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2012 Tax Software

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2012 Tax Software

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

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