refinancing. 2012 income tax booklet   Allocate the replacement loan to the same uses to which the repaid loan was allocated. 2012 income tax booklet Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. 2012 income tax booklet Debt-financed distribution. 2012 income tax booklet   A debt-financed distribution occurs when a partnership or S corporation borrows funds and allocates those funds to distributions made to partners or shareholders. 2012 income tax booklet The manner in which you report the interest expense associated with the distributed debt proceeds depends on your use of those proceeds. 2012 income tax booklet How to report. 2012 income tax booklet   If the proceeds were used in a nonpassive trade or business activity, report the interest on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership or S corporation in column (a) and the amount in column (h). 2012 income tax booklet If the proceeds were used in a passive activity, follow the Instructions for Form 8582, Passive Activity Loss Limitations, to determine the amount of interest expense that can be reported on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership in column (a) and the amount in column (f). 2012 income tax booklet If the proceeds were used in an investment activity, enter the interest on Form 4952. 2012 income tax booklet If the proceeds are used for personal purposes, the interest is generally not deductible. 2012 income tax booklet Interest You Can Deduct You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. 2012 income tax booklet Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. 2012 income tax booklet It does not matter what type of property secures the loan. 2012 income tax booklet You can deduct interest on a debt only if you meet all the following requirements. 2012 income tax booklet You are legally liable for that debt. 2012 income tax booklet Both you and the lender intend that the debt be repaid. 2012 income tax booklet You and the lender have a true debtor-creditor relationship. 2012 income tax booklet Partial liability. 2012 income tax booklet   If you are liable for part of a business debt, you can deduct only your share of the total interest paid or accrued. 2012 income tax booklet Example. 2012 income tax booklet You and your brother borrow money. 2012 income tax booklet You are liable for 50% of the note. 2012 income tax booklet You use your half of the loan in your business, and you make one-half of the loan payments. 2012 income tax booklet You can deduct your half of the total interest payments as a business deduction. 2012 income tax booklet Mortgage. 2012 income tax booklet   Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. 2012 income tax booklet However, rather than deducting the interest currently, you may have to add it to the cost basis of the property as explained later under Capitalization of Interest. 2012 income tax booklet Statement. 2012 income tax booklet   If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement. 2012 income tax booklet You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. 2012 income tax booklet A governmental unit is a person for purposes of furnishing the statement. 2012 income tax booklet   If you receive a refund of interest you overpaid in an earlier year, this amount will be reported in box 3 of Form 1098. 2012 income tax booklet You cannot deduct this amount. 2012 income tax booklet For information on how to report this refund, see Refunds of interest, later in this chapter. 2012 income tax booklet Expenses paid to obtain a mortgage. 2012 income tax booklet   Certain expenses you pay to obtain a mortgage cannot be deducted as interest. 2012 income tax booklet These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. 2012 income tax booklet If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage. 2012 income tax booklet Prepayment penalty. 2012 income tax booklet   If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as interest. 2012 income tax booklet Interest on employment tax deficiency. 2012 income tax booklet   Interest charged on employment taxes assessed on your business is deductible. 2012 income tax booklet Original issue discount (OID). 2012 income tax booklet   OID is a form of interest. 2012 income tax booklet A loan (mortgage or other debt) generally has OID when its proceeds are less than its principal amount. 2012 income tax booklet The OID is the difference between the stated redemption price at maturity and the issue price of the loan. 2012 income tax booklet   A loan's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on it other than qualified stated interest. 2012 income tax booklet Qualified stated interest is stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a single fixed rate. 2012 income tax booklet You generally deduct OID over the term of the loan. 2012 income tax booklet Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. 2012 income tax booklet De minimis OID. 2012 income tax booklet   The OID is de minimis if it is less than one-fourth of 1% (. 