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Aarp free tax preparation locations 8. Aarp free tax preparation locations   Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesDetermining Gain or Loss Like-Kind Exchanges Transfer to Spouse Ordinary or Capital Gain or LossCapital Assets Noncapital Assets Hedging (Commodity Futures) Livestock Converted Wetland and Highly Erodible Cropland Timber Sale of a Farm Foreclosure or Repossession Abandonment Introduction This chapter explains how to figure, and report on your tax return, your gain or loss on the disposition of your property or debt and whether such gain or loss is ordinary or capital. Aarp free tax preparation locations Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. Aarp free tax preparation locations Dispositions discussed in this chapter include sales, exchanges, foreclosures, repossessions, canceled debts, hedging transactions, and elections to treat cutting of timber as a sale or exchange. Aarp free tax preparation locations Topics - This chapter discusses: Sales and exchanges Ordinary or capital gain or loss Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 523 Selling Your Home 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 908 Bankruptcy Tax Guide Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8949 Sales and Other Dispositions of Capital Assets See chapter 16 for information about getting publications and forms. Aarp free tax preparation locations Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. Aarp free tax preparation locations This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible. Aarp free tax preparation locations A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Aarp free tax preparation locations An exchange is a transfer of property for other property or services. Aarp free tax preparation locations Determining Gain or Loss You usually realize a gain or loss when you sell or exchange property. Aarp free tax preparation locations If the amount you realize from a sale or exchange of property is more than its adjusted basis, you will have a gain. Aarp free tax preparation locations If the adjusted basis of the property is more than the amount you realize, you will have a loss. Aarp free tax preparation locations Basis and adjusted basis. Aarp free tax preparation locations   The basis of property you buy is usually its cost. Aarp free tax preparation locations The adjusted basis of property is basis plus certain additions and minus certain deductions. Aarp free tax preparation locations See chapter 6 for more information about basis and adjusted basis. Aarp free tax preparation locations Amount realized. Aarp free tax preparation locations   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (FMV) (defined in chapter 6) of all property or services you receive. Aarp free tax preparation locations The amount you realize also includes any of your liabilities assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Aarp free tax preparation locations   If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Publication 544. Aarp free tax preparation locations Amount recognized. Aarp free tax preparation locations   Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. Aarp free tax preparation locations A recognized gain is a gain you must include in gross income and report on your income tax return. Aarp free tax preparation locations A recognized loss is a loss you deduct from gross income. Aarp free tax preparation locations However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. Aarp free tax preparation locations See Like-Kind Exchanges next. Aarp free tax preparation locations Also, a loss from the disposition of property held for personal use is not deductible. Aarp free tax preparation locations Like-Kind Exchanges Certain exchanges of property are not taxable. Aarp free tax preparation locations This means any gain from the exchange is not recognized, and any loss cannot be deducted. Aarp free tax preparation locations Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. Aarp free tax preparation locations The exchange of property for the same kind of property is the most common type of nontaxable exchange. Aarp free tax preparation locations To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. Aarp free tax preparation locations Qualifying property. Aarp free tax preparation locations Like-kind property. Aarp free tax preparation locations These two requirements are discussed later. Aarp free tax preparation locations Multiple-party transactions. Aarp free tax preparation locations   The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. Aarp free tax preparation locations Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section. Aarp free tax preparation locations Receipt of title from third party. Aarp free tax preparation locations   If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title, but a third party does, you can still treat this transaction as a like-kind exchange if it meets all the requirements. Aarp free tax preparation locations Basis of property received. Aarp free tax preparation locations   If you receive property in a like-kind exchange, the basis of the property will be the same as the basis of the property you gave up. Aarp free tax preparation locations See chapter 6 for more information. Aarp free tax preparation locations Money paid. Aarp free tax preparation locations   If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. Aarp free tax preparation locations The basis of the property received is the basis of the property given up, increased by the money paid. Aarp free tax preparation locations Example. Aarp free tax preparation locations You traded an old tractor with an adjusted basis of $15,000 for a new one. Aarp free tax preparation locations The new tractor costs $300,000. Aarp free tax preparation locations You were allowed $80,000 for the old tractor and paid $220,000 cash. Aarp free tax preparation locations You have no recognized gain or loss on the transaction regardless of the adjusted basis of your old tractor and the basis of the new tractor is $235,000, the adjusted basis of the old tractor plus the cash paid ($15,000 + $220,000). Aarp free tax preparation locations If you had sold the old tractor to a third party for $80,000 and bought a new one, you would have a recognized gain or loss on the sale of your old tractor equal to the difference between the amount realized and the adjusted basis of the old tractor. Aarp free tax preparation locations In this case, the taxable gain would be $65,000 ($80,000 − $15,000) and the basis of the new tractor would be $300,000. Aarp free tax preparation locations Reporting the exchange. Aarp free tax preparation locations   Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. Aarp free tax preparation locations The Instructions for Form 8824 explain how to report the details of the exchange. Aarp free tax preparation locations   If you have any recognized gain because you received money or unlike property, report it on Schedule D (Form 1040) or Form 4797, whichever applies. Aarp free tax preparation locations You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. Aarp free tax preparation locations See chapter 9 for more information. Aarp free tax preparation locations Qualifying property. Aarp free tax preparation locations   In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. Aarp free tax preparation locations Machinery, buildings, land, trucks, breeding livestock, rental houses, and certain mutual ditch, reservoir, or irrigation company stock are examples of property that may qualify. Aarp free tax preparation locations Nonqualifying property. Aarp free tax preparation locations   The rules for like-kind exchanges do not apply to exchanges of the following property. Aarp free tax preparation locations Property you use for personal purposes, such as your home and family car. Aarp free tax preparation locations Stock in trade or other property held primarily for sale, such as crops and produce. Aarp free tax preparation locations Stocks, bonds, or notes. Aarp free tax preparation locations However, see Qualifying property above. Aarp free tax preparation locations Other securities or evidences of indebtedness, such as accounts receivable. Aarp free tax preparation locations Partnership interests. Aarp free tax preparation locations However, you may have a nontaxable exchange under other rules. Aarp free tax preparation locations See Other Nontaxable Exchanges in chapter 1 of Publication 544. Aarp free tax preparation locations Like-kind property. Aarp free tax preparation locations   To qualify as a nontaxable exchange, the properties exchanged must be of like kind. Aarp free tax preparation locations Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Aarp free tax preparation locations Generally, real property exchanged for real property qualifies as an exchange of like-kind property. Aarp free tax preparation locations For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange. Aarp free tax preparation locations   An exchange of a tractor for a new tractor is an exchange of like-kind property, and so is an exchange of timber land for crop acreage. Aarp free tax preparation locations An exchange of a tractor for acreage, however, is not an exchange of like-kind property. Aarp free tax preparation locations The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. Aarp free tax preparation locations For example, the exchange of a bull for a cow is not a like-kind exchange. Aarp free tax preparation locations An exchange of the assets of a business for the assets of a similar business cannot be treated as an exchange of one property for another property. Aarp free tax preparation locations    Note. Aarp free tax preparation locations Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. Aarp free tax preparation locations Personal property. Aarp free tax preparation locations   Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. Aarp free tax preparation locations Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. Aarp free tax preparation locations Property classified in any General Asset Class may not be classified within a Product Class. Aarp free tax preparation locations Assets that are not in the same class will qualify as like-kind property if they are of the same nature or character. Aarp free tax preparation locations General Asset Classes. Aarp free tax preparation locations   General Asset Classes describe the types of property frequently used in many businesses. Aarp free tax preparation locations They include, but are not limited to, the following property. Aarp free tax preparation locations Office furniture, fixtures, and equipment (asset class 00. Aarp free tax preparation locations 11). Aarp free tax preparation locations Information systems, such as computers and peripheral equipment (asset class 00. Aarp free tax preparation locations 12). Aarp free tax preparation locations Data handling equipment except computers (asset class 00. Aarp free tax preparation locations 13). Aarp free tax preparation locations Automobiles and taxis (asset class 00. Aarp free tax preparation locations 22). Aarp free tax preparation locations Light general purpose trucks (asset class 00. Aarp free tax preparation locations 241). Aarp free tax preparation locations Heavy general purpose trucks (asset class 00. Aarp free tax preparation locations 242). Aarp free tax preparation locations Tractor units for use over-the-road (asset class 00. Aarp free tax preparation locations 26). Aarp free tax preparation locations Trailers and trailer-mounted containers (asset class 00. Aarp free tax preparation locations 27). Aarp free tax preparation locations Industrial steam and electric generation and/or distribution systems (asset class 00. Aarp free tax preparation locations 4). Aarp free tax preparation locations Product Classes. Aarp free tax preparation locations   Product Classes include property listed in a 6-digit product class in sectors 31 through 33 of the North American Industry Classification System (NAICS) of the Executive Office of the President, Office of Management and Budget, United States, (NAICS Manual). Aarp free tax preparation locations The latest version of the manual can be accessed at www. Aarp free tax preparation locations census. Aarp free tax preparation locations gov/eos/www/naics/. Aarp free tax preparation locations Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at  www. Aarp free tax preparation locations ntis. Aarp free tax preparation locations gov/products/naics. Aarp free tax preparation locations aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. Aarp free tax preparation locations A CD-ROM version with search and retrieval software is also available from NTIS. Aarp free tax preparation locations    NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business. Aarp free tax preparation locations Partially nontaxable exchange. Aarp free tax preparation locations   If, in addition to like-kind property, you receive money or unlike property in an exchange on which you realize gain, you have a partially nontaxable exchange. Aarp free tax preparation locations You are taxed on the gain you realize, but only to the extent of the money and the FMV of the unlike property you receive. Aarp free tax preparation locations A loss is not deductible. Aarp free tax preparation locations Example 1. Aarp free tax preparation locations You trade farmland that cost $30,000 for $10,000 cash and other land to be used in farming with a FMV of $50,000. Aarp free tax preparation locations You have a realized gain of $30,000 ($50,000 FMV of new land + $10,000 cash − $30,000 basis of old farmland = $30,000 realized gain). Aarp free tax preparation locations However, only $10,000, the cash received, is recognized (included in income). Aarp free tax preparation locations Example 2. Aarp free tax preparation locations Assume the same facts as in Example 1, except that, instead of money, you received a tractor with a FMV of $10,000. Aarp free tax preparation locations Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property). Aarp free tax preparation locations Example 3. Aarp free tax preparation locations Assume in Example 1 that the FMV of the land you received was only $15,000. Aarp free tax preparation locations Your $5,000 loss is not recognized. Aarp free tax preparation locations Unlike property given up. Aarp free tax preparation locations   If, in addition to like-kind property, you give up unlike property, you must recognize gain or loss on the unlike property you give up. Aarp free tax preparation locations The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property. Aarp free tax preparation locations Like-kind exchanges between related persons. Aarp free tax preparation locations   Special rules apply to like-kind exchanges between related persons. Aarp free tax preparation locations These rules affect both direct and indirect exchanges. Aarp free tax preparation locations Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Aarp free tax preparation locations The gain or loss on the original exchange must be recognized as of the date of the later disposition. Aarp free tax preparation locations The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. Aarp free tax preparation locations Related persons. Aarp free tax preparation locations   Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc. Aarp free tax preparation locations ), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits. Aarp free tax preparation locations   For the complete list of related persons, see Related persons in chapter 2 of Publication 544. Aarp free tax preparation locations Example. Aarp free tax preparation locations You used a grey pickup truck in your farming business. Aarp free tax preparation locations Your sister used a red pickup truck in her landscaping business. Aarp free tax preparation locations In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. Aarp free tax preparation locations At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. Aarp free tax preparation locations The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. Aarp free tax preparation locations You realized a gain of $1,000 (the $7,200 FMV of the red pickup truck, minus the grey pickup truck's $6,000 adjusted basis, minus the $200 you paid). Aarp free tax preparation locations Your sister realized a gain of $6,200 (the $7,000 FMV of the grey pickup truck plus the $200 you paid, minus the $1,000 adjusted basis of the red pickup truck). Aarp free tax preparation locations However, because this was a like-kind exchange, you recognized no gain. Aarp free tax preparation locations Your basis in the red pickup truck was $6,200 (the $6,000 adjusted basis of the grey pickup truck plus the $200 you paid). Aarp free tax preparation locations She recognized gain only to the extent of the money she received, $200. Aarp free tax preparation locations Her basis in the grey pickup truck was $1,000 (the $1,000 adjusted basis of the red pickup truck minus the $200 received, plus the $200 gain recognized). Aarp free tax preparation locations In 2013, you sold the red pickup truck to a third party for $7,000. Aarp free tax preparation locations Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Aarp free tax preparation locations On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. Aarp free tax preparation locations You also report a loss on the sale as $200 (the adjusted basis of the red pickup truck, $7,200 (its $6,200 basis plus the $1,000 gain recognized), minus the $7,000 realized from the sale). Aarp free tax preparation locations In addition, your sister must report on her tax return for 2013 the $6,000 balance of her gain on the 2012 exchange. Aarp free tax preparation locations Her adjusted basis in the grey pickup truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized). Aarp free tax preparation locations Exceptions to the rules for related persons. Aarp free tax preparation locations   The following property dispositions are excluded from these rules. Aarp free tax preparation locations Dispositions due to the death of either related person. Aarp free tax preparation locations Involuntary conversions. Aarp free tax preparation locations Dispositions where it is established to the satisfaction of the IRS that neither the exchange nor the disposition has, as a main purpose, the avoidance of federal income tax. Aarp free tax preparation locations Multiple property exchanges. Aarp free tax preparation locations   Under the like-kind exchange rules, you must generally make a property-by-property comparison to figure your recognized gain and the basis of the property you receive in the exchange. Aarp free tax preparation locations However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. Aarp free tax preparation locations Transfer and receive properties in two or more exchange groups. Aarp free tax preparation locations Transfer or receive more than one property within a single exchange group. Aarp free tax preparation locations   For more information, see Multiple Property Exchanges in chapter 1 of Publication 544. Aarp free tax preparation locations Deferred exchange. Aarp free tax preparation locations   A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. Aarp free tax preparation locations A deferred exchange is an exchange in which you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. Aarp free tax preparation locations The property you receive is replacement property. Aarp free tax preparation locations The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. Aarp free tax preparation locations In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met. Aarp free tax preparation locations   For more information see Deferred Exchanges in chapter 1 of Publication 544. Aarp free tax preparation locations Transfer to Spouse No gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or a former spouse if incident to divorce. Aarp free tax preparation locations This rule does not apply if the recipient is a nonresident alien. Aarp free tax preparation locations Nor does this rule apply to a transfer in trust to the extent the liabilities assumed and the liabilities on the property are more than the property's adjusted basis. Aarp free tax preparation locations Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is not considered a sale or exchange. Aarp free tax preparation locations The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. Aarp free tax preparation locations This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its FMV at the time of transfer or any consideration paid by the recipient. Aarp free tax preparation locations This rule applies for determining loss as well as gain. Aarp free tax preparation locations Any gain recognized on a transfer in trust increases