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Amend 2008 Taxes

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Amend 2008 Taxes

Amend 2008 taxes 10. Amend 2008 taxes   Installment Sales Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Installment Sale of a Farm Installment MethodWhen to elect out. Amend 2008 taxes Revoking the election. Amend 2008 taxes More information. Amend 2008 taxes Figuring Installment Sale Income Payments Received or Considered Received ExampleSection 1231 gains. Amend 2008 taxes Summary. Amend 2008 taxes Introduction An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Amend 2008 taxes If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment. Amend 2008 taxes This method of reporting gain is called the installment method. Amend 2008 taxes You cannot use the installment method to report a loss. Amend 2008 taxes You can choose to report all of your gain in the year of sale. Amend 2008 taxes Installment obligation. Amend 2008 taxes   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. Amend 2008 taxes Topics - This chapter discusses: The general rules that apply to using the installment method Installment sale of a farm Useful Items - You may want to see: Publication 523 Selling Your Home 535 Business Expenses 537 Installment Sales 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property 6252 Installment Sale Income See chapter 16 for information about getting publications and forms. Amend 2008 taxes Installment Sale of a Farm The installment sale of a farm for one overall price under a single contract is not the sale of a single asset. Amend 2008 taxes It generally includes the sale of real property and personal property reportable on the installment method. Amend 2008 taxes It may also include the sale of property for which you must maintain an inventory, which cannot be reported on the installment method. Amend 2008 taxes See Inventory , later. Amend 2008 taxes The selling price must be allocated to determine the amount received for each class of asset. Amend 2008 taxes The tax treatment of the gain or loss on the sale of each class of assets is determined by its classification as a capital asset, as property used in the business, or as property held for sale and by the length of time the asset was held. Amend 2008 taxes (See chapter 8 for a discussion of capital assets and chapter 9 for a discussion of property used in the business. Amend 2008 taxes ) Separate computations must be made to figure the gain or loss for each class of asset sold. Amend 2008 taxes See Sale of a Farm in chapter 8. Amend 2008 taxes If you report the sale of property on the installment method, any depreciation recapture under section 1245 or 1250 of the Internal Revenue Code is generally taxable as ordinary income in the year of sale. Amend 2008 taxes See Depreciation recapture , later. Amend 2008 taxes This applies even if no payments are received in that year. Amend 2008 taxes Installment Method An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Amend 2008 taxes A farmer who is not required to maintain an inventory can use the installment method to report gain from the sale of property used or produced in farming. Amend 2008 taxes See Inventory , later, for information on the sale of farm property where inventory items are included in the assets sold. Amend 2008 taxes If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. Amend 2008 taxes Electing out of the installment method. Amend 2008 taxes   If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. Amend 2008 taxes   To make this election, do not report your sale on Form 6252. Amend 2008 taxes Instead, report it on Schedule D (Form 1040), Form 4797, or both. Amend 2008 taxes When to elect out. Amend 2008 taxes   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Amend 2008 taxes   However, if you timely file your tax return for the year the sale takes place without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Amend 2008 taxes Write “Filed pursuant to section 301. Amend 2008 taxes 9100-2” at the top of the amended return and file it where the original return was filed. Amend 2008 taxes Revoking the election. Amend 2008 taxes   Once made, the election can be revoked only with IRS approval. Amend 2008 taxes A revocation is retroactive. Amend 2008 taxes More information. Amend 2008 taxes   See Electing Out of the Installment Method in Publication 537 for more information. Amend 2008 taxes Inventory. Amend 2008 taxes   The sale of farm inventory items cannot be reported on the installment method. Amend 2008 taxes All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. Amend 2008 taxes   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. Amend 2008 taxes If you do not, each payment must be allocated between the inventory and the other assets sold. Amend 2008 taxes Sale at a loss. Amend 2008 taxes   If your sale results in a loss, you cannot use the installment method. Amend 2008 taxes If the loss is on an installment sale of business assets, you can deduct it only in the tax year of sale. Amend 2008 taxes Figuring Installment Sale Income Each payment on an installment sale usually consists of the following three parts. Amend 2008 taxes Interest income. Amend 2008 taxes Return of your adjusted basis in the property. Amend 2008 taxes Gain on the sale. Amend 2008 taxes In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. Amend 2008 taxes You do not include in income the part that is the return of your basis in the property. Amend 2008 taxes Basis is the amount of your investment in the property for installment sale purposes. Amend 2008 taxes Interest income. Amend 2008 taxes   You must report interest as ordinary income. Amend 2008 taxes Interest is generally not included in a down payment. Amend 2008 taxes However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. Amend 2008 taxes Interest provided in the agreement is called stated interest. Amend 2008 taxes If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. Amend 2008 taxes See Unstated interest , later. Amend 2008 taxes    You must continue to report the interest income on payments you receive in subsequent years as interest income. Amend 2008 taxes Adjusted basis and installment sale income (gain on sale). Amend 2008 taxes   After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. Amend 2008 taxes A tax-free return of your adjusted basis in the property, and Your gain (referred to as “installment sale income” on Form 6252). Amend 2008 taxes Figuring adjusted basis for installment sale purposes. Amend 2008 taxes   You can use Worksheet 10-1 to figure your adjusted basis in the property for installment sale purposes. Amend 2008 taxes When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. Amend 2008 taxes    Worksheet 10-1. Amend 2008 taxes Figuring Adjusted Basis and Gross Profit Percentage 1. Amend 2008 taxes Enter the selling price