2012 income tax booklet 0025) of the stated redemption price of the loan at maturity multiplied by the number of full years from the date of original issue to maturity (the term of the loan). 2012 income tax booklet   If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. 2012 income tax booklet On a constant-yield basis over the term of the loan. 2012 income tax booklet On a straight-line basis over the term of the loan. 2012 income tax booklet In proportion to stated interest payments. 2012 income tax booklet In its entirety at maturity of the loan. 2012 income tax booklet You make this choice by deducting the OID in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. 2012 income tax booklet Example. 2012 income tax booklet On January 1, 2013, you took out a $100,000 discounted loan and received $98,500 in proceeds. 2012 income tax booklet The loan will mature on January 1, 2023 (a 10-year term), and the $100,000 principal is payable on that date. 2012 income tax booklet Interest of $10,000 is payable on January 1 of each year, beginning January 1, 2014. 2012 income tax booklet The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × . 2012 income tax booklet 0025 × 10). 2012 income tax booklet You choose to deduct the OID on a straight-line basis over the term of the loan. 2012 income tax booklet Beginning in 2013, you can deduct $150 each year for 10 years. 2012 income tax booklet Constant-yield method. 2012 income tax booklet   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. 2012 income tax booklet You figure your deduction for the first year using the following steps. 2012 income tax booklet Determine the issue price of the loan. 2012 income tax booklet Generally, this equals the proceeds of the loan. 2012 income tax booklet If you paid points on the loan (as discussed later), the issue price generally is the difference between the proceeds and the points. 2012 income tax booklet Multiply the result in (1) by the yield to maturity. 2012 income tax booklet Subtract any qualified stated interest payments from the result in (2). 2012 income tax booklet This is the OID you can deduct in the first year. 2012 income tax booklet   To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). 2012 income tax booklet To get the adjusted issue price, add to the issue price any OID previously deducted. 2012 income tax booklet Then follow steps (2) and (3) above. 2012 income tax booklet   The yield to maturity is generally shown in the literature you receive from your lender. 2012 income tax booklet If you do not have this information, consult your lender or tax advisor. 2012 income tax booklet In general, the yield to maturity is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. 2012 income tax booklet Example. 2012 income tax booklet The facts are the same as in the previous example, except that you deduct the OID on a constant yield basis over the term of the loan. 2012 income tax booklet The yield to maturity on your loan is 10. 2012 income tax booklet 2467%, compounded annually. 2012 income tax booklet For 2013, you can deduct $93 [($98,500 × . 2012 income tax booklet 102467) − $10,000]. 2012 income tax booklet For 2014, you can deduct $103 [($98,593 × . 2012 income tax booklet 102467) − $10,000]. 2012 income tax booklet Loan or mortgage ends. 2012 income tax booklet   If your loan or mortgage ends, you may be able to deduct any remaining OID in the tax year in which the loan or mortgage ends. 2012 income tax booklet A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. 2012 income tax booklet If you refinance with the original lender, you generally cannot deduct the remaining OID in the year in which the refinancing occurs, but you may be able to deduct it over the term of the new mortgage or loan. 2012 income tax booklet See Interest paid with funds borrowed from original lender under Interest You Cannot Deduct, later. 2012 income tax booklet Points. 2012 income tax booklet   The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a loan or a mortgage. 2012 income tax booklet These charges are also called loan origination fees, maximum loan charges, discount points, or premium charges. 2012 income tax booklet If any of these charges (points) are solely for the use of money, they are interest. 2012 income tax booklet   Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. 2012 income tax booklet However, you can choose to fully deduct points in the year paid if you meet certain tests. 2012 income tax booklet For exceptions to the general rule, see Publication 936. 2012 income tax booklet The points reduce the issue price of the loan and result in original issue discount (OID), deductible as explained in the preceding discussion. 2012 income tax booklet Partial payments on a nontax debt. 2012 income tax booklet   If you make partial payments on a debt (other than a debt owed the IRS), the payments are applied, in general, first to interest and any remainder to principal. 2012 income tax booklet You can deduct only the interest. 