the basis. Aarp free tax preparation locations For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals. Aarp free tax preparation locations Ordinary or Capital Gain or Loss Generally, you will have a capital gain or loss if you sell or exchange a capital asset (defined below). Aarp free tax preparation locations You may also have a capital gain if your section 1231 transactions result in a net gain. Aarp free tax preparation locations See Section 1231 Gains and Losses in  chapter 9. Aarp free tax preparation locations To figure your net capital gain or loss, you must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). Aarp free tax preparation locations Your net capital gains may be taxed at a lower tax rate than ordinary income. Aarp free tax preparation locations See Capital Gains Tax Rates , later. Aarp free tax preparation locations Your deduction for a net capital loss may be limited. Aarp free tax preparation locations See Treatment of Capital Losses , later. Aarp free tax preparation locations Capital Assets Almost everything you own and use for personal purposes or investment is a capital asset. Aarp free tax preparation locations The following items are examples of capital assets. Aarp free tax preparation locations A home owned and occupied by you and your family. Aarp free tax preparation locations Household furnishings. Aarp free tax preparation locations A car used for pleasure. Aarp free tax preparation locations If your car is used both for pleasure and for farm business, it is partly a capital asset and partly a noncapital asset, defined later. Aarp free tax preparation locations Stocks and bonds. Aarp free tax preparation locations However, there are special rules for gains on qualified small business stock. Aarp free tax preparation locations For more information on this subject, see Gains on Qualified Small Business Stock and Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. Aarp free tax preparation locations Personal-use property. Aarp free tax preparation locations   Gain from a sale or exchange of personal-use property is a capital gain and is taxable. Aarp free tax preparation locations Loss from the sale or exchange of personal-use property is not deductible. Aarp free tax preparation locations You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Aarp free tax preparation locations For information on casualties and thefts, see chapter 11. Aarp free tax preparation locations Long and Short Term Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. Aarp free tax preparation locations The time you own an asset before disposing of it is the holding period. Aarp free tax preparation locations If you hold a capital asset 1 year or less, the gain or loss resulting from its disposition is short term. Aarp free tax preparation locations Report it in Part I of Schedule D (Form 1040). Aarp free tax preparation locations If you hold a capital asset longer than 1 year, the gain or loss resulting from its disposition is long term. Aarp free tax preparation locations Report it in Part II of Schedule D (Form 1040). Aarp free tax preparation locations Holding period. Aarp free tax preparation locations   To figure if you held property longer than 1 year, start counting on the day after the day you acquired the property. Aarp free tax preparation locations The day you disposed of the property is part of your holding period. Aarp free tax preparation locations Example. Aarp free tax preparation locations If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. Aarp free tax preparation locations If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year. Aarp free tax preparation locations Inherited property. Aarp free tax preparation locations   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. Aarp free tax preparation locations This rule does not apply to livestock used in a farm business. Aarp free tax preparation locations See Holding period under Livestock , later. Aarp free tax preparation locations Nonbusiness bad debt. Aarp free tax preparation locations   A nonbusiness bad debt is a short-term capital loss, deductible in the year the debt becomes worthless. Aarp free tax preparation locations See chapter 4 of Publication 550. Aarp free tax preparation locations Nontaxable exchange. Aarp free tax preparation locations   If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. Aarp free tax preparation locations That is, it begins on the same day as your holding period for the old property. Aarp free tax preparation locations Gift. Aarp free tax preparation locations   If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. Aarp free tax preparation locations Real property. Aarp free tax preparation locations   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, on the day after you took possession of it and assumed the burdens and privileges of ownership. Aarp free tax preparation locations   However, taking possession of real property under an option agreement is not enough to start the holding period. Aarp free tax preparation locations The holding period cannot start until there is an actual contract of sale. Aarp free tax preparation locations The holding period of the seller cannot end before that time. Aarp free tax preparation locations Figuring Net Gain or Loss The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. Aarp free tax preparation locations Net short-term capital gain or loss. Aarp free tax preparation locations   Combine your short-term capital gains and losses. Aarp free tax preparation locations Do this by adding all of your short-term capital gains. Aarp free tax preparation locations Then add all of your short-term capital losses. Aarp free tax preparation locations Subtract the lesser total from the greater. Aarp free tax preparation locations The difference is your net short-term capital gain or loss. Aarp free tax preparation locations Net long-term capital gain or loss. Aarp free tax preparation locations   Follow the same steps to combine your long-term capital gains and losses. Aarp free tax preparation locations The result is your net long-term capital gain or loss. Aarp free tax preparation locations Net gain. Aarp free tax preparation locations   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. Aarp free tax preparation locations However, part of your gain (but not more than your net capital gain) may be taxed at a lower rate than the rate of tax on your ordinary income. Aarp free tax preparation locations See Capital Gains Tax Rates , later. Aarp free tax preparation locations Net loss. Aarp free tax preparation locations   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. Aarp free tax preparation locations But there are limits on how much loss you can deduct and when you can deduct it. Aarp free tax preparation locations See Treatment of Capital Losses next. Aarp free tax preparation locations Treatment of Capital Losses If your capital losses are more than your capital gains, you must claim the difference even if you do not have ordinary income to offset it. Aarp free tax preparation locations For taxpayers other than corporations, the yearly limit on the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). Aarp free tax preparation locations If your other income is low, you may not be able to use the full $3,000. Aarp free tax preparation locations The part of the $3,000 you cannot use becomes part of your capital loss carryover (discussed next). Aarp free tax preparation locations Capital loss carryover. Aarp free tax preparation locations   Generally, you have a capital loss carryover if either of the following situations applies to you. Aarp free tax preparation locations Your net loss on Schedule D (Form 1040), is more than the yearly limit. Aarp free tax preparation locations Your taxable income without your deduction for exemptions is less than zero. Aarp free tax preparation locations If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carry over to 2014. Aarp free tax preparation locations    To figure your capital loss carryover from 2013 to 2014, you will need a copy of your 2013 Form 1040 and Schedule D (Form 1040). Aarp free tax preparation locations Capital Gains Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. Aarp free tax preparation locations These lower rates are called the maximum capital gains rates. Aarp free tax preparation locations The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. Aarp free tax preparation locations See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). Aarp free tax preparation locations Also see Publication 550. Aarp free tax preparation locations Noncapital Assets Noncapital assets include property such as inventory and depreciable property used in a trade or business. Aarp free tax preparation locations A list of properties that are not capital assets is provided in the Instructions for Schedule D (Form 1040). Aarp free tax preparation locations Property held for sale in the ordinary course of your farm business. Aarp free tax preparation locations   Property you hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is a noncapital asset. Aarp free tax preparation locations Gain or loss from sales or other dispositions of this property is reported on Schedule F (Form 1040) (not on Schedule D (Form 1040) or Form 4797). Aarp free tax preparation locations The treatment of this property is discussed in chapter 3. Aarp free tax preparation locations Land and depreciable properties. Aarp free tax preparation locations   Land and depreciable property you use in farming are not capital assets. Aarp free tax preparation locations Noncapital assets also include livestock held for draft, breeding, dairy, or sporting purposes. Aarp free tax preparation locations However, your gains and losses from sales and exchanges of your farmland and depreciable properties must be considered together with certain other transactions to determine whether the gains and losses are treated as capital or ordinary gains and losses. Aarp free tax preparation locations The sales of these business assets are reported on Form 4797. Aarp free tax preparation locations See chapter 9 for more information. Aarp free tax preparation locations Hedging (Commodity Futures) Hedging transactions are transactions that you enter into in the normal course of business primarily to manage the risk of interest rate or price changes, or currency fluctuations, with respect to borrowings, ordinary property, or ordinary obligations. Aarp free tax preparation locations Ordinary property or obligations are those that cannot produce capital gain or loss if sold or exchanged. Aarp free tax preparation locations A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a future date for a fixed price. Aarp free tax preparation locations The holder of an option on a futures contract has the right (but not the obligation) for a specified period of time to enter into a futures contract to buy or sell at a particular price. Aarp free tax preparation locations A forward contract is generally similar to a futures contract except that the terms are not standardized and the contract is not exchange traded. Aarp free tax preparation locations Businesses may enter into commodity futures contracts or forward contracts and may acquire options on commodity futures contracts as either of the following. Aarp free tax preparation locations Hedging transactions. Aarp free tax preparation locations Transactions that are not hedging transactions. Aarp free tax preparation locations Futures transactions with exchange-traded commodity futures contracts that are not hedging transactions, generally, result in capital gain or loss and are subject to the mark-to-market rules discussed in Publication 550. Aarp free tax preparation locations There is a limit on the amount of capital losses you can deduct each year. Aarp free tax preparation locations Hedging transactions are not subject to the mark-to-market rules. Aarp free tax preparation locations If, as a farmer-producer, to protect yourself from the risk of unfavorable price fluctuations, you enter into commodity forward contracts, futures contracts, or options on futures contracts and the contracts cover an amount of the commodity within your range of production, the transactions are generally considered hedging transactions. Aarp free tax preparation locations They can take place at any time you have the commodity under production, have it on hand for sale, or reasonably expect to have it on hand. Aarp free tax preparation locations The gain or loss on the termination of these hedges is generally ordinary gain or loss. Aarp free tax preparation locations Farmers who file their income tax returns on the cash method report any profit or loss on the hedging transaction on Schedule F, line 8. Aarp free tax preparation locations Gains or losses from hedging transactions that hedge supplies of a type regularly used or consumed in the ordinary course of your trade or business may be ordinary gains or losses. Aarp free tax preparation locations Examples include fuel and feed. Aarp free tax preparation locations If you have numerous transactions in the commodity futures market during the year, you must be able to show which transactions are hedging transactions. Aarp free tax preparation locations Clearly identify a hedging transaction on your books and records before the end of the day you entered into the transaction. Aarp free tax preparation locations It may be helpful to have separate brokerage accounts for your hedging and speculation transactions. Aarp free tax preparation locations Retain the identification of each hedging transaction with your books and records. Aarp free tax preparation locations Also, identify the item(s) or aggregate risk that is being hedged in your records. Aarp free tax preparation locations Although the identification of the hedging transaction must be made before the end of the day it was entered into, you have 35 days after entering into the transaction to identify the hedged item(s) or risk. Aarp free tax preparation locations For more information on the tax treatment of futures and options contracts, see Commodity Futures and Section 1256 Contracts Marked to Market in Publication 550. Aarp free tax preparation locations Accounting methods for hedging transactions. Aarp free tax preparation locations   The accounting method you use for a hedging transaction must clearly reflect income. Aarp free tax preparation locations This means that your accounting method must reasonably match the timing of income, deduction, gain, or loss from a hedging transaction with the timing of income, deduction, gain, or loss from the item or items being hedged. Aarp free tax preparation locations There are requirements and limits on the method you can use for certain hedging transactions. Aarp free tax preparation locations See Regulations section 1. Aarp free tax preparation locations 446-4(e) for those requirements and limits. Aarp free tax preparation locations   Hedging transactions must be accounted for under the rules stated above unless the transaction is subject to mark-to-market accounting under section 475 or you use an accounting method other than the following methods. Aarp free tax preparation locations Cash method. Aarp free tax preparation locations Farm-price method. Aarp free tax preparation locations Unit-livestock-price method. Aarp free tax preparation locations   Once you adopt a method, you must apply it consistently and must have IRS approval before changing it. Aarp free tax preparation locations   Your books and records must describe the accounting method used for each type of hedging transaction. Aarp free tax preparation locations They must also contain any additional identification necessary to verify the application of the accounting method you used for the transaction. Aarp free tax preparation locations You must make the additional identification no more than 35 days after entering into the hedging transaction. Aarp free tax preparation locations Example of a hedging transaction. Aarp free tax preparation locations   You file your income tax returns on the cash method. Aarp free tax preparation locations On July 2 you anticipate a yield of 50,000 bushels of corn this year. Aarp free tax preparation locations The December futures price is $5. Aarp free tax preparation locations 75 a bushel, but there are indications that by harvest time the price will drop. Aarp free tax preparation locations To protect yourself against a drop in the price, you enter into the following hedging transaction. Aarp free tax preparation locations You sell ten December futures contracts of 5,000 bushels each for a total of 50,000 bushels of corn at $5. Aarp free tax preparation locations 75 a bushel. Aarp free tax preparation locations   The price did not drop as anticipated but rose to $6 a bushel. Aarp free tax preparation locations In November, you sell your crop at a local elevator for $6 a bushel. Aarp free tax preparation locations You also close out your futures position by buying ten December contracts for $6 a bushel. Aarp free tax preparation locations You paid a broker's commission of $1,400 ($70 per contract) for the complete in and out position in the futures market. Aarp free tax preparation locations   The result is that the price of corn rose 25 cents a bushel and the actual selling price is $6 a bushel. Aarp free tax preparation locations Your loss on the hedge is 25 cents a bushel. Aarp free tax preparation locations In effect, the net selling price of your corn is $5. Aarp free tax preparation locations 75 a bushel. Aarp free tax preparation locations   Report the results of your futures transactions and your sale of corn separately on Schedule F. Aarp free tax preparation locations See the instructions for the 2013 Schedule F (Form 1040). Aarp free tax preparation locations   The loss on your futures transactions is $13,900, figured as follows. Aarp free tax preparation locations July 2 - Sold December corn futures (50,000 bu. Aarp free tax preparation locations @$5. Aarp free tax preparation locations 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Aarp free tax preparation locations @$6 plus $1,400 broker's commission) 301,400 Futures loss ($13,900) This loss is reported as a negative figure on Schedule F, Part I, line 8, as other income. Aarp free tax preparation locations   The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. Aarp free tax preparation locations × $6). Aarp free tax preparation locations Report it on Schedule F, Part I, line 2, as income from sales of products you raised. Aarp free tax preparation locations   Assume you were right and the price went down 25 cents a bushel. Aarp free tax preparation locations In effect, you would still net $5. Aarp free tax preparation locations 75 a bushel, figured as follows. Aarp free tax preparation locations Sold cash corn, per bushel $5. Aarp free tax preparation locations 50 Gain on hedge, per bushel . Aarp free tax preparation locations 25 Net price, per bushel $5. Aarp free tax preparation locations 75       The gain on your futures transactions would have been $11,100, figured as follows. Aarp free tax preparation locations July 2 - Sold December corn futures (50,000 bu. Aarp free tax preparation locations @$5. Aarp free tax preparation locations 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Aarp free tax preparation locations @$5. Aarp free tax preparation locations 50 plus $1,400 broker's commission) 276,400 Futures gain $11,100 The $11,100 is reported on Schedule F, Part I, line 8, as other income. Aarp free tax preparation locations   The proceeds from the sale of your corn at the local elevator, $275,000, are reported on Schedule F, Part I, line 2, as income from sales of products you raised. Aarp free tax preparation locations Livestock This part discusses the sale or exchange of livestock used in your farm business. Aarp free tax preparation locations Gain or loss from the sale or exchange of this livestock may qualify as a section 1231 gain or loss. Aarp free tax preparation locations However, any part of the gain that is ordinary income from the recapture of depreciation is not included as section 1231 gain. Aarp free tax preparation locations See chapter 9 for more information on section 1231 gains and losses and the recapture of depreciation under section 1245. Aarp free tax preparation locations The rules discussed here do not apply to the sale of livestock held primarily for sale to customers. Aarp free tax preparation locations The sale of this livestock is reported on Schedule F. Aarp free tax preparation locations See chapter 3. Aarp free tax preparation locations Also, special rules apply to sales or exchanges caused by weather-related conditions. Aarp free tax preparation locations See chapter 3. Aarp free tax preparation locations Holding period. Aarp free tax preparation locations   