for the property   2. Amend 2008 taxes Enter your adjusted basis for the property     3. Amend 2008 taxes Enter your selling expenses     4. Amend 2008 taxes Enter any depreciation recapture     5. Amend 2008 taxes Add lines 2, 3, and 4. Amend 2008 taxes  This is your adjusted basis  for installment sale purposes   6. Amend 2008 taxes Subtract line 5 from line 1. Amend 2008 taxes If zero or less, enter -0-. Amend 2008 taxes  This is your gross profit     If the amount entered on line 6 is zero, Stop here. Amend 2008 taxes You cannot use the installment method. Amend 2008 taxes   7. Amend 2008 taxes Enter the contract price for the property   8. Amend 2008 taxes Divide line 6 by line 7. Amend 2008 taxes This is your gross profit percentage   Selling price. Amend 2008 taxes   The selling price is the total cost of the property to the buyer and includes the following. Amend 2008 taxes Any money you are to receive. Amend 2008 taxes The fair market value (FMV) of any property you are to receive (FMV is discussed at Property used as a payment under Payments Received or Considered Received ). Amend 2008 taxes Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). Amend 2008 taxes Any of your selling expenses the buyer pays. Amend 2008 taxes Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. Amend 2008 taxes Adjusted basis for installment sale purposes. Amend 2008 taxes   Your adjusted basis is the total of the following three items. Amend 2008 taxes Adjusted basis. Amend 2008 taxes Selling expenses. Amend 2008 taxes Depreciation recapture. Amend 2008 taxes Adjusted basis. Amend 2008 taxes   Basis is your investment in the property for installment sale purposes. Amend 2008 taxes The way you figure basis depends on how you acquire the property. Amend 2008 taxes The basis of property you buy is generally its cost. Amend 2008 taxes The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. Amend 2008 taxes   While you own property, various events may change your original basis. Amend 2008 taxes Some events, such as adding rooms or making permanent improvements, increase basis. Amend 2008 taxes Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. Amend 2008 taxes The result is adjusted basis. Amend 2008 taxes See chapter 6 and Publication 551, Basis of Assets, for more information. Amend 2008 taxes Selling expenses. Amend 2008 taxes   Selling expenses relate to the sale of the property. Amend 2008 taxes They include commissions, attorney fees, and any other expenses paid on the sale. Amend 2008 taxes Selling expenses are added to the basis of the sold property. Amend 2008 taxes Depreciation recapture. Amend 2008 taxes   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. Amend 2008 taxes See Depreciation Recapture in chapter 9 and Depreciation Recapture Income in Publication 537. Amend 2008 taxes Gross profit. Amend 2008 taxes   Gross profit is the total gain you report on the installment method. Amend 2008 taxes   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. Amend 2008 taxes If the property you sold was your home, subtract from the gross profit any gain you can exclude. Amend 2008 taxes Contract price. Amend 2008 taxes   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. Amend 2008 taxes Gross profit percentage. Amend 2008 taxes   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. Amend 2008 taxes This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. Amend 2008 taxes   The gross profit percentage generally remains the same for each payment you receive. Amend 2008 taxes However, see the example under Selling price reduced , later, for a situation where the gross profit percentage changes. Amend 2008 taxes Amount to report as installment sale income. Amend 2008 taxes   Multiply the payments you receive each year (less interest) by the gross profit percentage. Amend 2008 taxes The result is your installment sales income for the tax year. Amend 2008 taxes In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. Amend 2008 taxes A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. Amend 2008 taxes For a detailed discussion, see Payments Received or Considered Received , later. Amend 2008 taxes Selling price reduced. Amend 2008 taxes   If the selling price is reduced at a later date, the gross profit on the sale also will change. Amend 2008 taxes You then must refigure the gross profit percentage for the remaining payments. Amend 2008 taxes Refigure your gross profit using Worksheet 10-2. Amend 2008 taxes New Gross Profit Percentage — Selling Price Reduced. Amend 2008 taxes You will spread any remaining gain over future installments. Amend 2008 taxes    Worksheet 10-2. Amend 2008 taxes New Gross Profit Percentage — Selling Price Reduced 1. Amend 2008 taxes Enter the reduced selling  price for the property   2. Amend 2008 taxes Enter your adjusted  basis for the  property     3. Amend 2008 taxes Enter your selling  expenses     4. Amend 2008 taxes Enter any depreciation  recapture     5. Amend 2008 taxes Add lines 2, 3, and 4. Amend 2008 taxes   6. Amend 2008 taxes Subtract line 5 from line 1. Amend 2008 taxes  This is your adjusted  gross profit   7. Amend 2008 taxes Enter any installment sale  income reported in  prior year(s)   8. Amend 2008 taxes Subtract line 7 from line 6   9. Amend 2008 taxes Future installments     10. Amend 2008 taxes Divide line 8 by line 9. Amend 2008 taxes  This is your new  gross profit percentage*. Amend 2008 taxes   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Amend 2008 taxes Example. Amend 2008 taxes In 2011, you sold land with a basis of $40,000 for $100,000. Amend 2008 taxes Your gross profit was $60,000. Amend 2008 taxes You received a $20,000 down payment and the buyer's note for $80,000. Amend 2008 taxes The note provides for monthly payments of $1,953 each, figured at 8% interest, amortized over four years, beginning in January 2012. Amend 2008 taxes Your gross profit percentage was 60%. Amend 2008 taxes You received the down payment of $20,000 in 2011 and total payments of $23,436 in 2012, of which $17,675 was principal and $5,761 was interest according to the amortization schedule. Amend 2008 taxes You reported a gain of $12,000 on the down payment received in 2011 and $10,605 ($17,675 X 60% (. Amend 2008 taxes 60)) in 2012. Amend 2008 taxes In January 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $1,483 a month amortized over the remaining three years. Amend 2008 taxes The new gross profit percentage, 47. Amend 2008 taxes 32%, is figured in Example — Worksheet 10-2. Amend 2008 taxes Example — Worksheet 10-2. Amend 2008 taxes New Gross Profit Percentage — Selling Price Reduced 1. Amend 2008 taxes Enter the reduced selling  price for the property 85,000 2. Amend 2008 taxes Enter your adjusted  basis for the  property 40,000   3. Amend 2008 taxes Enter your selling  expenses -0-   4. Amend 2008 taxes Enter any depreciation  recapture -0-   5. Amend 2008 taxes Add lines 2, 3, and 4. Amend 2008 taxes 40,000 6. Amend 2008 taxes Subtract line 5 from line 1. Amend 2008 taxes  This is your adjusted  gross profit 45,000 7. Amend 2008 taxes Enter any installment sale  income reported in  prior year(s) 22,605 8. Amend 2008 taxes Subtract line 7 from line 6 22,395 9. Amend 2008 taxes Future installments   47,325 10. Amend 2008 taxes Divide line 8 by line 9. Amend 2008 taxes  This is your new  gross profit percentage*. Amend 2008 taxes 47. Amend 2008 taxes 32% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Amend 2008 taxes You will report installment sale income of $6,878 (47. Amend 2008 taxes 32% of $14,535) in 2013, $7,449 (47. Amend 2008 taxes 32% of $15,742) in 2014, and $8,067 (47. Amend 2008 taxes 32% of $17,048) in 2015. Amend 2008 taxes Form 6252. Amend 2008 taxes   Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. Amend 2008 taxes Attach it to your tax return for each year. Amend 2008 taxes Disposition of Installment Obligation If you are using the installment method and you dispose of the installment obligation, generally you will have a gain or loss to report. Amend 2008 taxes It is considered gain or loss on the sale of the property for which you received the installment obligation. Amend 2008 taxes Cancellation. Amend 2008 taxes   If an installment obligation is canceled or otherwise becomes unenforceable, it is treated as a disposition other than a sale or exchange. Amend 2008 taxes Your gain or loss is the difference between your basis in the obligation and its fair market value (FMV) at the time you cancel it. Amend 2008 taxes If the parties are related, the FMV of the obligation is considered to be no less than its full face value. Amend 2008 taxes Transfer due to death. Amend 2008 taxes   The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller is not a disposition. Amend 2008 taxes Any unreported gain from the installment obligation is not treated as gross income to the decedent. Amend 2008 taxes No income is reported on the decedent's return due to the transfer. Amend 2008 taxes Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments. Amend 2008 taxes   However, if the installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it is a disposition. Amend 2008 taxes The estate must figure its gain or loss on the disposition. Amend 2008 taxes If the holder and the buyer were related, the FMV of the installment obligation is considered to be no less than its full face value. Amend 2008 taxes More information. Amend 2008 taxes   For more information on the disposition of an installment obligation, see Publication 537. Amend 2008 taxes Sale of depreciable property. Amend 2008 taxes   You generally cannot report gain from the sale of depreciable property to a related person on the installment method. Amend 2008 taxes See Sale to a Related Person in Publication 537. Amend 2008 taxes   You cannot use the installment method to report any depreciation recapture income up to the gain on the sale. Amend 2008 taxes However, report any gain greater than the recapture income on the installment method. Amend 2008 taxes   The recapture income reported in the year of sale is included in your installment sale basis to determine your gross profit on the installment sale. Amend 2008 taxes   Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Amend 2008 taxes Report the depreciation recapture income in Part II of Form 4797 as ordinary income in the year of sale. Amend 2008 taxes    If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. Amend 2008 taxes See the Form 6252 instructions for details. Amend 2008 taxes   For more information on the section 179 deduction, see Section 179 Expense Deduction in chapter 7. Amend 2008 taxes For more information on depreciation recapture, see Depreciation Recapture in  chapter 9. Amend 2008 taxes Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. Amend 2008 taxes In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. Amend 2008 taxes These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. Amend 2008 taxes However, as discussed later, the buyer's assumption of your debt is treated as a recovery of basis, rather than as a payment, in many cases. Amend 2008 taxes Buyer pays seller's expenses. Amend 2008 taxes   If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. Amend 2008 taxes Include these expenses in the selling and contract prices when figuring the gross profit percentage. Amend 2008 taxes Buyer assumes mortgage. Amend 2008 taxes   If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. Amend 2008 taxes Mortgage less than basis. Amend 2008 taxes   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. Amend 2008 taxes It is considered a recovery of your basis. Amend 2008 taxes The contract price is the selling price minus the mortgage. Amend 2008 taxes Example. Amend 2008 taxes You sell property with an adjusted basis of $19,000. Amend 2008 taxes You have selling expenses of $1,000. Amend 2008 taxes The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 8% interest) in each of the next 4 years). Amend 2008 taxes The selling price is $25,000 ($15,000 + $10,000). Amend 2008 taxes Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). Amend 2008 taxes The contract price is $10,000 ($25,000 − $15,000 mortgage). Amend 2008 taxes Your gross profit percentage is 50% ($5,000 ÷ $10,000). Amend 2008 taxes You report half of each $2,000 payment received as gain from the sale. Amend 2008 taxes You also report all interest you receive as ordinary income. Amend 2008 taxes Mortgage more than basis. Amend 2008 taxes   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. Amend 2008 taxes The part of the mortgage greater than your basis is treated as a payment received in the year of sale. Amend 2008 taxes   To figure the contract price, subtract the mortgage from the selling price. Amend 2008 taxes This is the total amount (other than interest) you will receive directly from the buyer. Amend 2008 taxes Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). Amend 2008 taxes The contract price is then the same as your gross profit from the sale. Amend 2008 taxes    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. Amend 2008 taxes Example. Amend 2008 taxes The selling price for your property is $9,000. Amend 2008 taxes The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. Amend 2008 taxes Your adjusted basis in the property is $4,400. Amend 2008 taxes You have selling expenses of $600, for a total installment sale basis of $5,000. Amend 2008 taxes The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). Amend 2008 taxes This amount is included in the contract price and treated as a payment received in the year of sale. Amend 2008 taxes The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000   Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000   Your gross profit percentage