2012 income tax booklet This rule does not apply when it can be inferred that the borrower and lender understood that a different allocation of the payments would be made. 2012 income tax booklet Installment purchase. 2012 income tax booklet   If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. 2012 income tax booklet If no interest or a low rate of interest is charged under the contract, a portion of the stated principal amount payable under the contract may be recharacterized as interest (unstated interest). 2012 income tax booklet The amount recharacterized as interest reduces your basis in the property and increases your interest expense. 2012 income tax booklet For more information on installment sales and unstated interest, see Publication 537. 2012 income tax booklet Interest You Cannot Deduct Certain interest payments cannot be deducted. 2012 income tax booklet In addition, certain other expenses that may seem to be interest but are not, cannot be deducted as interest. 2012 income tax booklet You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. 2012 income tax booklet Interest paid with funds borrowed from original lender. 2012 income tax booklet   If you use the cash method of accounting, you cannot deduct interest you pay with funds borrowed from the original lender through a second loan, an advance, or any other arrangement similar to a loan. 2012 income tax booklet You can deduct the interest expense once you start making payments on the new loan. 2012 income tax booklet   When you make a payment on the new loan, you first apply the payment to interest and then to the principal. 2012 income tax booklet All amounts you apply to the interest on the first loan are deductible, along with any interest you pay on the second loan, subject to any limits that apply. 2012 income tax booklet Capitalized interest. 2012 income tax booklet   You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. 2012 income tax booklet See Capitalization of Interest, later. 2012 income tax booklet In addition, if you buy property and pay interest owed by the seller (for example, by assuming the debt and any interest accrued on the property), you cannot deduct the interest. 2012 income tax booklet Add this interest to the basis of the property. 2012 income tax booklet Commitment fees or standby charges. 2012 income tax booklet   Fees you incur to have business funds available on a standby basis, but not for the actual use of the funds, are not deductible as interest payments. 2012 income tax booklet You may be able to deduct them as business expenses. 2012 income tax booklet   If the funds are for inventory or certain property used in your business, the fees are indirect costs and you generally must capitalize them under the uniform capitalization rules. 2012 income tax booklet See Capitalization of Interest, later. 2012 income tax booklet Interest on income tax. 2012 income tax booklet   Interest charged on income tax assessed on your individual income tax return is not a business deduction even though the tax due is related to income from your trade or business. 2012 income tax booklet Treat this interest as a business deduction only in figuring a net operating loss deduction. 2012 income tax booklet Penalties. 2012 income tax booklet   Penalties on underpaid deficiencies and underpaid estimated tax are not interest. 2012 income tax booklet You cannot deduct them. 2012 income tax booklet Generally, you cannot deduct any fines or penalties. 2012 income tax booklet Interest on loans with respect to life insurance policies. 2012 income tax booklet   You generally cannot deduct interest on a debt incurred with respect to any life insurance, annuity, or endowment contract that covers any individual unless that individual is a key person. 2012 income tax booklet   If the policy or contract covers a key person, you can deduct the interest on up to $50,000 of debt for that person. 2012 income tax booklet However, the deduction for any month cannot be more than the interest figured using Moody's Composite Yield on Seasoned Corporate Bonds (formerly known as Moody's Corporate Bond Yield Average-Monthly Average Corporates) (Moody's rate) for that month. 2012 income tax booklet Who is a key person?   A key person is an officer or 20% owner. 2012 income tax booklet However, the number of individuals you can treat as key persons is limited to the greater of the following. 2012 income tax booklet Five individuals. 2012 income tax booklet The lesser of 5% of the total officers and employees of the company or 20 individuals. 2012 income tax booklet Exceptions for pre-June 1997 contracts. 2012 income tax booklet   You can generally deduct the interest if the contract was issued before June 9, 1997, and the covered individual is someone other than an employee, officer, or someone financially interested in your business. 2012 income tax booklet If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is covered by the contract. 2012 income tax booklet Interest allocated to unborrowed policy cash value. 2012 income tax booklet   Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. 