The sale or exchange of livestock used in your farm business (defined below) qualifies as a section 1231 transaction if you held the livestock for 12 months or more (24 months or more for horses and cattle). Aarp free tax preparation locations Livestock. Aarp free tax preparation locations   For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. Aarp free tax preparation locations Also, for section 1231 transactions, livestock does not include chickens, turkeys, pigeons, geese, emus, ostriches, rheas, or other birds, fish, frogs, reptiles, etc. Aarp free tax preparation locations Livestock used in farm business. Aarp free tax preparation locations   If livestock is held primarily for draft, breeding, dairy, or sporting purposes, it is used in your farm business. Aarp free tax preparation locations The purpose for which an animal is held ordinarily is determined by a farmer's actual use of the animal. Aarp free tax preparation locations An animal is not held for draft, breeding, dairy, or sporting purposes merely because it is suitable for that purpose, or because it is held for sale to other persons for use by them for that purpose. Aarp free tax preparation locations However, a draft, breeding, or sporting purpose may be present if an animal is disposed of within a reasonable time after it is prevented from its intended use or made undesirable as a result of an accident, disease, drought, or unfitness of the animal. Aarp free tax preparation locations Example 1. Aarp free tax preparation locations You discover an animal that you intend to use for breeding purposes is sterile. Aarp free tax preparation locations You dispose of it within a reasonable time. Aarp free tax preparation locations This animal was held for breeding purposes. Aarp free tax preparation locations Example 2. Aarp free tax preparation locations You retire and sell your entire herd, including young animals that you would have used for breeding or dairy purposes had you remained in business. Aarp free tax preparation locations These young animals were held for breeding or dairy purposes. Aarp free tax preparation locations Also, if you sell young animals to reduce your breeding or dairy herd because of drought, these animals are treated as having been held for breeding or dairy purposes. Aarp free tax preparation locations See Sales Caused by Weather-Related Conditions in chapter 3. Aarp free tax preparation locations Example 3. Aarp free tax preparation locations You are in the business of raising hogs for slaughter. Aarp free tax preparation locations Customarily, before selling your sows, you obtain a single litter of pigs that you will raise for sale. Aarp free tax preparation locations You sell the brood sows after obtaining the litter. Aarp free tax preparation locations Even though you hold these brood sows for ultimate sale to customers in the ordinary course of your business, they are considered to be held for breeding purposes. Aarp free tax preparation locations Example 4. Aarp free tax preparation locations You are in the business of raising registered cattle for sale to others for use as breeding cattle. Aarp free tax preparation locations The business practice is to breed the cattle before sale to establish their fitness as registered breeding cattle. Aarp free tax preparation locations Your use of the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. Aarp free tax preparation locations Such use does not demonstrate that you are holding the cattle for breeding purposes. Aarp free tax preparation locations However, those cattle you held as additions or replacements to your own breeding herd to produce calves are considered to be held for breeding purposes, even though they may not actually have produced calves. Aarp free tax preparation locations The same applies to hog and sheep breeders. Aarp free tax preparation locations Example 5. Aarp free tax preparation locations You breed, raise, and train horses for racing purposes. Aarp free tax preparation locations Every year you cull horses from your racing stable. Aarp free tax preparation locations In 2013, you decided that to prevent your racing stable from getting too large to be effectively operated, you must cull six horses that had been raced at public tracks in 2012. Aarp free tax preparation locations These horses are all considered held for sporting purposes. Aarp free tax preparation locations Figuring gain or loss on the cash method. Aarp free tax preparation locations   Farmers or ranchers who use the cash method of accounting figure their gain or loss on the sale of livestock used in their farming business as follows. Aarp free tax preparation locations Raised livestock. Aarp free tax preparation locations   Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. Aarp free tax preparation locations Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expenses. Aarp free tax preparation locations The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised. Aarp free tax preparation locations However, see Uniform Capitalization Rules in chapter 6. Aarp free tax preparation locations Purchased livestock. Aarp free tax preparation locations   The gross sales price minus your adjusted basis and any expenses of sale is the gain or loss. Aarp free tax preparation locations Example. Aarp free tax preparation locations A farmer sold a breeding cow on January 8, 2013, for $1,250. Aarp free tax preparation locations Expenses of the sale were $125. Aarp free tax preparation locations The cow was bought July 2, 2009, for $1,300. Aarp free tax preparation locations Depreciation (not less than the amount allowable) was $867. Aarp free tax preparation locations Gross sales price $1,250 Cost (basis) $1,300   Minus: Depreciation deduction 867   Unrecovered cost (adjusted basis) $ 433   Expense of sale 125 558 Gain realized $ 692 Converted Wetland and Highly Erodible Cropland Special rules apply to dispositions of land converted to farming use after March 1, 1986. Aarp free tax preparation locations Any gain realized on the disposition of converted wetland or highly erodible cropland is treated as ordinary income. Aarp free tax preparation locations Any loss on the disposition of such property is treated as a long-term capital loss. Aarp free tax preparation locations Converted wetland. Aarp free tax preparation locations   This is generally land that was drained or filled to make the production of agricultural commodities possible. Aarp free tax preparation locations It includes converted wetland held by the person who originally converted it or held by any other person who used the converted wetland at any time after conversion for farming. Aarp free tax preparation locations   A wetland (before conversion) is land that meets all the following conditions. Aarp free tax preparation locations It is mostly soil that, in its undrained condition, is saturated, flooded, or ponded long enough during a growing season to develop an oxygen-deficient state that supports the growth and regeneration of plants growing in water. Aarp free tax preparation locations It is saturated by surface or groundwater at a frequency and duration sufficient to support mostly plants that are adapted for life in saturated soil. Aarp free tax preparation locations It supports, under normal circumstances, mostly plants that grow in saturated soil. Aarp free tax preparation locations Highly erodible cropland. Aarp free tax preparation locations   This is cropland subject to erosion that you used at any time for farming purposes other than grazing animals. Aarp free tax preparation locations Generally, highly erodible cropland is land currently classified by the Department of Agriculture as Class IV, VI, VII, or VIII under its classification system. Aarp free tax preparation locations Highly erodible cropland also includes land that would have an excessive average annual erosion rate in relation to the soil loss tolerance level, as determined by the Department of Agriculture. Aarp free tax preparation locations Successor. Aarp free tax preparation locations   Converted wetland or highly erodible cropland is also land held by any person whose basis in the land is figured by reference to the adjusted basis of a person in whose hands the property was converted wetland or highly erodible cropland. Aarp free tax preparation locations Timber Standing timber you held as investment property is a capital asset. Aarp free tax preparation locations Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. Aarp free tax preparation locations If you held the timber primarily for sale to customers, it is not a capital asset. Aarp free tax preparation locations Gain or loss on its sale is ordinary business income or loss. Aarp free tax preparation locations It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). Aarp free tax preparation locations See the Instructions for Schedule F (Form 1040). Aarp free tax preparation locations Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. Aarp free tax preparation locations Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc. Aarp free tax preparation locations , are ordinary farm income and expenses reported on Schedule F. Aarp free tax preparation locations Different rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange or you enter into a cutting contract, discussed below. Aarp free tax preparation locations Timber considered cut. Aarp free tax preparation locations   Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Aarp free tax preparation locations This is true whether the timber is cut under contract or whether you cut it yourself. Aarp free tax preparation locations Christmas trees. Aarp free tax preparation locations   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. Aarp free tax preparation locations They qualify for both rules discussed below. Aarp free tax preparation locations Election to treat cutting as a sale or exchange. Aarp free tax preparation locations   Under the general rule, the cutting of timber results in no gain or loss. Aarp free tax preparation locations It is not until a sale or exchange occurs that gain or loss is realized. Aarp free tax preparation locations But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year it is cut. Aarp free tax preparation locations Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. Aarp free tax preparation locations Any later sale results in ordinary business income or loss. Aarp free tax preparation locations See the example below. Aarp free tax preparation locations   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or use in your trade or business. Aarp free tax preparation locations Making the election. Aarp free tax preparation locations   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of your gain or loss. Aarp free tax preparation locations You do not have to make the election in the first year you cut the timber. Aarp free tax preparation locations You can make it in any year to which the election would apply. Aarp free tax preparation locations If the timber is partnership property, the election is made on the partnership return. Aarp free tax preparation locations This election cannot be made on an amended return. Aarp free tax preparation locations   Once you have made the election, it remains in effect for all later years unless you revoke it. Aarp free tax preparation locations Election under section 631(a) may be revoked. Aarp free tax preparation locations   If you previously elected for any tax year ending before October 23, 2004, to treat the cutting of timber as a sale or exchange under section 631(a), you may revoke this election without the consent of the IRS for any tax year ending after October 22, 2004. Aarp free tax preparation locations The prior election (and revocation) is disregarded for purposes of making a subsequent election. Aarp free tax preparation locations See Form T (Timber), Forest Activities Schedule, for more information. Aarp free tax preparation locations Gain or loss. Aarp free tax preparation locations   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its FMV on the first day of your tax year in which it is cut. Aarp free tax preparation locations   Your adjusted basis for depletion of cut timber is based on the number of units (board feet, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. Aarp free tax preparation locations Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 and Regulations section 1. Aarp free tax preparation locations 611-3. Aarp free tax preparation locations   Depletion of timber is discussed in chapter 7. Aarp free tax preparation locations Example. Aarp free tax preparation locations   In April 2013, you owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Aarp free tax preparation locations It had an adjusted basis for depletion of $40 per MBF. Aarp free tax preparation locations You are a calendar year taxpayer. Aarp free tax preparation locations On January 1, 2013, the timber had a FMV of $350 per MBF. Aarp free tax preparation locations It was cut in April for sale. Aarp free tax preparation locations On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Aarp free tax preparation locations You report the difference between the FMV and your adjusted basis for depletion as a gain. Aarp free tax preparation locations This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as a capital gain or as ordinary gain. Aarp free tax preparation locations You figure your gain as follows. Aarp free tax preparation locations FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000   The FMV becomes your basis in the cut timber, and a later sale of the cut timber, including any by-product or tree tops, will result in ordinary business income or loss. Aarp free tax preparation locations Outright sales of timber. Aarp free tax preparation locations   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined later). Aarp free tax preparation locations However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see Date of disposal below). Aarp free tax preparation locations Cutting contract. Aarp free tax preparation locations   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Aarp free tax preparation locations You are the owner of the timber. Aarp free tax preparation locations You held the timber longer than 1 year before its disposal. Aarp free tax preparation locations You kept an economic interest in the timber. Aarp free tax preparation locations   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. Aarp free tax preparation locations   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. Aarp free tax preparation locations Include this amount on Form 4797 along with your other section 1231 gains or losses. Aarp free tax preparation locations Date of disposal. Aarp free tax preparation locations   The date of disposal is the date the timber is cut. Aarp free tax preparation locations However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. Aarp free tax preparation locations   This election applies only to figure the holding period of the timber. Aarp free tax preparation locations It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Aarp free tax preparation locations   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Aarp free tax preparation locations The statement must identify the advance payments subject to the election and the contract under which they were made. Aarp free tax preparation locations   If you timely filed your return for the year you received payment without making the election, you can still make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). Aarp free tax preparation locations Attach the statement to the amended return and write “Filed pursuant to section 301. Aarp free tax preparation locations 9100-2” at the top of the statement. Aarp free tax preparation locations File the amended return at the same address the original return was filed. Aarp free tax preparation locations Owner. Aarp free tax preparation locations   An owner is any person who owns an interest in the timber, including a sublessor and the holder of a contract to cut the timber. Aarp free tax preparation locations You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. Aarp free tax preparation locations Tree stumps. Aarp free tax preparation locations   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. Aarp free tax preparation locations Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Aarp free tax preparation locations However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Aarp free tax preparation locations Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Aarp free tax preparation locations   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Aarp free tax preparation locations Sale of a Farm The sale of your farm will usually involve the sale of both nonbusiness property (your home) and business property (the land and buildings used in the farm operation and perhaps machinery and livestock). Aarp free tax preparation locations If you have a gain from the sale, you may be allowed to exclude the gain on your home. Aarp free tax preparation locations For more information, see Publication 523, Selling Your Home. Aarp free tax preparation locations The gain on the sale of your business property is taxable. Aarp free tax preparation locations A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. Aarp free tax preparation locations Your taxable gain or loss on the sale of property used in your farm business is taxed under the rules for section 1231 transactions. Aarp free tax preparation locations See chapter 9. Aarp free tax preparation locations Losses from personal-use property, other than casualty or theft losses, are not deductible. Aarp free tax preparation locations If you receive payments for your farm in installments, your gain is taxed over the period of years the payments are received, unless you elect not to use the installment method of reporting the gain. Aarp free tax preparation locations See chapter 10 for information about installment sales. Aarp free tax preparation locations When you sell your farm, the gain or loss on each asset is figured separately. Aarp free tax preparation locations The tax treatment of gain or loss on the sale of each asset is determined by the classification of the asset. Aarp free tax preparation locations Each of the assets sold must be classified as one of the following. Aarp free tax preparation locations Capital asset held 1 year or less. Aarp free tax preparation locations Capital asset held longer than 1 year. Aarp free tax preparation locations Property (including real estate) used in your business and held 1 year or less (including draft, breeding, dairy, and sporting animals held less than the holding periods discussed earlier under Livestock ). Aarp free tax preparation locations Property (including real estate) used in your business and held longer than 1 year (including only draft, breeding, dairy, and sporting animals held for the holding periods discussed earlier). Aarp free tax preparation locations Property held primarily for sale or which is of the kind that would be included in inventory if on hand at the end of your tax year. Aarp free tax preparation locations Allocation of consideration paid for a farm. Aarp free tax preparation locations   The sale of a farm for a lump sum is considered a sale of each individual asset rather than a single asset. Aarp free tax preparation locations The residual method is required only if the group of assets sold constitutes a trade or business. Aarp free tax preparation locations This method determines gain or loss from the transfer of each asset. Aarp free tax preparation locations It also determines the buyer's basis in the business assets. Aarp free tax preparation locations For more information, see Sale of a Business in chapter 2 of Publication 544. Aarp free tax preparation locations Property used in farm operation. Aarp free tax preparation locations   The rules for excluding the gain on the sale of your home, described later under Sale of your home , do not apply to the property used for your farming business. Aarp free tax preparation locations Recognized gains and losses on business property must be reported on your return for the year of the sale. Aarp free tax preparation locations If the property was held longer than 1 year, it may qualify for section 1231 treatment (see chapter 9). Aarp free tax preparation locations Example. Aarp free tax preparation locations You sell your farm, including your main home, which you have owned since December 2001. Aarp free tax preparation locations You realize gain on the sale as follows. Aarp free tax preparation locations   Farm   Farm   With Home Without   Home Only Home Selling price $382,000 $158,000 $224,000 Cost (or other basis) 240,000 110,000 130,000 Gain $142,000 $48,000 $94,000 You must report the $94,000 gain from the sale of the property used