is 100%. Amend 2008 taxes Report 100% of each payment (less interest) as gain from the sale. Amend 2008 taxes Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. Amend 2008 taxes Buyer assumes other debts. Amend 2008 taxes   If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. Amend 2008 taxes   If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. Amend 2008 taxes Compare the debt to your installment sale basis in the property being sold. Amend 2008 taxes If the debt is less than your installment sale basis, none of it is treated as a payment. Amend 2008 taxes If it is more, only the difference is treated as a payment. Amend 2008 taxes If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. Amend 2008 taxes These rules are the same as the rules discussed earlier under Buyer assumes mortgage . Amend 2008 taxes However, they apply only to the following types of debt the buyer assumes. Amend 2008 taxes Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. Amend 2008 taxes Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. Amend 2008 taxes   If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. Amend 2008 taxes The value of the assumed debt is then considered a payment to you in the year of sale. Amend 2008 taxes Property used as a payment. Amend 2008 taxes   If you receive property rather than money from the buyer, it is still considered a payment in the year received. Amend 2008 taxes However, see Trading property for like-kind property , later. Amend 2008 taxes Generally, the amount of the payment is the property's FMV on the date you receive it. Amend 2008 taxes Exception. Amend 2008 taxes   If the property the buyer gives you is payable on demand or readily tradable (see examples later), the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use an accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. Amend 2008 taxes See Unstated interest , later. Amend 2008 taxes Examples. Amend 2008 taxes If you receive a note from the buyer as payment, and the note stipulates that you can demand payment from the buyer at any time, the note is payable on demand. Amend 2008 taxes If you receive marketable securities from the buyer as payment, and you can sell the securities on an established securities market (such as the New York Stock Exchange) at any time, the securities are readily tradable. Amend 2008 taxes In these examples, use the above rules to determine the amount you should consider as payment in the year received. Amend 2008 taxes Debt not payable on demand. Amend 2008 taxes   Any evidence of debt you receive from the buyer that is not payable on demand is not considered a payment. Amend 2008 taxes This is true even if the debt is guaranteed by a third party, including a government agency. Amend 2008 taxes Fair market value (FMV). Amend 2008 taxes   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. Amend 2008 taxes Third-party note. Amend 2008 taxes   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. Amend 2008 taxes Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. Amend 2008 taxes The excess of the note's face value over its FMV is interest. Amend 2008 taxes Exclude this interest in determining the selling price of the property. Amend 2008 taxes However, see Exception under Property used as a payment , earlier. Amend 2008 taxes Example. Amend 2008 taxes You sold real estate in an installment sale. Amend 2008 taxes As part of the down payment, the buyer assigned to you a $50,000, 8% third-party note. Amend 2008 taxes The FMV of the third-party note at the time of the sale was $30,000. Amend 2008 taxes This amount, not $50,000, is a payment to you in the year of sale. Amend 2008 taxes The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. Amend 2008 taxes The remaining 40% is interest taxed as ordinary income. Amend 2008 taxes Bond. Amend 2008 taxes   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. Amend 2008 taxes For more information on the amount you should treat as a payment, see Exception under Property used as a payment , earlier. Amend 2008 taxes   If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. Amend 2008 taxes However, see Exception under Property used as a payment , earlier. Amend 2008 taxes Buyer's note. Amend 2008 taxes   The buyer's note (unless payable on demand) is not considered payment on the sale. Amend 2008 taxes However, its full face value is included when figuring the selling price and the contract price. Amend 2008 taxes Payments you receive on the note are used to figure your gain in the year received. Amend 2008 taxes Sale to a related person. Amend 2008 taxes   If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. Amend 2008 taxes For information on these rules, see the Instructions for Form 6252 and Sale to a Related Person in Publication 537. Amend 2008 taxes Trading property for like-kind property. Amend 2008 taxes   If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. Amend 2008 taxes See Like-Kind Exchanges in chapter 8 for a discussion of like-kind property. Amend 2008 taxes   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine installment sale income each year. Amend 2008 taxes The contract price is reduced by the FMV of the like-kind property received in the trade. Amend 2008 taxes The gross profit is reduced by any gain on the trade that can be postponed. Amend 2008 taxes Like-kind property received in the trade is not considered payment on the installment obligation. Amend 2008 taxes Unstated interest. Amend 2008 taxes   An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. Amend 2008 taxes Interest provided in the contract is called stated interest. Amend 2008 taxes   If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. Amend 2008 taxes If Internal Revenue Code section 483 applies to the contract, this interest is called unstated interest. Amend 2008 taxes   If Internal Revenue Code section 1274 applies to the contract, this interest is called original issue discount (OID). Amend 2008 taxes   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. Amend 2008 taxes Therefore, the buyer cannot deduct the unstated interest. Amend 2008 taxes The seller must report the unstated interest as income. Amend 2008 taxes Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. Amend 2008 taxes   If the debt is subject to the Internal Revenue Code section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. Amend 2008 taxes   Unstated interest reduces the stated selling price of the property and the buyer's basis in the property. Amend 2008 taxes It increases the seller's interest income and the buyer's interest expense. Amend 2008 taxes   In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the applicable federal rate (AFR). Amend 2008 taxes    The AFRs are published monthly in the Internal Revenue Bulletin (IRB). Amend 2008 taxes You can get this information by contacting an IRS office. Amend 2008 taxes