2012 income tax booklet This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. 2012 income tax booklet For more information, see section 264(f) of the Internal Revenue Code. 2012 income tax booklet Capitalization of Interest Under the uniform capitalization rules, you generally must capitalize interest on debt equal to your expenditures to produce real property or certain tangible personal property. 2012 income tax booklet The property must be produced by you for use in your trade or business or for sale to customers. 2012 income tax booklet You cannot capitalize interest related to property that you acquire in any other manner. 2012 income tax booklet Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. 2012 income tax booklet Designated property is any of the following. 2012 income tax booklet Real property. 2012 income tax booklet Tangible personal property with a class life of 20 years or more. 2012 income tax booklet Tangible personal property with an estimated production period of more than 2 years. 2012 income tax booklet Tangible personal property with an estimated production period of more than 1 year if the estimated cost of production is more than $1 million. 2012 income tax booklet Property you produce. 2012 income tax booklet   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. 2012 income tax booklet Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. 2012 income tax booklet Carrying charges. 2012 income tax booklet   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. 2012 income tax booklet You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. 2012 income tax booklet For more information, see chapter 7. 2012 income tax booklet Capitalized interest. 2012 income tax booklet   Treat capitalized interest as a cost of the property produced. 2012 income tax booklet You recover your interest when you sell or use the property. 2012 income tax booklet If the property is inventory, recover capitalized interest through cost of goods sold. 2012 income tax booklet If the property is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. 2012 income tax booklet Partnerships and S corporations. 2012 income tax booklet   The interest capitalization rules are applied first at the partnership or S corporation level. 2012 income tax booklet The rules are then applied at the partners' or shareholders' level to the extent the partnership or S corporation has insufficient debt to support the production or construction costs. 2012 income tax booklet   If you are a partner or a shareholder, you may have to capitalize interest you incur during the tax year for the production costs of the partnership or S corporation. 2012 income tax booklet You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. 2012 income tax booklet To properly capitalize interest under these rules, you must be given the required information in an attachment to the Schedule K-1 you receive from the partnership or S corporation. 2012 income tax booklet Additional information. 2012 income tax booklet   The procedures for applying the uniform capitalization rules are beyond the scope of this publication. 2012 income tax booklet For more information, see sections 1. 2012 income tax booklet 263A-8 through 1. 2012 income tax booklet 263A-15 of the regulations and Notice 88-99. 2012 income tax booklet Notice 88-99 is in Cumulative Bulletin 1988-2. 2012 income tax booklet When To Deduct Interest If the uniform capitalization rules, discussed under Capitalization of Interest, earlier, do not apply to you, deduct interest as follows. 2012 income tax booklet Cash method. 2012 income tax booklet   Under the cash method, you can generally deduct only the interest you actually paid during the tax year. 2012 income tax booklet You cannot deduct a promissory note you gave as payment because it is a promise to pay and not an actual payment. 2012 income tax booklet Prepaid interest. 2012 income tax booklet   You generally cannot deduct any interest paid before the year it is due. 2012 income tax booklet Interest paid in advance can be deducted only in the tax year in which it is due. 2012 income tax booklet Discounted loan. 2012 income tax booklet   If interest or a discount is subtracted from your loan proceeds, it is not a payment of interest and you cannot deduct it when you get the loan. 2012 income tax booklet For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. 2012 income tax booklet Refunds of interest. 2012 income tax booklet   If you pay interest and then receive a refund in the same tax year of any part of the interest, reduce your interest deduction by the refund. 2012 income tax booklet If you receive the refund in a later tax year, include the refund in your income to the extent the deduction for the interest reduced your tax. 2012 income tax booklet Accrual method. 2012 income tax booklet   Under an accrual method, you can deduct only interest that has accrued during the tax year. 2012 income tax booklet Prepaid interest. 2012 income tax booklet   See Prepaid interest, earlier. 