in your farm business. Aarp free tax preparation locations All or a part of that gain may have to be reported as ordinary income from the recapture of depreciation or soil and water conservation expenses. Aarp free tax preparation locations Treat the balance as section 1231 gain. Aarp free tax preparation locations The $48,000 gain from the sale of your home is not taxable as long as you meet the requirements explained later under Sale of your home . Aarp free tax preparation locations Partial sale. Aarp free tax preparation locations   If you sell only part of your farm, you must report any recognized gain or loss on the sale of that part on your tax return for the year of the sale. Aarp free tax preparation locations You cannot wait until you have sold enough of the farm to recover its entire cost before reporting gain or loss. Aarp free tax preparation locations For a detailed discussion on installment sales, see Publication 544. Aarp free tax preparation locations Adjusted basis of the part sold. Aarp free tax preparation locations   This is the properly allocated part of your original cost or other basis of the entire farm plus or minus necessary adjustments for improvements, depreciation, etc. Aarp free tax preparation locations , on the part sold. Aarp free tax preparation locations If your home is on the farm, you must properly adjust the basis to exclude those costs from your farm asset costs, as discussed below under Sale of your home . Aarp free tax preparation locations Example. Aarp free tax preparation locations You bought a 600-acre farm for $700,000. Aarp free tax preparation locations The farm included land and buildings. Aarp free tax preparation locations The purchase contract designated $600,000 of the purchase price to the land. Aarp free tax preparation locations You later sold 60 acres of land on which you had installed a fence. Aarp free tax preparation locations Your adjusted basis for the part of your farm sold is $60,000 (1/10 of $600,000), plus any unrecovered cost (cost not depreciated) of the fence on the 60 acres at the time of sale. Aarp free tax preparation locations Use this amount to determine your gain or loss on the sale of the 60 acres. Aarp free tax preparation locations Assessed values for local property taxes. Aarp free tax preparation locations   If you paid a flat sum for the entire farm and no other facts are available for properly allocating your original cost or other basis between the land and the buildings, you can use the assessed values for local property taxes for the year of purchase to allocate the costs. Aarp free tax preparation locations Example. Aarp free tax preparation locations Assume that in the preceding example there was no breakdown of the $700,000 purchase price between land and buildings. Aarp free tax preparation locations However, in the year of purchase, local taxes on the entire property were based on assessed valuations of $420,000 for land and $140,000 for improvements, or a total of $560,000. Aarp free tax preparation locations The assessed valuation of the land is 3/4 (75%) of the total assessed valuation. Aarp free tax preparation locations Multiply the $700,000 total purchase price by 75% to figure basis of $525,000 for the 600 acres of land. Aarp free tax preparation locations The unadjusted basis of the 60 acres you sold would then be $52,500 (1/10 of $525,000). Aarp free tax preparation locations Sale of your home. Aarp free tax preparation locations   Your home is a capital asset and not property used in the trade or business of farming. Aarp free tax preparation locations If you sell a farm that includes a house you and your family occupy, you must determine the part of the selling price and the part of the cost or other basis allocable to your home. Aarp free tax preparation locations Your home includes the immediate surroundings and outbuildings relating to it that are not used for business purposes. Aarp free tax preparation locations   If you use part of your home for business, you must make an appropriate adjustment to the basis for depreciation allowed or allowable. Aarp free tax preparation locations For more information on basis, see chapter 6. Aarp free tax preparation locations More information. Aarp free tax preparation locations   For more information on selling your home, see Publication 523. Aarp free tax preparation locations Gain from condemnation. Aarp free tax preparation locations   If you have a gain from a condemnation or sale under threat of condemnation, you may use the preceding rules for excluding the gain, rather than the rules discussed under Postponing Gain in chapter 11. Aarp free tax preparation locations However, any gain that cannot be excluded (because it is more than the limit) may be postponed under the rules discussed under Postponing Gain in chapter 11. Aarp free tax preparation locations Foreclosure or Repossession If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. Aarp free tax preparation locations The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Aarp free tax preparation locations This is true even if you voluntarily return the property to the lender. Aarp free tax preparation locations You may also realize ordinary income from cancellation of debt if the loan balance is more than the FMV of the property. Aarp free tax preparation locations Buyer's (borrower's) gain or loss. Aarp free tax preparation locations   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. Aarp free tax preparation locations The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Aarp free tax preparation locations See Determining Gain or Loss , earlier. Aarp free tax preparation locations Worksheet 8-1. Aarp free tax preparation locations Worksheet for Foreclosures andRepossessions Part 1. Aarp free tax preparation locations Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Aarp free tax preparation locations Complete this part only if you were personally liable for the debt. Aarp free tax preparation locations Otherwise, go to Part 2. Aarp free tax preparation locations   1. Aarp free tax preparation locations Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable after the transfer of property   2. Aarp free tax preparation locations Enter the Fair Market Value of the transferred property   3. Aarp free tax preparation locations Ordinary income from cancellation of debt upon foreclosure or repossession. Aarp free tax preparation locations * Subtract line 2 from line 1. Aarp free tax preparation locations If zero or less, enter -0-   Part 2. Aarp free tax preparation locations Figure your gain or loss from foreclosure or repossession. Aarp free tax preparation locations   4. Aarp free tax preparation locations If you completed Part 1, enter the smaller of line 1 or line 2. Aarp free tax preparation locations If you did not complete Part 1, enter the outstanding debt immediately before the transfer of property   5. Aarp free tax preparation locations Enter any proceeds you received from the foreclosure sale   6. Aarp free tax preparation locations Add lines 4 and 5   7. Aarp free tax preparation locations Enter the adjusted basis of the transferred property   8. Aarp free tax preparation locations Gain or loss from foreclosure or repossession. Aarp free tax preparation locations Subtract line 7  from line 6   * The income may not be taxable. Aarp free tax preparation locations See Cancellation of debt . Aarp free tax preparation locations    You can use Worksheet 8-1 to figure your gain or loss from a foreclosure or repossession. Aarp free tax preparation locations Amount realized on a nonrecourse debt. Aarp free tax preparation locations   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full amount of the debt canceled by the transfer. Aarp free tax preparation locations The full canceled debt is included in the amount realized even if the fair market value of the property is less than the canceled debt. Aarp free tax preparation locations Example 1. Aarp free tax preparation locations Ann paid $200,000 for land used in her farming business. Aarp free tax preparation locations She paid $15,000 down and borrowed the remaining $185,000 from a bank. Aarp free tax preparation locations Ann is not personally liable for the loan (nonrecourse debt), but pledges the land as security. Aarp free tax preparation locations The bank foreclosed on the loan 2 years after Ann stopped making payments. Aarp free tax preparation locations When the bank foreclosed, the balance due on the loan was $180,000 and the FMV of the land was $170,000. Aarp free tax preparation locations The amount Ann realized on the foreclosure was $180,000, the debt canceled by the foreclosure. Aarp free tax preparation locations She figures her gain or loss on Form 4797, Part I, by comparing the amount realized ($180,000) with her adjusted basis ($200,000). Aarp free tax preparation locations She has a $20,000 deductible loss. Aarp free tax preparation locations Example 2. Aarp free tax preparation locations Assume the same facts as in Example 1 except the FMV of the land was $210,000. Aarp free tax preparation locations The result is the same. Aarp free tax preparation locations The amount Ann realized on the foreclosure is $180,000, the debt canceled by the foreclosure. Aarp free tax preparation locations Because her adjusted basis is $200,000, she has a deductible loss of $20,000, which she reports on Form 4797, Part I. Aarp free tax preparation locations Amount realized on a recourse debt. Aarp free tax preparation locations   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. Aarp free tax preparation locations   You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. Aarp free tax preparation locations The amount realized does not include the canceled debt that is your income from cancellation of debt. Aarp free tax preparation locations See Cancellation of debt , later. Aarp free tax preparation locations Example 3. Aarp free tax preparation locations Assume the same facts as in Example 1 above except Ann is personally liable for the loan (recourse debt). Aarp free tax preparation locations In this case, the amount she realizes is $170,000. Aarp free tax preparation locations This is the canceled debt ($180,000) up to the FMV of the land ($170,000). Aarp free tax preparation locations Ann figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($200,000). Aarp free tax preparation locations She has a $30,000 deductible loss, which she figures on Form 4797, Part I. Aarp free tax preparation locations She is also treated as receiving ordinary income from cancellation of debt. Aarp free tax preparation locations That income is $10,000 ($180,000 − $170,000). Aarp free tax preparation locations This is the part of the canceled debt not included in the amount realized. Aarp free tax preparation locations She reports this as other income on Schedule F, line 8. Aarp free tax preparation locations Seller's (lender's) gain or loss on repossession. Aarp free tax preparation locations   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. Aarp free tax preparation locations For more information, see Repossession in Publication 537, Installment Sales. Aarp free tax preparation locations Cancellation of debt. Aarp free tax preparation locations   If property that is repossessed or foreclosed upon secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the FMV of the property. Aarp free tax preparation locations This income is separate from any gain or loss realized from the foreclosure or repossession. Aarp free tax preparation locations Report the income from cancellation of a business debt on Schedule F, line 8. Aarp free tax preparation locations Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Aarp free tax preparation locations    You can use Worksheet 8-1 to figure your income from cancellation of debt. Aarp free tax preparation locations   However, income from cancellation of debt is not taxed if any of the following apply. Aarp free tax preparation locations The cancellation is intended as a gift. Aarp free tax preparation locations The debt is qualified farm debt (see chapter 3). Aarp free tax preparation locations The debt is qualified real property business debt (see chapter 5 of Publication 334). Aarp free tax preparation locations You are insolvent or bankrupt (see  chapter 3). Aarp free tax preparation locations The debt is qualified principal residence indebtedness (see chapter 3). Aarp free tax preparation locations   Use Form 982 to report the income exclusion. Aarp free tax preparation locations Abandonment The abandonment of property is a disposition of property. Aarp free tax preparation locations You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership, but without passing it on to anyone else. Aarp free tax preparation locations Business or investment property. Aarp free tax preparation locations   Loss from abandonment of business or investment property is deductible as a loss. Aarp free tax preparation locations Loss from abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Aarp free tax preparation locations If your adjusted basis is more than the amount you realize (if any), then you have a loss. Aarp free tax preparation locations If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Aarp free tax preparation locations This rule also applies to leasehold improvements the lessor made for the lessee. Aarp free tax preparation locations However, if the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed earlier under Foreclosure or Repossession . Aarp free tax preparation locations   If the abandoned property is secured by debt, special rules apply. Aarp free tax preparation locations The tax consequences of abandonment of property that secures a debt depend on whether you are personally liable for the debt (recourse debt) or were not personally liable for the debt (nonrecourse debt). Aarp free tax preparation locations For more information, see chapter 3 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). Aarp free tax preparation locations The abandonment loss is deducted in the tax year in which the loss is sustained. Aarp free tax preparation locations Report the loss on Form 4797, Part II, line 10. Aarp free tax preparation locations Personal-use property. Aarp free tax preparation locations   You cannot deduct any loss from abandonment of your home or other property held for personal use. Aarp free tax preparation locations Canceled debt. Aarp free tax preparation locations   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you will realize ordinary income equal to the canceled debt. Aarp free tax preparation locations This income is separate from any loss realized from abandonment of the property. Aarp free tax preparation locations Report income from cancellation of a debt related to a business or rental activity as business or rental income. Aarp free tax preparation locations Report income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Aarp free tax preparation locations   However, income from cancellation of debt is not taxed in certain circumstances. Aarp free tax preparation locations See Cancellation of debt earlier under Foreclosure or Repossession . Aarp free tax preparation locations Forms 1099-A and 1099-C. Aarp free tax preparation locations   A lender who acquires an interest in your property in a foreclosure, repossession, or abandonment should send you Form 1099-A showing the information you need to figure your loss from the foreclosure, repossession, or abandonment. Aarp free tax preparation locations However, if the lender cancels part of your debt and the lender must file Form 1099-C, the lender may include the information about the foreclosure, repossession, or abandonment on that form instead of Form 1099-A. Aarp free tax preparation locations The lender must file Form 1099-C and send you a copy if the canceled debt is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Aarp free tax preparation locations For foreclosures, repossessions, abandonments of property, and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Aarp free tax preparation locations Prev  Up  Next   Home   More Online Publications
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The Aarp Free Tax Preparation Locations

Aarp free tax preparation locations Publication 929 - Main Content Table of Contents Part 1. Aarp free tax preparation locations Rules for All Dependents Filing RequirementsEarned Income Only Unearned Income Only Both Earned and Unearned Income Other Filing Requirements Should a Return Be Filed Even If Not Required? Responsibility for Child's ReturnThird party designee. Aarp free tax preparation locations Designated as representative. Aarp free tax preparation locations IRS notice. Aarp free tax preparation locations Standard DeductionStandard Deduction of Zero Dependent's Own Exemption Withholding From WagesExceptions. Aarp free tax preparation locations Part 2. Aarp free tax preparation locations Tax on Unearned Income of Certain ChildrenWhich Parent's Return To Use Parent's Election To Report Child's Interest and DividendsEffect of Making the Election Figuring Child's Income Figuring Additional Tax Tax for Certain Children Who Have Unearned IncomeProviding Parental Information (Form 8615, Lines A–C) Step 1. Aarp free tax preparation locations Figuring the Child's Net Unearned Income (Form 8615, Part I) Step 2. Aarp free tax preparation locations Figuring a Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) Step 3. Aarp free tax preparation locations Figuring the Child's Tax (Form 8615, Part III) Alternative Minimum Tax Illustrated Example Part 1. Aarp free tax preparation locations Rules for All Dependents This part of the publication discusses the filing requirements for dependents, who is responsible for a child's return, how to figure a dependent's standard deduction and exemption (if any), and whether a dependent can claim exemption from federal income tax withholding. Aarp free tax preparation locations Filing Requirements Whether a dependent has to file a return generally depends on the amount of the dependent's earned and unearned income and whether the dependent is married, is age 65 or older, or is blind. Aarp free tax preparation locations A dependent may have to file a return even if his or her income is less than the amount that would normally require a return. Aarp free tax preparation locations See Other Filing Requirements, later. Aarp free tax preparation locations The following sections apply to dependents with: Earned income only, Unearned income only, and Both earned and unearned income. Aarp free tax preparation locations  To find out whether a dependent must file, read the section that applies, or use Table 1. Aarp free tax preparation locations Earned Income Only A dependent whose gross income is only earned income must file a return if the gross income is more than the amount listed in the following table. Aarp free tax preparation locations Marital Status Amount Single   Under 65 and not blind $6,100 Either 65 or older or blind $7,600 65 or older and blind $9,100 Married*   Under 65 and not blind $6,100 Either 65 or older or blind $7,300 65 or older and blind $8,500 *If a dependent's spouse itemizes deductions on a separate return, the dependent must file a return if the dependent has $5 or more of gross income (earned and/or unearned). Aarp free tax preparation locations Example. Aarp free tax preparation locations William is 16. Aarp free tax preparation locations His mother claims an exemption for him on her income tax return. Aarp free tax preparation locations He worked part time on weekends during the school year and full time during the summer. Aarp free tax preparation locations He earned $7,000 in wages. Aarp free tax preparation locations He did not have any unearned income. Aarp free tax preparation locations He must file a tax return because he has earned income only and his gross income is more than $6,100. Aarp free tax preparation locations If he is blind, he does not have to file a return because his gross income is not more than $7,600. Aarp free tax preparation locations Unearned Income Only A dependent whose gross income is only unearned income must file a return if the gross income is more than the amount listed in the following table. Aarp free tax preparation locations Marital Status Amount Single   Under 65 and not blind $1,000 Either 65 or older or blind $2,500 65 or older and blind $4,000 Married*   Under 65 and not blind $1,000 Either 65 or older or blind $2,200 65 or older and blind $3,400 *If a dependent's spouse itemizes deductions on a separate return, the dependent must file a return if the dependent has $5 or more of gross income (earned and/or unearned). Aarp free tax preparation locations Example. Aarp free tax preparation locations Sarah is 18 and single. Aarp free tax preparation locations Her parents can claim an exemption for her on their income tax return. Aarp free tax preparation locations She received $1,970 of taxable interest and dividend income. Aarp free tax preparation locations She did not work during the year. Aarp free tax preparation locations She must file a tax return because she has unearned income only and her gross income is more than $1,000. Aarp free tax preparation locations If she is blind, she does not have to file a return because she has unearned income only and her gross income is not more than $2,500. Aarp free tax preparation locations Election to report child's unearned income on parent's return. Aarp free tax preparation locations   A parent of a child under age 19 (or under age 24 if a full-time student) may be able to elect to include the child's interest and dividend income on the parent's return. Aarp free tax preparation locations See Parent's Election To Report Child's Interest and Dividends in Part 2. Aarp free tax preparation locations If the parent makes this election, the child does not have to file a return. Aarp free tax preparation locations Both Earned and Unearned Income A dependent who has both earned and unearned income generally must file a return if the dependent's gross income is more than line 5 of the following worksheet. Aarp free tax preparation locations Filing Requirement Worksheet for Most Dependents 1. Aarp free tax preparation locations Enter dependent's earned income plus $350     2. Aarp free tax preparation locations Minimum amount   $1,000 3. Aarp free tax preparation locations Compare lines 1 and 2. Aarp free tax preparation locations Enter the larger amount     4. Aarp free tax preparation locations Maximum amount   6,100 5. Aarp free tax preparation locations Compare lines 3 and 4. Aarp free tax preparation locations Enter the smaller amount     6. Aarp free tax preparation locations Enter the dependent's gross income. Aarp free tax preparation locations If line 6 is more than line 5, the dependent must file an income tax return. Aarp free tax preparation locations If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 6 is $5 or more. Aarp free tax preparation locations       Table 1. Aarp free tax preparation locations 2013 Filing Requirements for Dependents If your parent (or someone else) can claim you as a dependent, use this table to see if you must file a return. Aarp free tax preparation locations   See the definitions of “dependent,”“earned income,”“unearned income,” and “gross income” in the Glossary. Aarp free tax preparation locations   Single dependents—Were you either age 65 or older or blind?     