IRBs are also available at IRS. Amend 2008 taxes gov. Amend 2008 taxes More information. Amend 2008 taxes   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Amend 2008 taxes Example. Amend 2008 taxes You sell property at a contract price of $6,000 and your gross profit is $1,500. Amend 2008 taxes Your gross profit percentage is 25% ($1,500 ÷ $6,000). Amend 2008 taxes After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. Amend 2008 taxes The remainder (balance) of each payment is the tax-free return of your adjusted basis. Amend 2008 taxes Example On January 3, 2013, you sold your farm, including the home, farm land and buildings. Amend 2008 taxes You received $50,000 down and the buyer's note for $200,000. Amend 2008 taxes In addition, the buyer assumed an outstanding $50,000 mortgage on the farm land. Amend 2008 taxes The total selling price was $300,000. Amend 2008 taxes The note payments of $25,000 each, plus adequate interest, are due every July 1 and January 1, beginning in July 2013. Amend 2008 taxes Your selling expenses were $15,000. Amend 2008 taxes Adjusted basis and depreciation. Amend 2008 taxes   The adjusted basis and depreciation claimed on each asset sold are as follows:   Depreciation Adjusted Asset Claimed Basis Home* -0- $33,743 Farm land -0- 73,610 Buildings $31,500 35,130 * Owned and used as main home for at least 2 of the 5 years prior to the sale Gain on each asset. Amend 2008 taxes   The following schedule shows the assets included in the sale, each asset's selling price based on its respective value, the selling expense allocated to each asset, the adjusted basis of each asset, and the gain on each asset. Amend 2008 taxes The selling expense for each asset is 5% of the selling price ($15,000 selling expense ÷ $300,000 selling price). Amend 2008 taxes   Selling Selling Adjusted     Price Expense Basis Gain Home* $60,000 $3,000 $33,743 $23,257 Farm land  165,000  8,250  73,610  83,140 Buildings 75,000 3,750 35,130 36,120   $300,000 $15,000 $142,483 $142,517 * Owned and used as main home for at least 2 of the 5 years prior to the sale Depreciation recapture. Amend 2008 taxes   The buildings are section 1250 property. Amend 2008 taxes There is no depreciation recapture income for them because they were depreciated using the straight line method. Amend 2008 taxes See chapter 9 for more information on depreciation recapture. Amend 2008 taxes   Special rules may apply when you sell section 1250 assets depreciated under the straight line method. Amend 2008 taxes See the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040). Amend 2008 taxes See chapter 3 of Publication 544, Sales and Other Dispositions of Assets, for more information on section 1250 assets. Amend 2008 taxes Installment sale basis and gross profit. Amend 2008 taxes   The following table shows each asset reported on the installment method, its selling price, installment sale basis, and gross profit. Amend 2008 taxes     Installment     Selling Sale Gross   Price Basis Profit Farm land $165,000 $73,610 $83,140 Buildings 75,000 35,130 36,120   $240,000 $108,740 $119,260 Section 1231 gains. Amend 2008 taxes   The gain on the farm land and buildings is reported as section 1231 gains. Amend 2008 taxes See Section 1231 Gains and Losses in chapter 9. Amend 2008 taxes Contract price and gross profit percentage. Amend 2008 taxes   The contract price is $250,000 for the part of the sale reported on the installment method. Amend 2008 taxes This is the selling price ($300,000) minus the mortgage assumed ($50,000). Amend 2008 taxes   Gross profit percentage for the sale is 47. Amend 2008 taxes 70% ($119,260 gross profit ÷ $250,000 contract price). Amend 2008 taxes The gross profit percentage for each asset is figured as follows:   Percent Farm land ($83,140 ÷ $250,000) 33. Amend 2008 taxes 256 Buildings ($36,120 ÷ $250,000) 14. Amend 2008 taxes 448 Total 47. Amend 2008 taxes 70 Figuring the gain to report on the installment method. Amend 2008 taxes   One hundred percent (100%) of each payment is reported on the installment method. Amend 2008 taxes The total amount received on the sale in 2013 is $75,000 ($50,000 down payment + $25,000 payment on July 1). Amend 2008 taxes The installment sale part of the total payments received in 2013 is also $75,000. Amend 2008 taxes Figure the gain to report for each asset by multiplying its gross profit percentage times $75,000. Amend 2008 taxes   Income Farm land—33. Amend 2008 taxes 256% × $75,000 $24,942 Buildings—14. Amend 2008 taxes 448% × $75,000 10,836 Total installment income for 2013 $35,778 Reporting the sale. Amend 2008 taxes   Report the installment sale on Form 6252. Amend 2008 taxes Then report the amounts from Form 6252 on Form 4797 and Schedule D (Form 1040). Amend 2008 taxes Attach a separate page to Form 6252 that shows the computations in the example. Amend 2008 taxes If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. Amend 2008 taxes Section 1231 gains. Amend 2008 taxes   The gains on the farm land and buildings are section 1231 gains. Amend 2008 taxes They may be reported as either capital or ordinary gain depending on the net balance when combined with other section 1231 losses. Amend 2008 taxes A net 1231 gain is capital gain and a net 1231 loss is an ordinary loss. Amend 2008 taxes Installment income for years after 2013. Amend 2008 taxes   You figure installment income for the years after 2013 by applying the same gross profit percentages to the payments you receive each year. Amend 2008 taxes If you receive $50,000 during the year, the entire $50,000 is considered received on the installment sale (100% × $50,000). Amend 2008 taxes You realize income as follows:   Income Farm land—33. Amend 2008 taxes 256% × $50,000 $16,628 Buildings—14. Amend 2008 taxes 448% × $50,000 7,224 Total installment income $23,852   In this example, no gain ever is recognized from the sale of your home. Amend 2008 taxes You will combine your section 1231 gains from this sale with section 1231 gains and losses from other sales in each of the later years to determine whether to report them as ordinary or capital gains. Amend 2008 taxes The interest received with each payment will be included in full as ordinary income. Amend 2008 taxes Summary. Amend 2008 taxes   The installment income (rounded to the nearest dollar) from the sale of the farm is reported as follows: Selling price $190,000 Minus: Installment basis (108,740) Gross profit $81,260     Gain reported in 2012 (year of sale) $35,778 Gain reported in 2013:   $50,000 × 47. Amend 2008 taxes 70% 23,850 Gain reported in 2014:   $50,000 × 47. Amend 2008 taxes 70% 23,850 Gain reported in 2015:   $50,000 × 47. Amend 2008 taxes 70% 23,850 Gain reported in 2016:   $25,000 × 47. Amend 2008 taxes 70% 11,925 Total gain reported $119,253 Prev  Up  Next   Home   More Online Publications