2012 income tax booklet Discounted loan. 2012 income tax booklet   See Discounted loan, earlier. 2012 income tax booklet Tax deficiency. 2012 income tax booklet   If you contest a federal income tax deficiency, interest does not accrue until the tax year the final determination of liability is made. 2012 income tax booklet If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. 2012 income tax booklet   However, if you contest but pay the proposed tax deficiency and interest, and you do not designate the payment as a cash bond, then the interest is deductible in the year paid. 2012 income tax booklet Related person. 2012 income tax booklet   If you use an accrual method, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. 2012 income tax booklet The relationship is determined as of the end of the tax year for which the interest would otherwise be deductible. 2012 income tax booklet See section 267 of the Internal Revenue Code for more information. 2012 income tax booklet Below-Market Loans If you receive a below-market gift or demand loan and use the proceeds in your trade or business, you may be able to deduct the forgone interest. 2012 income tax booklet See Treatment of gift and demand loans, later, in this discussion. 2012 income tax booklet A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. 2012 income tax booklet A gift or demand loan that is a below-market loan generally is considered an arm's-length transaction in which you, the borrower, are considered as having received both the following. 2012 income tax booklet A loan in exchange for a note that requires the payment of interest at the applicable federal rate. 2012 income tax booklet An additional payment in an amount equal to the forgone interest. 2012 income tax booklet The additional payment is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. 2012 income tax booklet Forgone interest. 2012 income tax booklet   For any period, forgone interest is The 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. 2012 income tax booklet Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. 2012 income tax booklet Internal Revenue Bulletins are available on the IRS web site at www. 2012 income tax booklet irs. 2012 income tax booklet gov/irb. 2012 income tax booklet You can also contact an IRS office to get these rates. 2012 income tax booklet Loans subject to the rules. 2012 income tax booklet   The rules for below-market loans apply to the following. 2012 income tax booklet Gift loans (below-market loans where the forgone interest is in the nature of a gift). 2012 income tax booklet Compensation-related loans (below-market loans between an employer and an employee or between an independent contractor and a person for whom the contractor provides services). 2012 income tax booklet Corporation-shareholder loans. 2012 income tax booklet Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest arrangement). 2012 income tax booklet Loans to qualified continuing care facilities under a continuing care contract (made after October 11, 1985). 2012 income tax booklet   Except as noted in (5) above, these rules apply to demand loans (loans payable in full at any time upon the lender's demand) outstanding after June 6, 1984, and to term loans (loans that are not demand loans) made after that date. 2012 income tax booklet Treatment of gift and demand loans. 2012 income tax booklet   If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc. 2012 income tax booklet ) equal to the forgone interest on the loan. 2012 income tax booklet You are then treated as transferring this amount back to the lender as interest. 2012 income tax booklet These transfers are considered to occur annually, generally on December 31. 2012 income tax booklet If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. 2012 income tax booklet The lender must report it as interest income. 2012 income tax booklet Limit on forgone interest for gift loans of $100,000 or less. 2012 income tax booklet   For gift loans between individuals, forgone interest treated as transferred back to the lender is limited to the borrower's net investment income for the year. 2012 income tax booklet This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. 2012 income tax booklet If the borrower's net investment income is $1,000 or less, it is treated as zero. 2012 income tax booklet This limit does not apply to a loan if the avoidance of any federal tax is one of the main purposes of the interest arrangement. 2012 income tax booklet Treatment of term loans. 2012 income tax booklet   If you receive a below-market term loan other than a gift or demand loan, you are treated as receiving an additional cash payment (as a dividend, etc. 2012 income tax booklet ) on the date the loan is made. 2012 income tax booklet This payment is equal to the loan amount minus the present value, at the applicable federal rate, of all payments due under the loan. 2012 income tax booklet The same amount is treated as original issue discount on the loan. 2012 income tax booklet See Original issue discount (OID) under Interest You Can Deduct, earlier. 