No. Aarp free tax preparation locations You must file a return if any of the following apply. Aarp free tax preparation locations       Your unearned income was over $1,000. Aarp free tax preparation locations Your earned income was over $6,100. Aarp free tax preparation locations Your gross income was more than the larger of—       $1,000, or Your earned income (up to $5,750) plus $350. Aarp free tax preparation locations         Yes. Aarp free tax preparation locations You must file a return if any of the following apply. Aarp free tax preparation locations     Your unearned income was over $2,500 ($4,000 if 65 or older and blind), Your earned income was over $7,600 ($9,100 if 65 or older and blind), Your gross income was more than the larger of—       $2,500 ($4,000 if 65 or older and blind), or Your earned income (up to $5,750) plus $1,850 ($3,350 if 65 or older and blind). Aarp free tax preparation locations       Married dependents—Were you either age 65 or older or blind?     No. Aarp free tax preparation locations You must file a return if any of the following apply. Aarp free tax preparation locations       Your gross income was at least $5 and your spouse files a separate return and itemizes deductions. Aarp free tax preparation locations Your unearned income was over $1,000. Aarp free tax preparation locations Your earned income was over $6,100. Aarp free tax preparation locations Your gross income was more than the larger of—       $1,000, or Your earned income (up to $5,750) plus $350. Aarp free tax preparation locations       Yes. Aarp free tax preparation locations You must file a return if any of the following apply. Aarp free tax preparation locations       Your gross income was at least $5 and your spouse files a separate return and itemizes deductions. Aarp free tax preparation locations Your unearned income was over $2,200 ($3,400 if 65 or older and blind), Your earned income was over $7,300 ($8,500 if 65 or older and blind), Your gross income was more than the larger of—       $2,200 ($3,400 if 65 or older and blind), or Your earned income (up to $5,750) plus $1,550 ($2,750 if 65 or older and blind). Aarp free tax preparation locations       Example 1. Aarp free tax preparation locations Joe is 20, single, not blind, and a full-time college student. Aarp free tax preparation locations He does not provide more than half of his own support, and his parents claim an exemption for him on their income tax return. Aarp free tax preparation locations He received $200 taxable interest income and earned $2,750 from a part-time job. Aarp free tax preparation locations He does not have to file a tax return because his gross income of $2,950 ($200 interest plus $2,750 in wages) is not more than $3,100, the amount on line 5 of his filled-in Filing Requirement Worksheet for Most Dependents (shown next). Aarp free tax preparation locations Filled-in Example 1 Filing Requirement Worksheet  for Most Dependents 1. Aarp free tax preparation locations Enter dependent's earned income plus $350   $ 3,100 2. Aarp free tax preparation locations Minimum amount   1,000 3. Aarp free tax preparation locations Compare lines 1 and 2. Aarp free tax preparation locations Enter the larger amount   3,100 4. Aarp free tax preparation locations Maximum amount   6,100 5. Aarp free tax preparation locations Compare lines 3 and 4. Aarp free tax preparation locations Enter the smaller amount   3,100 6. Aarp free tax preparation locations Enter the dependent's gross income. Aarp free tax preparation locations If line 6 is more than line 5, the dependent must file an income tax return. Aarp free tax preparation locations If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 6 is $5 or more. Aarp free tax preparation locations   $ 2,950   Example 2. Aarp free tax preparation locations The facts are the same as in Example 1 except that Joe had $600 taxable interest income. Aarp free tax preparation locations He must file a tax return because his gross income of $3,350 ($600 interest plus $2,750 wages) is more than $3,100, the amount on line 5 of his filled-in worksheet (shown next). Aarp free tax preparation locations Filled-in Example 2 Filing Requirement Worksheet for Most Dependents 1. Aarp free tax preparation locations Enter dependent's earned income plus $350   $ 3,100 2. Aarp free tax preparation locations Minimum amount   1,000 3. Aarp free tax preparation locations Compare lines 1 and 2. Aarp free tax preparation locations Enter the larger amount   3,100 4. Aarp free tax preparation locations Maximum amount   6,100 5. Aarp free tax preparation locations Compare lines 3 and 4. Aarp free tax preparation locations Enter the smaller amount   3,100 6. Aarp free tax preparation locations Enter the dependent's gross income. Aarp free tax preparation locations If line 6 is more than line 5, the dependent must file an income tax return. Aarp free tax preparation locations If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 6 is $5 or more. Aarp free tax preparation locations   $ 3,350   Age 65 or older or blind. Aarp free tax preparation locations A dependent who is age 65 or older or blind must file a return if his or her gross income is more than line 7 of the following worksheet. Aarp free tax preparation locations Filing Requirement Worksheet  for Dependents Who Are Age 65 or Older or Blind 1. Aarp free tax preparation locations Enter dependent's earned income plus $350     2. Aarp free tax preparation locations Minimum amount   $1,000 3. Aarp free tax preparation locations Compare lines 1 and 2. Aarp free tax preparation locations Enter the larger amount     4. Aarp free tax preparation locations Maximum amount   6,100 5. Aarp free tax preparation locations Compare lines 3 and 4. Aarp free tax preparation locations Enter the smaller amount     6. Aarp free tax preparation locations Enter the amount from the following table that applies to the dependent       Marital Status Amount     Single         Either 65 or older or blind $1,500       65 or older and blind $3,000     Married         Either 65 or older or blind $1,200       65 or older and blind $2,400   7. Aarp free tax preparation locations Add lines 5 and 6. Aarp free tax preparation locations Enter the total     8. Aarp free tax preparation locations Enter the dependent's gross income. Aarp free tax preparation locations If line 8 is more than line 7, the dependent must file an income tax return. Aarp free tax preparation locations If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 8 is $5 or more     Example 3. Aarp free tax preparation locations The facts are the same as in Example 2 except that Joe is also blind. Aarp free tax preparation locations He does not have to file a return because his gross income of $3,350 is not more than $4,600, the amount on line 7 of his filled-in Filing Requirement Worksheet for Dependents Who Are Age 65 or Older or Blind (shown next). Aarp free tax preparation locations   Filled-in Example 3 Filing Requirement Worksheet  for Dependents Who Are Age 65 or Older or Blind 1. Aarp free tax preparation locations Enter dependent's earned income plus $350   $3,100 2. Aarp free tax preparation locations Minimum amount   1,000 3. Aarp free tax preparation locations Compare lines 1 and 2. Aarp free tax preparation locations Enter the larger amount   3,100 4. Aarp free tax preparation locations Maximum amount   6,100 5. Aarp free tax preparation locations Compare lines 3 and 4. Aarp free tax preparation locations Enter the smaller amount   3,100 6. Aarp free tax preparation locations Enter the amount from the following table that applies to the dependent   1,500   Marital Status Amount     Single         Either 65 or older or blind $1,500       65 or older and blind $3,000     Married         Either 65 or older or blind $1,200       65 or older and blind $2,400   7. Aarp free tax preparation locations Add lines 5 and 6. Aarp free tax preparation locations Enter the total   4,600 8. Aarp free tax preparation locations Enter the dependent's gross income. Aarp free tax preparation locations If line 8 is more than line 7, the dependent must file an income tax return. Aarp free tax preparation locations If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 8 is $5 or more   $3,350 Other Filing Requirements Some dependents may have to file a tax return even if their income is less than the amount that would normally require them to file a return. Aarp free tax preparation locations A dependent must file a tax return if he or she owes any other taxes, such as: Social security and Medicare taxes on tips not reported to his or her employer or on wages received from an employer who did not withhold these taxes, Uncollected social security and Medicare or railroad retirement taxes on tips reported to his or her employer or on group-term life insurance, Alternative minimum tax, Additional tax on a health savings account from Form 8889, Part III, Recapture taxes, such as the tax from recapture of an education credit, or Additional tax on a qualified plan, including an individual retirement arrangement (IRA), or other tax-favored account. Aarp free tax preparation locations But if the dependent is filing a return only because of this tax, the dependent can file Form 5329 by itself. Aarp free tax preparation locations A dependent must also file a tax return if he or she: Had wages of $108. Aarp free tax preparation locations 28 or more from a church or qualified church-controlled organization that is exempt from employer social security and Medicare taxes, or Had net earnings from self-employment of at least $400. Aarp free tax preparation locations Spouse itemizes. Aarp free tax preparation locations   A dependent must file a return if the dependent's spouse itemizes deductions on a separate return and the dependent has $5 or more of gross income (earned and/or unearned). Aarp free tax preparation locations Should a Return Be Filed Even If Not Required? Even if a dependent does not meet any of the filing requirements discussed earlier, he or she should file a tax return if either of the following applies. Aarp free tax preparation locations Income tax was withheld from his or her income. Aarp free tax preparation locations He or she qualifies for the earned income credit, additional child tax credit, health coverage tax credit, or refundable American opportunity education credit. Aarp free tax preparation locations See the tax return instructions to find out who qualifies for these credits. Aarp free tax preparation locations  By filing a return, the dependent can get a refund. Aarp free tax preparation locations Responsibility for Child's Return Generally, a child is responsible for filing his or her own tax return and for paying any tax, penalties, or interest on that return. Aarp free tax preparation locations If a child cannot file his or her own return for any reason, such as age, the child's parent, guardian, or other legally responsible person must file it for the child. Aarp free tax preparation locations Signing the child's return. Aarp free tax preparation locations   If the child cannot sign his or her return, a parent or guardian must sign the child's name followed by the words “By (signature), parent (or guardian) for minor child. Aarp free tax preparation locations ” Authority of parent or guardian. Aarp free tax preparation locations   A parent or guardian who signs a return on a child's behalf can deal with the IRS on all matters connected with the return. Aarp free tax preparation locations   In general, a parent or guardian who does not sign the child's return can only provide information concerning the child's return and pay the child's tax. Aarp free tax preparation locations That parent or guardian is not entitled to receive information from the IRS or legally bind the child to a tax liability arising from the return. Aarp free tax preparation locations Third party designee. Aarp free tax preparation locations   A child's parent or guardian who does not sign the child's return may be authorized, as a third party designee, to discuss the processing of the return with the IRS as well as provide information concerning the return. Aarp free tax preparation locations The child or the person signing the return on the child's behalf must check the “Yes” box in the “Third Party Designee” area of the return and name the parent or guardian as the designee. Aarp free tax preparation locations   If designated, a parent or guardian can respond to certain IRS notices and receive information about the processing of the return and the status of a refund or payment. Aarp free tax preparation locations This designation does not authorize the parent or guardian to receive any refund check, bind the child to any tax liability, or otherwise represent the child before the IRS. Aarp free tax preparation locations See the return instructions for more information. Aarp free tax preparation locations Designated as representative. Aarp free tax preparation locations   A parent or guardian who does not sign the child's return may be designated as the child's representative by the child or the person signing the return on the child's behalf. Aarp free tax preparation locations Form 2848, Power of Attorney and Declaration of Representative, is used to designate a child's representative. Aarp free tax preparation locations See Publication 947, Practice Before the IRS and Power of Attorney, for more information. Aarp free tax preparation locations   If designated, a parent or guardian can receive information about the child's return but cannot legally bind the child to a tax liability unless authorized to do so by the law of the state in which the child lives. Aarp free tax preparation locations IRS notice. Aarp free tax preparation locations   If you or the child receives a notice from the IRS concerning the child's return or tax liability, you should immediately inform the IRS that the notice concerns a child. Aarp free tax preparation locations The notice will show who to contact. Aarp free tax preparation locations The IRS will try to resolve the matter with the parent(s) or guardian(s) of the child consistent with their authority. Aarp free tax preparation locations Child's earnings. Aarp free tax preparation locations   For federal income tax purposes, amounts a child earns by performing services are included in the gross income of the child and not the gross income of the parent. Aarp free tax preparation locations This is true even if, under state law, the parent has the right to the earnings and may actually have received them. Aarp free tax preparation locations If the child does not pay the tax due on this income, the parent may be liable for the tax. Aarp free tax preparation locations Child's expenses. Aarp free tax preparation locations   Deductions for payments that are made out of a child's earnings are the child's, even if the payments are made by the parent. Aarp free tax preparation locations Example. Aarp free tax preparation locations You made payments on your child's behalf that are deductible as a business expense and a charitable contribution. Aarp free tax preparation locations You made the payments out of your child's earnings. Aarp free tax preparation locations These items can be deducted only on the child's return. Aarp free tax preparation locations Standard Deduction The standard deduction for an individual who can be claimed as a dependent on another person's tax return is generally limited to the larger of: $1,000, or The individual's earned income plus $350, but not more than the regular standard deduction (generally $6,100). Aarp free tax preparation locations However, the standard deduction may be higher for a dependent who: Is 65 or older, or Is blind. Aarp free tax preparation locations Certain dependents cannot claim any standard deduction. Aarp free tax preparation locations See Standard Deduction of Zero , later. Aarp free tax preparation locations Worksheet 1. Aarp free tax preparation locations   Use Worksheet 1 to figure the dependent's standard deduction. Aarp free tax preparation locations Worksheet 1. Aarp free tax preparation locations Standard Deduction Worksheet for Dependents Use this worksheet only if someone else can claim you (or your spouse, if filing jointly) as a dependent. Aarp free tax preparation locations If you were 65 or older and/or blind, check the correct number of boxes below. Aarp free tax preparation locations Put the total number of boxes checked in box c and go to line 1. Aarp free tax preparation locations a. Aarp free tax preparation locations You 65 or older   Blind   b. Aarp free tax preparation locations Your spouse, if claiming  spouse's exemption 65 or older   Blind   c. Aarp free tax preparation locations Total boxes checked         1. Aarp free tax preparation locations Enter your earned income (defined below) plus $350. Aarp free tax preparation locations If none, enter -0-. Aarp free tax preparation locations 1. Aarp free tax preparation locations     2. Aarp free tax preparation locations Minimum amount. Aarp free tax preparation locations   2. Aarp free tax preparation locations $1,000   3. Aarp free tax preparation locations Compare lines 1 and 2. Aarp free tax preparation locations Enter the larger of the two amounts here. Aarp free tax preparation locations 3. Aarp free tax preparation locations     4. Aarp free tax preparation locations Enter on line 4 the amount shown below for your filing status. Aarp free tax preparation locations       Single or Married filing separately—$6,100 Married filing jointly—$12,200 Head of household—$8,950 4. Aarp free tax preparation locations     5. Aarp free tax preparation locations Standard deduction. Aarp free tax preparation locations         a. Aarp free tax preparation locations Compare lines 3 and 4. Aarp free tax preparation locations Enter the smaller amount here. Aarp free tax preparation locations If under 65 and not blind, stop here. Aarp free tax preparation locations This is your standard deduction. Aarp free tax preparation locations Otherwise, go on to line 5b. Aarp free tax preparation locations 5a. Aarp free tax preparation locations     b. Aarp free tax preparation locations If 65 or older or blind, multiply $1,500 ($1,200 if married) by the number in box c above. Aarp free tax preparation