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Amend 2008 taxes 18. Amend 2008 taxes   Alimony Table of Contents IntroductionSpouse or former spouse. Amend 2008 taxes Divorce or separation instrument. Amend 2008 taxes Useful Items - You may want to see: General RulesMortgage payments. Amend 2008 taxes Taxes and insurance. Amend 2008 taxes Other payments to a third party. Amend 2008 taxes Instruments Executed After 1984Payments to a third party. Amend 2008 taxes Exception. Amend 2008 taxes Substitute payments. Amend 2008 taxes Specifically designated as child support. Amend 2008 taxes Contingency relating to your child. Amend 2008 taxes Clearly associated with a contingency. Amend 2008 taxes How To Deduct Alimony Paid How To Report Alimony Received Recapture Rule Introduction This chapter discusses the rules that apply if you pay or receive alimony. Amend 2008 taxes It covers the following topics. Amend 2008 taxes What payments are alimony. Amend 2008 taxes What payments are not alimony, such as child support. Amend 2008 taxes How to deduct alimony you paid. Amend 2008 taxes How to report alimony you received as income. Amend 2008 taxes Whether you must recapture the tax benefits of alimony. Amend 2008 taxes Recapture means adding back in your income all or part of a deduction you took in a prior year. Amend 2008 taxes Alimony is a payment to or for a spouse or former spouse under a divorce or separation instrument. Amend 2008 taxes It does not include voluntary payments that are not made under a divorce or separation instrument. Amend 2008 taxes Alimony is deductible by the payer and must be included in the spouse's or former spouse's income. Amend 2008 taxes Although this chapter is generally written for the payer of the alimony, the recipient can use the information to determine whether an amount received is alimony. Amend 2008 taxes To be alimony, a payment must meet certain requirements. Amend 2008 taxes Different requirements generally apply to payments under instruments executed after 1984 and to payments under instruments executed before 1985. Amend 2008 taxes This chapter discusses the rules for payments under instruments executed after 1984. Amend 2008 taxes If you need the rules for payments under pre-1985 instruments, get and keep a copy of the 2004 version of Publication 504. Amend 2008 taxes That was the last year the information on pre-1985 instruments was included in Publication 504. Amend 2008 taxes Use Table 18-1 in this chapter as a guide to determine whether certain payments are considered alimony. Amend 2008 taxes Definitions. Amend 2008 taxes   The following definitions apply throughout this chapter. Amend 2008 taxes Spouse or former spouse. Amend 2008 taxes   Unless otherwise stated, the term “spouse” includes former spouse. Amend 2008 taxes Divorce or separation instrument. Amend 2008 taxes   The term “divorce or separation instrument” means: A decree of divorce or separate maintenance or a written instrument incident to that decree, A written separation agreement, or A decree or any type of court order requiring a spouse to make payments for the support or maintenance of the other spouse. Amend 2008 taxes This includes a temporary decree, an interlocutory (not final) decree, and a decree of alimony pendente lite (while awaiting action on the final decree or agreement). Amend 2008 taxes Useful Items - You may want to see: Publication 504 Divorced or Separated Individuals General Rules The following rules apply to alimony regardless of when the divorce or separation instrument was executed. Amend 2008 taxes Payments not alimony. Amend 2008 taxes   Not all payments under a divorce or separation instrument are alimony. Amend 2008 taxes Alimony does not include: Child support, Noncash property settlements, Payments that are your spouse's part of community income, as explained under Community Property in Publication 504, Payments to keep up the payer's property, or Use of the payer's property. Amend 2008 taxes Payments to a third party. Amend 2008 taxes   Cash payments, checks, or money orders to a third party on behalf of your spouse under the terms of your divorce or separation instrument can be alimony, if they otherwise qualify. Amend 2008 taxes These include payments for your spouse's medical expenses, housing costs (rent, utilities, etc. Amend 2008 taxes ), taxes, tuition, etc. Amend 2008 taxes The payments are treated as received by your spouse and then paid to the third party. Amend 2008 taxes Life insurance premiums. Amend 2008 taxes   Alimony includes premiums you must pay under your divorce or separation instrument for insurance on your life to the extent your spouse owns the policy. Amend 2008 taxes Payments for jointly-owned home. Amend 2008 taxes   If your divorce or separation instrument states that you must pay expenses for a home owned by you and your spouse, some of your payments may be alimony. Amend 2008 taxes Mortgage payments. Amend 2008 taxes   If you must pay all the mortgage payments (principal and interest) on a jointly-owned home, and they otherwise qualify as alimony, you can deduct one-half of the total payments as alimony. Amend 2008 taxes If you itemize deductions and the home is a qualified home, you can claim one-half of the interest in figuring your deductible interest. Amend 2008 taxes Your spouse must report one-half of the payments as alimony received. Amend 2008 taxes If your spouse itemizes deductions and the home is a qualified home, he or she can claim one-half of the interest on the mortgage in figuring deductible interest. Amend 2008 taxes Taxes and insurance. Amend 2008 taxes   If you must pay all the real estate taxes or insurance on a home held as tenants in common, you can deduct one-half of these payments as alimony. Amend 2008 taxes Your spouse must report one-half of these payments as alimony received. Amend 2008 taxes If you and your spouse itemize deductions, you can each claim one-half of the real estate taxes and none of the home insurance. Amend 2008 taxes    If your home is held as tenants by the entirety or joint tenants, none of your payments for taxes or insurance are alimony. Amend 2008 taxes But if you itemize deductions, you can claim all of the real estate taxes and none of the home insurance. Amend 2008 taxes Other payments to a third party. Amend 2008 taxes   If you made other third-party payments, see Publication 504 to see whether any part of the payments qualifies as alimony. Amend 2008 taxes Instruments Executed After 1984 The following rules for alimony apply to payments under divorce or separation instruments executed after 1984. Amend 2008 taxes Exception for instruments executed before 1985. Amend 2008 taxes   There are two situations where the rules for instruments executed after 1984 apply to instruments executed before 1985. Amend 2008 taxes A divorce or separation instrument executed before 1985 and then modified after 1984 to specify that the after-1984 