2012 income tax booklet Exceptions for loans of $10,000 or less. 2012 income tax booklet   The rules for below-market loans do not apply to any day on which the total outstanding loans between the borrower and lender is $10,000 or less. 2012 income tax booklet This exception applies only to the following. 2012 income tax booklet Gift loans between individuals if the loan is not directly used to buy or carry income-producing assets. 2012 income tax booklet Compensation-related loans or corporation-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. 2012 income tax booklet This exception does not apply to a term loan described in (2) above that was previously subject to the below-market loan rules. 2012 income tax booklet Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. 2012 income tax booklet Exceptions for loans without significant tax effect. 2012 income tax booklet   The following loans are specifically exempted from the rules for below-market loans because their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. 2012 income tax booklet Loans made available by lenders to the general public on the same terms and conditions that are consistent with the lender's customary business practices. 2012 income tax booklet Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public. 2012 income tax booklet Certain employee-relocation loans. 2012 income tax booklet Certain loans to or from a foreign person, unless the interest income would be effectively connected with the conduct of a U. 2012 income tax booklet S. 2012 income tax booklet trade or business and not exempt from U. 2012 income tax booklet S. 2012 income tax booklet tax under an income tax treaty. 2012 income tax booklet Any other loan if the taxpayer can show that the interest arrangement has no significant effect on the federal tax liability of the lender or the borrower. 2012 income tax booklet Whether an interest arrangement has a significant effect on the federal tax liability of the lender or the borrower will be determined by all the facts and circumstances. 2012 income tax booklet Consider all the following factors. 2012 income tax booklet Whether items of income and deduction generated by the loan offset each other. 2012 income tax booklet The amount of the items. 2012 income tax booklet The cost of complying with the below-market loan provisions if they were to apply. 2012 income tax booklet Any reasons, other than taxes, for structuring the transaction as a below-market loan. 2012 income tax booklet Exception for loans to qualified continuing care facilities. 2012 income tax booklet   The below-market interest rules do not apply to a loan owed by a qualified continuing care facility under a continuing care contract if the lender or lender's spouse is age 62 or older by the end of the calendar year. 2012 income tax booklet A qualified continuing care facility is one or more facilities (excluding nursing homes) meeting the requirements listed below. 2012 income tax booklet Designed to provide services under continuing care contracts (defined below). 2012 income tax booklet Includes an independent living unit, and either an assisted living or nursing facility, or both. 2012 income tax booklet Substantially all of the independent living unit residents are covered by continuing care contracts. 2012 income tax booklet A continuing care contract is a written contract between an individual and a qualified continuing care facility that includes all of the following conditions. 2012 income tax booklet The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. 2012 income tax booklet The individual or individual's spouse will be provided with housing, as appropriate for the health of the individual or individual's spouse in an: independent living unit (which has additional available facilities outside the unit for the provision of meals and other personal care), and assisted living or nursing facility available in the continuing care facility. 2012 income tax booklet The individual or individual's spouse will be provided with assisted living or nursing care available in the continuing care facility, as required for the health of the individual or the individual's spouse. 2012 income tax booklet For more information, see section 7872(h) of the Internal Revenue Code. 2012 income tax booklet Sale or exchange of property. 2012 income tax booklet   Different rules generally apply to a loan connected with the sale or exchange of property. 2012 income tax booklet If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. 2012 income tax booklet However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. 2012 income tax booklet See Unstated Interest and Original Issue Discount (OID) in Publication 537. 2012 income tax booklet More information. 2012 income tax booklet   For more information on below-market loans, see section 7872 of the Internal Revenue Code and section 1. 2012 income tax booklet 7872-5 of the regulations. 2012 income tax booklet Prev  Up  Next   Home   More Online Publications