locations Enter the result here. Aarp free tax preparation locations 5b. Aarp free tax preparation locations     c. Aarp free tax preparation locations Add lines 5a and 5b. Aarp free tax preparation locations This is your standard deduction for 2013. Aarp free tax preparation locations 5c. Aarp free tax preparation locations     Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. Aarp free tax preparation locations It also includes any amount received as a scholarship that you must include in income. Aarp free tax preparation locations   Example 1. Aarp free tax preparation locations Michael is single, age 15, and not blind. Aarp free tax preparation locations His parents can claim him as a dependent on their tax return. Aarp free tax preparation locations He has taxable interest income of $800 and wages of $150. Aarp free tax preparation locations He enters $500 (his earned income plus $350) on line 1 of Worksheet 1. Aarp free tax preparation locations On line 3, he enters $1,000, the larger of $500 or $1,000. Aarp free tax preparation locations Michael enters $6,100 on line 4. Aarp free tax preparation locations On line 5a, he enters $1,000, the smaller of $1,000 or $6,100. Aarp free tax preparation locations His standard deduction is $1,000. Aarp free tax preparation locations Example 2. Aarp free tax preparation locations Judy, a full-time student, is single, age 22, and not blind. Aarp free tax preparation locations Her parents can claim her as a dependent on their tax return. Aarp free tax preparation locations She has dividend income of $275 and wages of $2,500. Aarp free tax preparation locations She enters $2,850 (her earned income plus $350) on line 1 of Worksheet 1. Aarp free tax preparation locations On line 3, she enters $2,850, the larger of $2,850 or $1,000. Aarp free tax preparation locations She enters $6,100 on line 4. Aarp free tax preparation locations On line 5a, she enters $2,850 (the smaller of $2,850 or $6,100) as her standard deduction. Aarp free tax preparation locations Example 3. Aarp free tax preparation locations Amy, who is single, is claimed as a dependent on her parents' tax return. Aarp free tax preparation locations She is 18 years old and blind. Aarp free tax preparation locations She has taxable interest income of $1,000 and wages of $2,000. Aarp free tax preparation locations She enters $2,350 (her earned income plus $350) on line 1 of Worksheet 1. Aarp free tax preparation locations She enters $2,350 (the larger of $2,350 or $1,000) on line 3, $6,100 on line 4, and $2,350 (the smaller of $2,350 or $6,100) on line 5a. Aarp free tax preparation locations Because Amy is blind, she checks the box for blindness and enters “1” in box c at the top of Worksheet 1. Aarp free tax preparation locations She enters $1,500 (the number in box c times $1,500) on line 5b. Aarp free tax preparation locations Her standard deduction on line 5c is $3,850 ($2,350 + $1,500). Aarp free tax preparation locations Standard Deduction of Zero The standard deduction for the following dependents is zero. Aarp free tax preparation locations A married dependent filing a separate return whose spouse itemizes deductions. Aarp free tax preparation locations A dependent who files a return for a period of less than 12 months due to a change in his or her annual accounting period. Aarp free tax preparation locations A nonresident or dual-status alien dependent, unless the dependent is married to a U. Aarp free tax preparation locations S. Aarp free tax preparation locations citizen or resident alien at the end of the year and chooses to be treated as a U. Aarp free tax preparation locations S. Aarp free tax preparation locations resident for the year. Aarp free tax preparation locations See Publication 519, U. Aarp free tax preparation locations S. Aarp free tax preparation locations Tax Guide for Aliens, for information on making this choice. Aarp free tax preparation locations Example. Aarp free tax preparation locations Jennifer, who is a dependent of her parents, is entitled to file a joint return with her husband. Aarp free tax preparation locations However, her husband elects to file a separate return and itemize his deductions. Aarp free tax preparation locations Because he itemizes, Jennifer's standard deduction on her return is zero. Aarp free tax preparation locations She can, however, itemize any of her allowable deductions. Aarp free tax preparation locations Dependent's Own Exemption A person who can be claimed as a dependent on another taxpayer's return cannot claim his or her own exemption. Aarp free tax preparation locations This is true even if the other taxpayer does not actually claim the exemption. Aarp free tax preparation locations Example. Aarp free tax preparation locations James and Barbara can claim their child, Ben, as a dependent on their return. Aarp free tax preparation locations Ben is a college student who works during the summer and must file a tax return. Aarp free tax preparation locations Ben cannot claim his own exemption on his return. Aarp free tax preparation locations This is true even if James and Barbara do not claim him as a dependent on their return. Aarp free tax preparation locations Withholding From Wages Employers generally withhold federal income tax, social security tax, and Medicare tax from an employee's wages. Aarp free tax preparation locations If the employee claims exemption from withholding on Form W-4, the employer will not withhold federal income tax. Aarp free tax preparation locations The exemption from withholding does not apply to social security and Medicare taxes. Aarp free tax preparation locations Conditions for exemption from withholding. Aarp free tax preparation locations   An employee can claim exemption from withholding for 2014 only if he or she meets both of the following conditions. Aarp free tax preparation locations For 2013, the employee had a right to a refund of all federal income tax withheld because he or she had no tax liability. Aarp free tax preparation locations For 2014, the employee expects a refund of all federal income tax withheld because he or she expects to have no tax liability. Aarp free tax preparation locations Dependents. Aarp free tax preparation locations   An employee who is a dependent ordinarily cannot claim exemption from withholding if both of the following are true. Aarp free tax preparation locations The employee's gross income will be more than $1,000, the minimum standard deduction for 2014. Aarp free tax preparation locations The employee's unearned income will be more than $350. Aarp free tax preparation locations Exceptions. Aarp free tax preparation locations   An employee may be able to claim exemption from withholding even if the employee is a dependent, if the employee: Is age 65 or older, Is blind, or Will claim on his or her 2014 tax return: Adjustments to income, Tax credits, or Itemized deductions. Aarp free tax preparation locations The above exceptions do not apply to supplemental wages greater than $1,000,000. Aarp free tax preparation locations For more information, see Exemption From Withholding in chapter 1 of Publication 505. Aarp free tax preparation locations Example. Aarp free tax preparation locations Guy is 17 and a student. Aarp free tax preparation locations During the summer he works part time at a grocery store. Aarp free tax preparation locations He expects to earn about $1,200 this year. Aarp free tax preparation locations He also worked at the store last summer and received a refund of all his withheld income tax because he did not have a tax liability. Aarp free tax preparation locations The only other income he expects during the year is $375 interest on a savings account. Aarp free tax preparation locations He expects that his parents will be able to claim him as a dependent on their tax return. Aarp free tax preparation locations He is not blind and will not claim adjustments to income, itemized deductions, a higher standard deduction, or tax credits on his return. Aarp free tax preparation locations Guy cannot claim exemption from withholding when he fills out Form W-4 because his parents will be able to claim him as a dependent, his gross income will be more than $1,000 (the minimum standard deduction amount) and his unearned income will be more than $350. Aarp free tax preparation locations Claiming exemption from withholding. Aarp free tax preparation locations    To claim exemption from withholding, an employee must enter “Exempt” in the space provided on Form W-4, line 7. Aarp free tax preparation locations The employee must complete the rest of the form, as explained in the form instructions, and give it to his or her employer. Aarp free tax preparation locations Renewing an exemption from withholding. Aarp free tax preparation locations   An exemption from withholding is good for only one year. Aarp free tax preparation locations An employee must file a new Form W-4 by February 15 each year to continue the exemption. Aarp free tax preparation locations Part 2. Aarp free tax preparation locations Tax on Unearned Income of Certain Children The two rules that follow may affect the tax on the unearned income of certain children. Aarp free tax preparation locations If the child's interest and dividend income (including capital gain distributions) total less than $10,000, the child's parent may be able to choose to include that income on the parent's return rather than file a return for the child. Aarp free tax preparation locations (See Parent's Election To Report Child's Interest and Dividends , later. Aarp free tax preparation locations ) If the child's interest, dividends, and other unearned income total more than $2,000, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. Aarp free tax preparation locations (See Tax for Certain Children Who Have Unearned Income , later. Aarp free tax preparation locations ) For these rules, the term “child” includes a legally adopted child and a stepchild. Aarp free tax preparation locations These rules apply whether or not the child is a dependent. Aarp free tax preparation locations These rules do not apply if neither of the child's parents were living at the end of the year. Aarp free tax preparation locations Which Parent's Return To Use If a child's parents are married to each other and file a joint return, use the joint return to figure the tax on the child's unearned income. Aarp free tax preparation locations The tax rate and other return information from that return are used to figure the child's tax as explained later under Tax for Certain Children Who Have Unearned Income . Aarp free tax preparation locations Parents Who Do Not File a Joint Return For parents who do not file a joint return, the following discussions explain which parent's tax return must be used to figure the tax. Aarp free tax preparation locations Only the parent whose tax return is used can make the election described under Parent's Election To Report Child's Interest and Dividends . Aarp free tax preparation locations Parents are married. Aarp free tax preparation locations   If the child's parents file separate returns, use the return of the parent with the greater taxable income. Aarp free tax preparation locations Parents not living together. Aarp free tax preparation locations   If the child's parents are married to each other but not living together, and the parent with whom the child lives (the custodial parent) is considered unmarried, use the return of the custodial parent. Aarp free tax preparation locations If the custodial parent is not considered unmarried, use the return of the parent with the greater taxable income. Aarp free tax preparation locations   For an explanation of when a married person living apart from his or her spouse is considered unmarried, see Head of Household in Publication 501. Aarp free tax preparation locations Parents are divorced. Aarp free tax preparation locations   If the child's parents are divorced or legally separated, and the parent who had custody of the child for the greater part of the year (the custodial parent) has not remarried, use the return of the custodial parent. Aarp free tax preparation locations Custodial parent remarried. Aarp free tax preparation locations   If the custodial parent has remarried, the stepparent (rather than the noncustodial parent) is treated as the child's other parent. Aarp free tax preparation locations Therefore, if the custodial parent and the stepparent file a joint return, use that joint return. Aarp free tax preparation locations Do not use the return of the noncustodial parent. Aarp free tax preparation locations   If the custodial parent and the stepparent are married, but file separate returns, use the return of the one with the greater taxable income. Aarp free tax preparation locations If the custodial parent and the stepparent are married but not living together, the earlier discussion under Parents not living together applies. Aarp free tax preparation locations Parents never married. Aarp free tax preparation locations   If a child's parents have never been married to each other, but lived together all year, use the return of the parent with the greater taxable income. Aarp free tax preparation locations If the parents did not live together all year, the rules explained earlier under Parents are divorced apply. Aarp free tax preparation locations Widowed parent remarried. Aarp free tax preparation locations   If a widow or widower remarries, the new spouse is treated as the child's other parent. Aarp free tax preparation locations The rules explained earlier under Custodial parent remarried apply. Aarp free tax preparation locations Parent's Election To Report Child's Interest and Dividends You may be able to elect to include your child's interest and dividend income (including capital gain distributions) on your tax return. Aarp free tax preparation locations If you do, your child will not have to file a return. Aarp free tax preparation locations You can make this election only if all the following conditions are met. Aarp free tax preparation locations Your child was under age 19 (or under age 24 if a full-time student) at the end of the year. Aarp free tax preparation locations Your child had income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends). Aarp free tax preparation locations The child's gross income was less than $10,000. Aarp free tax preparation locations The child is required to file a return unless you make this election. Aarp free tax preparation locations The child does not file a joint return for the year. Aarp free tax preparation locations No estimated tax payment was made for the year, and no overpayment from the previous year (or from any amended return) was applied to this year under your child's name and social security number. Aarp free tax preparation locations No federal income tax was withheld from your child's income under the backup withholding rules. Aarp free tax preparation locations You are the parent whose return must be used when applying the special tax rules for children. Aarp free tax preparation locations (See Which Parent's Return To Use , earlier. Aarp free tax preparation locations ) These conditions are also shown in Figure 1. Aarp free tax preparation locations Certain January 1 birthdays. Aarp free tax preparation locations   A child born on January 1, 1995, is considered to be age 19 at the end of 2013. Aarp free tax preparation locations You cannot make this election for such a child unless the child was a full-time student. Aarp free tax preparation locations   A child born on January 1, 1990, is considered to be age 24 at the end of 2013. Aarp free tax preparation locations You cannot make this election for such a child. Aarp free tax preparation locations How to make the election. Aarp free tax preparation locations    Make the election by attaching Form 8814 to your Form 1040 or Form 1040NR. Aarp free tax preparation locations (If you make this election, you cannot file Form 1040A or Form 1040EZ. Aarp free tax preparation locations ) Attach a separate Form 8814 for each child for whom you make the election. Aarp free tax preparation locations You can make the election for one or more children and not for others. Aarp free tax preparation locations Effect of Making the Election The federal income tax on your child's income may be more if you make the Form 8814 election. Aarp free tax preparation locations Rate may be higher. Aarp free tax preparation locations   If your child received qualified dividends or capital gain distributions, you may pay up to $100 more tax if you make this election instead of filing a separate tax return for the child. Aarp free tax preparation locations This is because the tax rate on the child's income between $1,000 and $2,000 is 10% if you make this election. Aarp free tax preparation locations However, if you file a separate return for the child, the tax rate may be as low as 0% (zero percent) because of the preferential tax rates for qualified dividends and capital gain distributions. Aarp free tax preparation locations Deductions you cannot take. Aarp free tax preparation locations   By making the Form 8814 election, you cannot take any of the following deductions that the child would be entitled to on his or her return. Aarp free tax preparation locations The additional standard deduction if the child is blind. Aarp free tax preparation locations The deduction for a penalty on an early withdrawal of your child's savings. Aarp free tax preparation locations Itemized deductions (such as your child's investment expenses or charitable contributions). Aarp free tax preparation locations Figure 1. Aarp free tax preparation locations Can You Include Your Child's Income On Your Tax Return? Please click here for the text description of the image. Aarp free tax preparation locations Figure 1. Aarp free tax preparation locations Can You Include Your Child's Income On Your Tax Return? Deductible investment interest. Aarp free tax preparation locations   If you use Form 8814, your child's unearned income is considered your unearned income. Aarp free tax preparation locations To figure the limit on your deductible investment interest, add the child's unearned income to yours. Aarp free tax preparation locations However, if your child received qualified dividends, capital gain distributions, or Alaska Permanent Fund dividends, see chapter 3 of Publication 550 for information about how to figure the limit. Aarp free tax preparation locations Alternative minimum tax. Aarp free tax preparation locations    If your child received tax-exempt interest (or exempt-interest dividends paid by a regulated investment company) from certain private activity bonds, you must determine if that interest is a tax preference item for alternative minimum tax (AMT) purposes. Aarp free tax preparation locations If it is, you must include it with your own tax preference items when figuring your AMT. Aarp free tax preparation locations See Form 6251, Alternative Minimum Tax—Individuals, and its instructions for details. Aarp free tax preparation locations Reduced deductions or credits. Aarp free tax preparation locations   If you use Form 8814, your increased adjusted gross income may reduce certain deductions or credits on your return, including the following. Aarp free tax preparation locations Deduction for contributions to a traditional individual retirement arrangement (IRA). Aarp free tax preparation locations Deduction for student loan interest. Aarp free tax preparation locations Itemized deductions for medical expenses, casualty and theft losses, and certain miscellaneous expenses. Aarp free tax preparation locations Credit for child and dependent care expenses. Aarp free tax preparation locations Child tax credit. Aarp free tax preparation locations Education tax credits. Aarp free tax preparation locations Earned income credit. Aarp free tax preparation locations Penalty for underpayment of estimated tax. Aarp free tax preparation locations   If you make this election for 2013 and did not have enough tax withheld or pay enough estimated tax to cover the tax you owe, you may be subject to a penalty. Aarp free tax preparation locations If you plan to make this election for 2014, you may need to increase your federal income tax withholding or your estimated tax payments to avoid the penalty. Aarp free tax preparation locations Get Publication 505 for more information. Aarp free tax preparation locations Figuring Child's Income Use Form 8814, Part I, to figure your child's interest and dividend income to report on your return. Aarp free tax preparation locations Only the amount over $2,000 is added to your income. Aarp free tax preparation locations The amount over $2,000 is shown on Form 8814, line 6. Aarp free tax preparation locations Unless the child's income includes qualified dividends or capital gain