rules will apply. Amend 2008 taxes A temporary divorce or separation instrument executed before 1985 and incorporated into, or adopted by, a final decree executed after 1984 that: Changes the amount or period of payment, or Adds or deletes any contingency or condition. Amend 2008 taxes   For the rules for alimony payments under pre-1985 instruments not meeting these exceptions, get the 2004 version of Publication 504 at www. Amend 2008 taxes irs. Amend 2008 taxes gov/pub504. Amend 2008 taxes Example 1. Amend 2008 taxes In November 1984, you and your former spouse executed a written separation agreement. Amend 2008 taxes In February 1985, a decree of divorce was substituted for the written separation agreement. Amend 2008 taxes The decree of divorce did not change the terms for the alimony you pay your former spouse. Amend 2008 taxes The decree of divorce is treated as executed before 1985. Amend 2008 taxes Alimony payments under this decree are not subject to the rules for payments under instruments executed after 1984. Amend 2008 taxes Example 2. Amend 2008 taxes Assume the same facts as in Example 1 except that the decree of divorce changed the amount of the alimony. Amend 2008 taxes In this example, the decree of divorce is not treated as executed before 1985. Amend 2008 taxes The alimony payments are subject to the rules for payments under instruments executed after 1984. Amend 2008 taxes Alimony requirements. Amend 2008 taxes   A payment to or for a spouse under a divorce or separation instrument is alimony if the spouses do not file a joint return with each other and all the following requirements are met. Amend 2008 taxes The payment is in cash. Amend 2008 taxes The instrument does not designate the payment as not alimony. Amend 2008 taxes Spouses legally separated under a decree of divorce or separate maintenance are not members of the same household. Amend 2008 taxes There is no liability to make any payment (in cash or property) after the death of the recipient spouse. Amend 2008 taxes The payment is not treated as child support. Amend 2008 taxes Each of these requirements is discussed below. Amend 2008 taxes Cash payment requirement. Amend 2008 taxes   Only cash payments, including checks and money orders, qualify as alimony. Amend 2008 taxes The following do not qualify as alimony. Amend 2008 taxes Transfers of services or property (including a debt instrument of a third party or an annuity contract). Amend 2008 taxes Execution of a debt instrument by the payer. Amend 2008 taxes The use of the payer's property. Amend 2008 taxes Payments to a third party. Amend 2008 taxes   Cash payments to a third party under the terms of your divorce or separation instrument can qualify as cash payments to your spouse. Amend 2008 taxes See Payments to a third party under General Rules, earlier. Amend 2008 taxes   Also, cash payments made to a third party at the written request of your spouse may qualify as alimony if all the following requirements are met. Amend 2008 taxes The payments are in lieu of payments of alimony directly to your spouse. Amend 2008 taxes The written request states that both spouses intend the payments to be treated as alimony. Amend 2008 taxes You receive the written request from your spouse before you file your return for the year you made the payments. Amend 2008 taxes Payments designated as not alimony. Amend 2008 taxes   You and your spouse can designate that otherwise qualifying payments are not alimony. Amend 2008 taxes You do this by including a provision in your divorce or separation instrument that states the payments are not deductible as alimony by you and are excludable from your spouse's income. Amend 2008 taxes For this purpose, any instrument (written statement) signed by both of you that makes this designation and that refers to a previous written separation agreement is treated as a written separation agreement (and therefore a divorce or separation instrument). Amend 2008 taxes If you are subject to temporary support orders, the designation must be made in the original or a later temporary support order. Amend 2008 taxes   Your spouse can exclude the payments from income only if he or she attaches a copy of the instrument designating them as not alimony to his or her return. Amend 2008 taxes The copy must be attached each year the designation applies. Amend 2008 taxes Spouses cannot be members of the same household. Amend 2008 taxes    Payments to your spouse while you are members of the same household are not alimony if you are legally separated under a decree of divorce or separate maintenance. Amend 2008 taxes A home you formerly shared is considered one household, even if you physically separate yourselves in the home. Amend 2008 taxes   You are not treated as members of the same household if one of you is preparing to leave the household and does leave no later than 1 month after the date of the payment. Amend 2008 taxes Exception. Amend 2008 taxes   If you are not legally separated under a decree of divorce or separate maintenance, a payment under a written separation agreement, support decree, or other court order may qualify as alimony even if you are members of the same household when the payment is made. Amend 2008 taxes Table 18-1. Amend 2008 taxes Alimony Requirements (Instruments Executed After 1984) Payments ARE alimony if all of the following are true: Payments are NOT alimony if any of the following are true: Payments are required by a divorce or separation instrument. Amend 2008 taxes Payments are not required by a divorce or separation instrument. Amend 2008 taxes Payer and recipient spouse do not file a joint return with each other. Amend 2008 taxes Payer and recipient spouse file a joint return with each other. Amend 2008 taxes Payment is in cash (including checks or money orders). Amend 2008 taxes Payment is: Not in cash, A noncash property settlement, Spouse's part of community income, or To keep up the payer's property. Amend 2008 taxes Payment is not designated in the instrument as not alimony. Amend 2008 taxes Payment is designated in the instrument as not alimony. Amend 2008 taxes Spouses legally separated under a decree of divorce or separate maintenance are not members of the same household. Amend 2008 taxes Spouses legally separated under a decree of divorce or separate maintenance are members of the same household. Amend 2008 taxes Payments are not required after death of the recipient spouse. Amend 2008 taxes Payments are required after death of the recipient spouse. Amend 2008 taxes Payment is not treated as child support. Amend 2008 taxes Payment is treated as child support. Amend 2008 taxes These payments are deductible by the payer and includible in income by the recipient. Amend 2008 taxes These payments are neither deductible by the payer nor includible in income by the recipient. Amend 2008 taxes Liability for payments after death