distributions (discussed next), the same amount is shown on Form 8814, line 12. Aarp free tax preparation locations Include the amount from Form 8814, line 12, on Form 1040 or Form 1040NR, line 21. Aarp free tax preparation locations If you file more than one Form 8814, include the total amounts from line 12 of all your Forms 8814 on Form 1040 or Form 1040NR, line 21. Aarp free tax preparation locations On the dotted line next to line 21, enter “Form 8814” and the total of the Form 8814, line 12 amounts. Aarp free tax preparation locations Note. Aarp free tax preparation locations The tax on the first $2,000 is figured on Form 8814, Part II. Aarp free tax preparation locations See Figuring Additional Tax , later. Aarp free tax preparation locations Qualified dividends. Aarp free tax preparation locations   Enter on Form 8814, line 2a, any ordinary dividends your child received. Aarp free tax preparation locations This amount may include qualified dividends. Aarp free tax preparation locations Qualified dividends are those dividends reported on Form 1040, line 9b, or Form 1040NR, line 10b, and are eligible for lower tax rates that apply to a net capital gain. Aarp free tax preparation locations For detailed information about qualified dividends, see Publication 550. Aarp free tax preparation locations   If your child received qualified dividends, the amount of these dividends that is added to your income must be reported on Form 1040, lines 9a and 9b, or Form 1040NR, lines 10a and 10b. Aarp free tax preparation locations You do not include these dividends on Form 8814, line 12, or on line 21 of Form 1040 or Form 1040NR. Aarp free tax preparation locations   Enter the child's qualified dividends on Form 8814, line 2b. Aarp free tax preparation locations But do not include this amount on Form 1040, lines 9a and 9b, or Form 1040NR, lines 10a and 10b. Aarp free tax preparation locations Instead, include the amount from Form 8814, line 9, on Form 1040, lines 9a and 9b, or Form 1040NR, lines 10a and 10b. Aarp free tax preparation locations (The amount on Form 8814, line 9, may be less than the amount on Form 8814, line 2b, because lines 7 through 12 of the form divide the $2,000 base amount on Form 8814, line 5, between the child's qualified dividends, capital gain distributions, and other interest and dividend income, reducing each of those amounts. Aarp free tax preparation locations ) Capital gain distributions. Aarp free tax preparation locations   Enter on Form 8814, line 3, any capital gain distributions your child received. Aarp free tax preparation locations The amount of these distributions that is added to your income must be reported on Schedule D (Form 1040), line 13, or, if you are not required to file Schedule D, on Form 1040, line 13, or Form 1040NR, line 14. Aarp free tax preparation locations You do not include it on Form 8814, line 12, or on line 21 of Form 1040 or Form 1040NR. Aarp free tax preparation locations   Include the amount from Form 8814, line 10, on Schedule D, line 13; Form 1040, line 13; or Form 1040NR, line 14, whichever applies. Aarp free tax preparation locations (The amount on Form 8814, line 10, may be less than the amount on Form 8814, line 3, because lines 7 through 12 of the form divide the $2,000 base amount on Form 8814, line 5, between the child's qualified dividends, capital gain distributions, and other interest and dividend income, reducing each of those amounts. Aarp free tax preparation locations ) Collectibles (28% rate) gain. Aarp free tax preparation locations    If any of the child's capital gain distributions are reported on Form 1099-DIV as collectibles (28% rate) gain, you must determine how much to also include on line 4 of the 28% Rate Gain Worksheet, in the instructions for Schedule D, line 18. Aarp free tax preparation locations Multiply the child's capital gain distribution included on Schedule D, line 13, by a fraction. Aarp free tax preparation locations The numerator is the part of the child's total capital gain distribution that is collectibles (28% rate) gain. Aarp free tax preparation locations The denominator is the child's total capital gain distribution. Aarp free tax preparation locations Enter the result on line 4 of the 28% Rate Gain Worksheet. Aarp free tax preparation locations Unrecaptured section 1250 gain. Aarp free tax preparation locations   If any of the child's capital gain distributions are reported on Form 1099-DIV as unrecaptured section 1250 gain, you must determine how much to include on line 11 of the Unrecaptured Section 1250 Gain Worksheet in the instructions for Schedule D, line 19. Aarp free tax preparation locations Multiply the child's capital gain distribution included on Schedule D, line 13, by a fraction. Aarp free tax preparation locations The numerator is the part of the child's total capital gain distribution that is unrecaptured section 1250 gain. Aarp free tax preparation locations The denominator is the child's total capital gain distribution. Aarp free tax preparation locations Enter the result on the Unrecaptured Section 1250 Gain Worksheet, line 11. Aarp free tax preparation locations Section 1202 gain. Aarp free tax preparation locations   If any of the child's capital gain distributions are reported as section 1202 gain (gain on qualified small business stock) on Form 1099-DIV, part or all of that gain may be eligible for the section 1202 exclusion. Aarp free tax preparation locations (For information about the exclusion, see chapter 4 of Publication 550. Aarp free tax preparation locations ) To figure that part, multiply the child's capital gain distribution included on Schedule D, line 13, by a fraction. Aarp free tax preparation locations The numerator is the part of the child's total capital gain distribution that is section 1202 gain. Aarp free tax preparation locations The denominator is the child's total capital gain distribution. Aarp free tax preparation locations Your section 1202 exclusion is generally 50% of the result, but may be subject to a limit. Aarp free tax preparation locations In some cases, the exclusion is more than 50%. Aarp free tax preparation locations See the instructions for Schedule D for details and information on how to report the exclusion amount. Aarp free tax preparation locations Example. Aarp free tax preparation locations Fred is 6 years old. Aarp free tax preparation locations In 2013, he received dividend income of $2,100, which included $1,575 of ordinary dividends and a $525 capital gain distribution from a mutual fund. Aarp free tax preparation locations (None of the distributions were reported on Form 1099-DIV as unrecaptured section 1250 gain, section 1202 gain, or collectibles (28% rate) gain. Aarp free tax preparation locations ) All of the ordinary dividends are qualified dividends. Aarp free tax preparation locations He has no other income and is not subject to backup withholding. Aarp free tax preparation locations No estimated tax payments were made under his name and social security number. Aarp free tax preparation locations Fred's parents elect to include Fred's income on their tax return instead of filing a return for him. Aarp free tax preparation locations They figure the amount to report on Form 1040, lines 9a and 9b, the amount to report on their Schedule D, line 13, and the amount to report on Form 1040, line 21, as follows. Aarp free tax preparation locations They leave lines 1a and 1b of Form 8814 blank because Fred does not have any interest income. Aarp free tax preparation locations They enter his ordinary dividends of $1,575 on lines 2a and 2b because all of Fred's ordinary dividends are qualified dividends. Aarp free tax preparation locations They enter the amount of Fred's capital gain distributions, $525, on line 3. Aarp free tax preparation locations Next, they add the amounts on lines 1a, 2a, and 3 and enter the result, $2,100, on line 4. Aarp free tax preparation locations They subtract the base amount on line 5, $2,000, from the amount on line 4, $2,100, and enter the result, $100, on line 6. Aarp free tax preparation locations This is the total amount from Form 8814 to be reported on their return. Aarp free tax preparation locations Next, they figure how much of this amount is qualified dividends and how much is capital gain distributions. Aarp free tax preparation locations They divide the amount on line 2b, $1,575, by the amount on line 4, $2,100. Aarp free tax preparation locations They enter the result, . Aarp free tax preparation locations 75, on line 7. Aarp free tax preparation locations They divide the amount on line 3, $525, by the amount on line 4, $2,100. Aarp free tax preparation locations They enter the result, . Aarp free tax preparation locations 25, on line 8. Aarp free tax preparation locations They multiply the amount on line 6, $100, by the decimal on line 7, . Aarp free tax preparation locations 75, and enter the result, $75, on line 9. Aarp free tax preparation locations They multiply the amount on line 6, $100, by the decimal on line 8, . Aarp free tax preparation locations 25, and enter the result, $25, on line 10. Aarp free tax preparation locations They include the amount from line 9, $75, on lines 9a and 9b of their Form 1040 and enter “Form 8814 – $75” on the dotted lines next to lines 9a and 9b. Aarp free tax preparation locations They include the amount from line 10, $25, on line 13 of their Schedule D (Form 1040) and enter “Form 8814 – $25” on the dotted line next to Schedule D, line 13. Aarp free tax preparation locations They enter $100 ($75 + $25) on line 11 and -0- ($100 – $100) on line 12. Aarp free tax preparation locations Because the amount on line 12 is -0-, they do not include any amount from Form 8814 on their Form 1040, line 21. Aarp free tax preparation locations Figuring Additional Tax Use Form 8814, Part II, to figure the tax on the $2,000 of your child's interest and dividends that you do not include in your income. Aarp free tax preparation locations This tax is added to the tax figured on your income. Aarp free tax preparation locations This additional tax is the smaller of: 10% x (your child's gross income − $1,000), or $100. Aarp free tax preparation locations Include the amount from line 15 of all your Forms 8814 in the total on Form 1040, line 44, or Form 1040NR, line 42. Aarp free tax preparation locations Check box a on Form 1040, line 44, or Form 1040NR, line 42. Aarp free tax preparation locations Tax for Certain Children Who Have Unearned Income If a child's interest, dividends, and other unearned income total more than $2,000, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. Aarp free tax preparation locations If the parent does not or cannot choose to include the child's income on the parent's return, use Form 8615 to figure the child's tax. Aarp free tax preparation locations Attach the completed form to the child's Form 1040, Form 1040A, or Form 1040NR. Aarp free tax preparation locations When Form 8615 must be filed. Aarp free tax preparation locations   Form 8615 must be filed for a child if all of the following statements are true. Aarp free tax preparation locations The child's unearned income was more than $2,000. Aarp free tax preparation locations The child is required to file a return for 2013. Aarp free tax preparation locations The child either: Was under age 18 at the end of the year, Was age 18 at the end of the year and did not have earned income that was more than half of his or her support, or Was over age 18 and under age 24 at the end of the year, was a full-time student, and did not have earned income that was more than half of his or her support. Aarp free tax preparation locations At least one of the child's parents was alive at the end of 2013. Aarp free tax preparation locations The child does not file a joint return for 2013. Aarp free tax preparation locations These conditions are also shown in Figure 2. Aarp free tax preparation locations Certain January 1 birthdays. Aarp free tax preparation locations   Use the following chart to determine whether certain children with January 1 birthdays meet condition 3 under When Form 8615 must be filed. Aarp free tax preparation locations IF a child was born on. Aarp free tax preparation locations . Aarp free tax preparation locations . Aarp free tax preparation locations THEN, at the end of 2013, the child is considered to be. Aarp free tax preparation locations . Aarp free tax preparation locations . Aarp free tax preparation locations January 1, 1996 18* January 1, 1995 19** January 1, 1990 24*** *This child is not under age 18. Aarp free tax preparation locations The child meets condition 3 only if the child did not have earned income that was more than half of the child's support. Aarp free tax preparation locations  **This child meets condition 3 only if the child was a full-time student who did not have earned income that was more than half of the child's support. Aarp free tax preparation locations  ***Do not use Form 8615 for this child. Aarp free tax preparation locations Figure 2. Aarp free tax preparation locations Do You Have To Use Form 8615 To Figure Your Child's Tax? Please click here for the text description of the image. Aarp free tax preparation locations Figure 2. Aarp free tax preparation locations Do You Have To Use Form 8615 To Figure Your Child's Tax? Providing Parental Information (Form 8615, Lines A–C) On Form 8615, lines A and B, enter the parent's name and social security number. Aarp free tax preparation locations (If the parents filed a joint return, enter the name and social security number listed first on the joint return. Aarp free tax preparation locations ) On line C, check the box for the parent's filing status. Aarp free tax preparation locations See Which Parent's Return To Use, earlier, for information on which parent's return information must be used on Form 8615. Aarp free tax preparation locations Parent with different tax year. Aarp free tax preparation locations   If the parent and the child do not have the same tax year, complete Form 8615 using the information on the parent's return for the tax year that ends in the child's tax year. Aarp free tax preparation locations Example. Aarp free tax preparation locations Kimberly must use her mother's tax and taxable income to complete her Form 8615 for calendar year 2013 (January 1 – December 31). Aarp free tax preparation locations Kimberly's mother files her tax return on a fiscal year basis (July 1 – June 30). Aarp free tax preparation locations Kimberly must use the information on her mother's return for the tax year ending June 30, 2013, to complete her 2013 Form 8615. Aarp free tax preparation locations Parent's return information not known timely. Aarp free tax preparation locations   If the information needed from the parent's return is not known by the time the child's return is due (usually April 15), you can file the return using estimates. Aarp free tax preparation locations   You can use any reasonable estimate. Aarp free tax preparation locations This includes using information from last year's return. Aarp free tax preparation locations If you use an estimated amount on Form 8615, enter “Estimated” on the line next to the amount. Aarp free tax preparation locations   When you get the correct information, file an amended return on Form 1040X, Amended U. Aarp free tax preparation locations S. Aarp free tax preparation locations Individual Income Tax Return. Aarp free tax preparation locations Extension of time to file. Aarp free tax preparation locations   Instead of using estimates, you can get an automatic 6-month extension of time to file if, by the date your return is due, you file Form 4868, Application for Automatic Extension of Time To File U. Aarp free tax preparation locations S. Aarp free tax preparation locations Individual Income Tax Return. Aarp free tax preparation locations See the instructions for Form 4868 for details. Aarp free tax preparation locations    An extension of time to file is not an extension of time to pay. Aarp free tax preparation locations You must make an accurate estimate of the tax for 2013. Aarp free tax preparation locations If you do not pay the full amount due by the regular due date, the child will owe interest and may also be charged penalties. Aarp free tax preparation locations See Form 4868 and its instructions. Aarp free tax preparation locations Parent's return information not available. Aarp free tax preparation locations   If a child cannot get the required information about his or her parent's tax return, the child (or the child's legal representative) can request the necessary information from the Internal Revenue Service (IRS). Aarp free tax preparation locations How to request. Aarp free tax preparation locations   After the end of the tax year, send a signed, written request for the information to the Internal Revenue Service Center where the parent's return will be filed. Aarp free tax preparation locations (The IRS cannot process a request received before the end of the tax year. Aarp free tax preparation locations )    You should also consider getting an extension of time to file the child's return, because there may be a delay in getting the requested information. Aarp free tax preparation locations   The request must contain all of the following. Aarp free tax preparation locations A statement that you are making the request to comply with section 1(g) of the Internal Revenue Code and that you have tried to get the information from the parent. Aarp free tax preparation locations Proof of the child's age (for example, a copy of the child's birth certificate). Aarp free tax preparation locations Evidence the child has more than $2,000 of unearned income (for example, a copy of the child's prior year tax return or copies of Forms 1099 for the current year). Aarp free tax preparation locations The name, address, social security number (if known), and filing status (if known) of the parent whose information is to be shown on Form 8615. Aarp free tax preparation locations    A child's legal representative making the request should include a copy of his or her Power of Attorney, such as Form 2848, or proof of legal guardianship. Aarp free tax preparation locations Step 1. Aarp free tax preparation locations Figuring the Child's Net Unearned Income (Form 8615, Part I) The first step in figuring a child's tax using Form 8615 is to figure the child's net unearned income. Aarp free tax preparation locations To do that, use Form 8615, Part I. Aarp free tax preparation locations Line 1 (Unearned Income) If the child had no earned income, enter on this line the adjusted gross income shown on the child's return. Aarp free tax preparation locations Adjusted gross income is shown on Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37. Aarp free tax preparation locations Form 1040EZ and Form 1040NR-EZ cannot be used if Form 8615 must be filed. Aarp free tax preparation locations If the child had earned income, figure the amount to enter on Form 8615, line 1, by using the worksheet in the instructions for the form. Aarp free tax preparation locations However, use the following worksheet if: the child has excluded any foreign earned income, deducted a loss from self-employment, or has a net operating loss from another year. Aarp free tax preparation locations Alternate Worksheet for Form 8615, Line 1 A. Aarp free tax preparation locations Enter the amount from the child's Form 1040, line 22, or Form 1040NR, line 23   B. Aarp free tax preparation locations Enter the total of any net loss  from self-employment, any net operating loss deduction, any foreign earned income exclusion, and any foreign housing exclusion from the child's Form 1040 or Form 1040NR. Aarp free tax preparation locations Enter this total as a positive number (greater than zero)   C. Aarp free tax preparation locations Add line A and line B and  enter the total   D. Aarp free tax preparation locations Enter the child's earned income plus any amount from the child's Form 1040, line 30, or the child's Form 1040NR, line 30     Generally, the child's earned income is the total of the amounts reported on Form 1040, lines 7, 12, and 18 (if line 12 or 18 is a loss, use zero) or Form 1040NR, lines 8, 13, and 19 (if line 13 or 19 is a loss, use zero)   E. Aarp free tax preparation locations Subtract line D from line C. Aarp free tax preparation locations Enter the result here and on Form 8615, line 1   Unearned income defined. Aarp free tax preparation locations   Unearned income is generally all income other than salaries, wages, and other amounts received as pay for work actually performed. Aarp free tax preparation locations It includes taxable interest, dividends, capital gains (including capital gain distributions), the taxable part of social security and pension payments, certain distributions from trusts, and unemployment compensation. Aarp free tax preparation locations Unearned income includes amounts produced by assets the child obtained with earned income (such as interest on a savings account into which the child deposited wages). Aarp free tax preparation locations Nontaxable income. Aarp free tax preparation locations   For this purpose, unearned income includes only amounts the child must include in gross income. Aarp free tax preparation locations Nontaxable unearned income, such as tax-exempt interest and the nontaxable part of social security and pension payments, is not included. Aarp free tax preparation locations Capital loss. Aarp free tax preparation locations   A child's capital losses are taken into account in figuring the child's unearned income. Aarp free tax preparation locations Capital losses are first applied against capital gains. Aarp free tax preparation locations If the capital losses are more than the capital gains, the difference (up to $3,000) is subtracted from the child's interest, dividends, and other unearned income. Aarp free tax preparation locations Any difference over $3,000 is carried to the next year. Aarp free tax preparation locations Income from property received as a gift. Aarp free tax preparation locations   A child's unearned income includes all income produced by property belonging to the child. Aarp free tax preparation locations This is true even if the property was transferred to the child, regardless of when the property was transferred or purchased or who transferred it. Aarp free tax preparation locations   A child's unearned income includes income produced by property given as a gift to the child. Aarp free tax preparation locations This includes gifts to the child from grandparents or any other person and gifts made under the Uniform Gift to Minors Act. Aarp free tax preparation locations Example. Aarp free tax preparation locations Amanda Black, age 13, received the following income. Aarp free tax preparation locations Dividends—$800 Wages—$2,100 Taxable interest—$1,200 Tax-exempt interest—$100 Capital gains—$300 Capital losses—($200) The dividends were qualified dividends on stock given to her by her grandparents. Aarp free tax preparation locations Amanda's unearned income is $2,100. Aarp free tax preparation locations This is the total of the dividends ($800), taxable interest ($1,200), and capital gains reduced by capital losses ($300 − $200 = $100). Aarp free tax preparation locations Her wages are earned (not unearned) income because they are received for work actually performed. Aarp free tax preparation locations Her tax-exempt interest is not included because it is nontaxable. Aarp free tax preparation locations Trust income. Aarp free tax preparation locations   If a child is the beneficiary of a trust, distributions of taxable interest, dividends, capital gains, and other unearned income from the trust are unearned income to the child. Aarp free tax preparation locations   However, taxable distributions from a qualified disability trust are considered earned income for the purposes of completing Form 8615. Aarp free tax preparation locations See the Form 8615 instructions for details. Aarp free tax preparation locations Adjustment to income. Aarp free tax preparation locations   In figuring the amount to enter on line 1, the child's unearned income is reduced by any penalty on the early withdrawal of savings. Aarp free tax preparation locations Line 2 (Deductions) If the child does not itemize deductions on Schedule A (Form 1040 or Form 1040NR), enter $2,000 on line 2. Aarp free tax preparation locations If the child itemizes deductions, enter on line 2 the larger of: $1,000 plus the portion of the child's itemized deductions on Schedule A (Form 1040), line 29 (or Schedule A (Form 1040NR), line 15), that are directly connected with the production of the unearned income entered on line 1, or $2,000. Aarp free tax preparation locations Directly connected. Aarp free tax preparation locations   Itemized deductions are directly connected with the production of unearned income if they are for expenses paid to produce or collect taxable income or to manage, conserve, or maintain property held for producing income. Aarp free tax preparation locations These expenses include custodian fees and service charges, service fees to collect taxable interest and dividends, and certain investment counsel fees. Aarp free tax preparation locations    These expenses are added to certain other miscellaneous itemized deductions on Schedule A (Form 1040). Aarp free tax preparation locations Only the amount greater than 2% of the child's adjusted gross income can be deducted. Aarp free tax preparation locations See Publication 529, Miscellaneous Deductions, for more information. Aarp free tax preparation locations Example 1. Aarp free tax preparation locations Roger, age 12, has unearned income of $8,000, no other income, no adjustments to income, and itemized deductions of $300 (net of the 2%-of-adjusted-gross-income limit) that are directly connected with his unearned income. Aarp free tax preparation locations His adjusted gross income is $8,000, which is entered on Form 1040, line 38, and on Form 8615, line 1. Aarp free tax preparation locations Roger enters $2,000 on line 2 because that is more than the total of $1,000 plus his directly-connected itemized deductions of $300. Aarp free tax preparation locations Example 2. Aarp free tax preparation locations Eleanor, age 8, has unearned income of $16,000 and an early withdrawal penalty of $100. Aarp free tax preparation locations She has no other income. Aarp free tax preparation locations She has itemized deductions of $1,050 (net of the 2%-of-adjusted-gross-income limit) that are directly connected with the production of her unearned income. Aarp free tax preparation locations Her adjusted gross income, entered on line 1, is $15,900 ($16,000 − $100). Aarp free tax preparation locations The amount on line 2 is $2,050. Aarp free tax preparation locations This is the larger of: $1,000 plus the $1,050 of directly connected itemized deductions, or $2,000. Aarp free tax preparation locations Line 3 Subtract line 2 from line 1 and enter the result on this line. Aarp free tax preparation locations If zero or less, do not complete the rest of the form. Aarp free tax preparation locations However, you must still attach Form 8615 to the child's tax return. Aarp free tax preparation locations Figure the tax on the child's taxable income in the normal manner. Aarp free tax preparation locations Line 4 (Child's Taxable Income) Enter on line 4 the child's taxable income from Form 1040, line 43; Form 1040A, line 27; or Form 1040NR, line 41. Aarp free tax preparation locations Child files Form 2555 or 2555-EZ. Aarp free tax preparation locations   If the child files Form 2555 or 2555-EZ to claim the foreign earned income exclusion, housing exclusion, or housing deduction, the Foreign Earned Income Tax Worksheet (in the Form 1040 instructions) is used to figure the child's tax. Aarp free tax preparation locations Enter the amount from line 3 of the Foreign Earned Income Tax Worksheet as the child's taxable income on Form 8615, line 4. Aarp free tax preparation locations Line 5 (Net Unearned Income) A child's net unearned income cannot be more than his or her taxable income. Aarp free tax preparation locations Enter on Form 8615, line 5, the smaller of line 3 or line 4. Aarp free tax preparation locations This is the child's net unearned income. Aarp free tax preparation locations If zero or less, do not complete the rest of the form. Aarp free tax preparation locations However, you must still attach Form 8615 to the child's tax return. Aarp free tax preparation locations Figure the tax on the child's taxable income in the normal manner. Aarp free tax preparation locations Step 2. Aarp free tax preparation locations Figuring a Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) The next step in completing Form 8615 is to figure a tentative tax on the child's net unearned income at the parent's tax rate. Aarp free tax preparation locations The tentative tax at the parent's tax rate is the difference between the tax on the parent's taxable income figured with the child's net unearned income (plus the net unearned income of any other child whose Form 8615 includes the tax return information of that parent) and the tax figured without it. Aarp free tax preparation locations When figuring the tentative tax at the parent's tax rate on Form 8615, do not refigure any of the exclusions, deductions, or credits on the parent's return because of the child's net unearned income. Aarp free tax preparation locations For example, do not refigure the medical expense deduction. Aarp free tax preparation locations Figure the tentative tax on Form 8615, lines 6 through 13. Aarp free tax preparation locations Line 6 (Parent's Taxable Income) Enter on line 6 the amount from the parent's Form 1040, line 43; Form 1040A, line 27; Form 1040EZ, line 6; Form 1040NR, line 41; or Form 1040NR-EZ, line 14. Aarp free tax preparation locations If the parent's taxable income is zero or less, enter zero on line 6. Aarp free tax preparation locations Parent files Form 2555 or 2555-EZ. Aarp free tax preparation locations   If the parent files Form 2555 or 2555-EZ to claim the foreign earned income exclusion, housing exclusion, or housing deduction, the Foreign Earned Income Tax Worksheet in the Form 1040 instructions is used to figure the parent's tax. Aarp free tax preparation locations Enter the amount from line 3 of the Foreign Earned Income Tax Worksheet as the parent's taxable income, on line 6 of Form 8615. Aarp free tax preparation locations Line 7 (Net Unearned Income of Other Children) If the tax return information of the parent is also used on any other child's Form 8615, enter on line 7 the total of the amounts from line 5 of all the other children's Forms 8615. Aarp free tax preparation locations Do not include the amount from line 5 of the Form 8615 being completed. Aarp free tax preparation locations (The term “other child” means any other child whose Form 8615 uses the tax information of the parent identified on Lines A and B of Form 8615. Aarp free tax preparation locations ) Example. Aarp free tax preparation locations Paul and Jane Persimmon have three children, Sharon, Jerry, and Mike, who must attach Form 8615 to their tax returns. Aarp free tax preparation locations The children's net unearned income amounts on line 5 of their Forms 8615 are: Sharon—$800 Jerry—$600 Mike—$1,000 Line 7 of Sharon's Form 8615 will show $1,600, the total of the amounts on line 5 of Jerry's and Mike's Forms 8615. Aarp free tax preparation locations Line 7 of Jerry's Form 8615 will show $1,800 ($800 + $1,000). Aarp free tax preparation locations Line 7 of Mike's Form 8615 will show $1,400 ($800 + $600). Aarp free tax preparation locations Other children's information not available. Aarp free tax preparation locations   If the net unearned income of the other children is not available when the return is due, either file the return using estimates or get an extension of time to file. Aarp free tax preparation locations Estimates and extensions are discussed earlier under Providing Parental Information (Form 8615, Lines A–C) . Aarp free tax preparation locations Line 8 (Parent's Taxable Income Plus Children's Net Unearned Income) Enter on this line the total of lines 5, 6, and 7. Aarp free tax preparation locations You must determine the amount of net capital gain and qualified dividends included on this line before completing Form 8615, line 9. Aarp free tax preparation locations Net capital gain. Aarp free tax preparation locations   Net capital gain is the smaller of the gain, if any, on Schedule D (Form 1040), line 15, or the gain, if any, on Schedule D, line 16. Aarp free tax preparation locations If Schedule D is not required, it is the amount on Form 1040, line 13; Form 1040A, line 10; or Form 1040NR, line 14. Aarp free tax preparation locations Qualified dividends. Aarp free tax preparation locations   Qualified dividends are those dividends reported on line 9b of Form 1040 or Form 1040A, or line 10b of Form 1040NR. Aarp free tax preparation locations Net capital gain and qualified dividends on line 8. Aarp free tax preparation locations   If neither the child, nor the parent, nor any other child has net capital gain, the net capital gain on line 8 is zero. Aarp free tax preparation locations   If neither the child, nor the parent, nor any other child has qualified dividends, the amount of qualified dividends on line 8 is zero. Aarp free tax preparation locations   If the child, parent, or any other child has net capital gain, figure the amount of net capital gain included on line 8 by adding together the net capital gain amounts included on lines 5, 6, and 7 of Form 8615. Aarp free tax preparation locations   If the child, parent, or any other child has qualified dividends, figure the amount of qualified dividends included on line 8 by adding together the qualified dividend amounts included on lines 5, 6, and 7. Aarp free tax preparation locations   Use the instructions for Form 8615, line 8, including the appropriate Line 5 Worksheet, to find these amounts. Aarp free tax preparation locations See the instructions for Form 8615 for more details. Aarp free tax preparation locations Note. Aarp free tax preparation locations The amount of any net capital gain or qualified dividends is not separately reported on line 8. Aarp free tax preparation locations It is  needed, however, when figuring the tax on line 9. Aarp free tax preparation locations Line 9 (Tax on Parent's Taxable Income Plus Children's Net Unearned Income) Figure the tax on the amount on line 8 using the Tax Table, the Tax Computation Worksheet, the Qualified Dividends and Capital Gain Tax Worksheet (in the Form 1040, 1040A, or 1040NR instructions), the Schedule D Tax Worksheet (in the Schedule D instructions), or Schedule J (Form 1040), as follows. Aarp free tax preparation locations If line 8 does not include any net capital gain or qualified dividends, use the Tax Table or Tax Computation Worksheet to figure this tax. Aarp free tax preparation locations But if Schedule J, Income Averaging for Farmers and Fishermen, is used to figure the tax on the parent's return, use it to figure this tax. Aarp free tax preparation locations If line 8 includes any net capital gain or qualified dividends, use the Qualified Dividends and Capital Gain Tax Worksheet to figure this tax. Aarp free tax preparation locations For details, see the instructions for Form 8615, line 9. Aarp free tax preparation locations However, if the child, parent, or any other child has 28% rate gain or unrecaptured section 1250 gain, use the Schedule D Tax Worksheet. Aarp free tax preparation locations But if Schedule J is used to figure the tax on the parent's return, use it to figure this tax. Aarp free tax preparation locations Child files Form 2555 or 2555-EZ. Aarp free tax preparation locations   If line 8 includes any net capital gain or qualified dividends and the child, or any other child filing Form 8615, also files Form 2555 or 2555-EZ, use Using the Schedule D Tax Worksheet for line 9 tax, next, to figure the line 9 tax. Aarp free tax preparation locations Using the Schedule D Tax Worksheet for line 9 tax. Aarp free tax preparation locations    Use the Schedule D Tax Worksheet (in the Schedule D instructions) to figure the line 9 tax on Form 8615 if the child, parent, or any other child has unrecaptured section 1250 gain or 28% rate gain. Aarp free tax preparation locations If you must use the Schedule D Tax Worksheet, first complete any Schedule D and any actual Schedule D Tax Worksheet required for the child, parent, or any other child. Aarp free tax preparation locations Then figure the line 9 tax using another Schedule D Tax Worksheet. Aarp free tax preparation locations (Do not attach this Schedule D Tax Worksheet to the child's return. Aarp free tax preparation locations )   Complete this Schedule D Tax Worksheet as follows. Aarp free tax preparation locations On line 1, enter the amount from Form 8615, line 8. Aarp free tax preparation locations On line 2, enter the qualified dividends included on Form 8615, line 8. Aarp free tax preparation locations (See the earlier discussion for line 8. Aarp free tax preparation locations ) On line 3, enter the total of the amounts, if any, on line 4g of all Forms 4952 filed by the child, parent, or any other child. Aarp free tax preparation locations On line 4, enter the total of the amounts, if any, on line 4e of all Forms 4952 filed by the child, parent, or any other child. Aarp free tax preparation locations If applicable, include instead the smaller amount entered on the dotted line next to line 4e. Aarp free tax preparation locations On lines 5 and 6, follow the worksheet instructions. Aarp free tax preparation locations On line 7, enter the net capital gain included on Form 8615, line 8. Aarp free tax preparation locations (See the earlier discussion for line 8. Aarp free tax preparation locations ) On lines 8 through 10, follow the worksheet instructions. Aarp free tax preparation locations On line 11, enter zero if neither the child, nor the parent, nor any other child has unrecaptured section 1250 gain (Schedule D, line 19) or 28% rate gain (Schedule D, line 18). Aarp free tax preparation locations Otherwise, enter the amount of unrecaptured section 1250 gain and 28% rate gain included in the net capital gain on line 8 of Form 8615. Aarp free tax preparation locations Figure these amounts as explained later under Figuring unrecaptured section 1250 gain (line 11) and Figuring 28% rate gain (line 11). Aarp free tax preparation locations If the Foreign Earned Income Tax Worksheet was used to figure the parent's tax or the tax of any child, go to step 10 below. Aarp free tax preparation locations Otherwise, skip steps 10, 11, and 12 below, and go to step 13. Aarp free tax preparation locations Determine whether there is a line 8 capital gain excess as follows. Aarp free tax preparation locations Add the amounts on line 2 of all Foreign Earned Income Tax Worksheets completed by the parent or any child for whom Form 8615 is filed. Aarp free tax preparation locations (But for each child do not add more than the excess, if any, of the amount on line 5 of the child's Form 8615 over the child's taxable income on Form 1040, line 43; Form 1040A, line 27; or Form 1040NR, line 41. Aarp free tax preparation locations ) Subtract (a) from the amount on line 1 of this Schedule D Tax Worksheet. Aarp free tax preparation locations Subtract (b) from the amount on line 10 of this Schedule D Tax Worksheet. Aarp free tax preparation locations If the result is more than zero, that amount is the line 8 capital gain excess. Aarp free tax preparation locations If the result is zero or less, there is no line 8 capital gain excess. Aarp free tax preparation locations If there is no line 8 capital gain excess, skip step 12 below and go to step 13. Aarp free tax preparation locations If there is a line 8 capital gain excess, complete a second Schedule D Tax Worksheet as instructed above and in step 13, but in its entirety and with the following additional modifications. Aarp free tax preparation locations (These modifications are to be made only for purposes of filling out this additional Schedule D Tax Worksheet. Aarp free tax preparation locations ) Reduce the amount you would otherwise enter on line 9 (but not below zero) by the line 8 capital gain excess. Aarp free tax preparation locations Reduce the amount you would otherwise enter on line 6 (but not below zero) by any of the line 8 capital gain excess not used in (a) above. Aarp free tax preparation locations If the child, parent, or any other child has 28% rate gain, reduce the amount you would otherwise enter on line 8 of Worksheet 1 for Line 11 of the Schedule D Tax Worksheet – 28% Rate Gain (Line 9 Tax), shown later, (but not below zero) by the line 8 capital gain excess, and refigure the amount on line 11 of this Schedule D Tax Worksheet. Aarp free tax preparation locations If the child, parent, or any other child has unrecaptured section 1250 gain, reduce the amount you would otherwise enter on line 8 of Worksheet 2 for Line 11 of the Schedule D Tax Worksheet – Unrecaptured Section 1250 Gain (Line 9 Tax) (but not below zero) by the line 8 capital gain excess not used in 12(c), and refigure the amount on line 11 of this Schedule D Tax Worksheet. Aarp free tax preparation locations Complete lines 12 through 45 following the worksheet instructions. Aarp free tax preparation locations Use the parent's filing status to complete lines 15, 42, and 44. Aarp free tax preparation locations Enter the amount from line 45 of this Schedule D Tax Worksheet on Form 8615, line 9, and check the box on that line