of recipient spouse. Amend 2008 taxes   If any part of payments you make must continue to be made for any period after your spouse's death, that part of your payments is not alimony, whether made before or after the death. Amend 2008 taxes If all of the payments would continue, then none of the payments made before or after the death are alimony. Amend 2008 taxes   The divorce or separation instrument does not have to expressly state that the payments cease upon the death of your spouse if, for example, the liability for continued payments would end under state law. Amend 2008 taxes Example. Amend 2008 taxes You must pay your former spouse $10,000 in cash each year for 10 years. Amend 2008 taxes Your divorce decree states that the payments will end upon your former spouse's death. Amend 2008 taxes You must also pay your former spouse or your former spouse's estate $20,000 in cash each year for 10 years. Amend 2008 taxes The death of your spouse would not terminate these payments under state law. Amend 2008 taxes The $10,000 annual payments may qualify as alimony. Amend 2008 taxes The $20,000 annual payments that do not end upon your former spouse's death are not alimony. Amend 2008 taxes Substitute payments. Amend 2008 taxes   If you must make any payments in cash or property after your spouse's death as a substitute for continuing otherwise qualifying payments before the death, the otherwise qualifying payments are not alimony. Amend 2008 taxes To the extent that your payments begin, accelerate, or increase because of the death of your spouse, otherwise qualifying payments you made may be treated as payments that were not alimony. Amend 2008 taxes Whether or not such payments will be treated as not alimony depends on all the facts and circumstances. Amend 2008 taxes Example 1. Amend 2008 taxes Under your divorce decree, you must pay your former spouse $30,000 annually. Amend 2008 taxes The payments will stop at the end of 6 years or upon your former spouse's death, if earlier. Amend 2008 taxes Your former spouse has custody of your minor children. Amend 2008 taxes The decree provides that if any child is still a minor at your spouse's death, you must pay $10,000 annually to a trust until the youngest child reaches the age of majority. Amend 2008 taxes The trust income and corpus (principal) are to be used for your children's benefit. Amend 2008 taxes These facts indicate that the payments to be made after your former spouse's death are a substitute for $10,000 of the $30,000 annual payments. Amend 2008 taxes Of each of the $30,000 annual payments, $10,000 is not alimony. Amend 2008 taxes Example 2. Amend 2008 taxes Under your divorce decree, you must pay your former spouse $30,000 annually. Amend 2008 taxes The payments will stop at the end of 15 years or upon your former spouse's death, if earlier. Amend 2008 taxes The decree provides that if your former spouse dies before the end of the 15-year period, you must pay the estate the difference between $450,000 ($30,000 × 15) and the total amount paid up to that time. Amend 2008 taxes For example, if your spouse dies at the end of the tenth year, you must pay the estate $150,000 ($450,000 − $300,000). Amend 2008 taxes These facts indicate that the lump-sum payment to be made after your former spouse's death is a substitute for the full amount of the $30,000 annual payments. Amend 2008 taxes None of the annual payments are alimony. Amend 2008 taxes The result would be the same if the payment required at death were to be discounted by an appropriate interest factor to account for the prepayment. Amend 2008 taxes Child support. Amend 2008 taxes   A payment that is specifically designated as child support or treated as specifically designated as child support under your divorce or separation instrument is not alimony. Amend 2008 taxes The amount of child support may vary over time. Amend 2008 taxes Child support payments are not deductible by the payer and are not taxable to the recipient. Amend 2008 taxes Specifically designated as child support. Amend 2008 taxes   A payment will be treated as specifically designated as child support to the extent that the payment is reduced either: On the happening of a contingency relating to your child, or At a time that can be clearly associated with the contingency. Amend 2008 taxes A payment may be treated as specifically designated as child support even if other separate payments are specifically designated as child support. Amend 2008 taxes Contingency relating to your child. Amend 2008 taxes   A contingency relates to your child if it depends on any event relating to that child. Amend 2008 taxes It does not matter whether the event is certain or likely to occur. Amend 2008 taxes Events relating to your child include the child's: Becoming employed, Dying, Leaving the household, Leaving school, Marrying, or Reaching a specified age or income level. Amend 2008 taxes Clearly associated with a contingency. Amend 2008 taxes   Payments that would otherwise qualify as alimony are presumed to be reduced at a time clearly associated with the happening of a contingency relating to your child only in the following situations. Amend 2008 taxes The payments are to be reduced not more than 6 months before or after the date the child will reach 18, 21, or local age of majority. Amend 2008 taxes The payments are to be reduced on two or more occasions that occur not more than 1 year before or after a different one of your children reaches a certain age from 18 to 24. Amend 2008 taxes This certain age must be the same for each child, but need not be a whole number of years. Amend 2008 taxes In all other situations, reductions in payments are not treated as clearly associated with the happening of a contingency relating to your child. Amend 2008 taxes   Either you or the IRS can overcome the presumption in the two situations above. Amend 2008 taxes This is done by showing that the time at which the payments are to be reduced was determined independently of any contingencies relating to your children. Amend 2008 taxes For example, if you can show that the period of alimony payments is customary in the local jurisdiction, such as a period equal to one-half of the duration of the marriage, you can overcome the presumption and may be able to treat the amount as alimony. Amend 2008 taxes How To Deduct Alimony Paid You can deduct alimony you paid, whether or not you itemize deductions on your return. Amend 2008 taxes You must file Form 1040. Amend 2008 taxes You cannot use Form 1040A or Form 1040EZ. Amend 2008 taxes Enter the amount of alimony you paid on Form 1040, line 31a. Amend 2008 taxes In the space provided on line 31b, enter your spouse's social security number (SSN) or individual taxpayer identification number (ITIN). Amend 2008 taxes If you paid alimony to more than one person, enter the SSN or ITIN of one of the recipients. Amend 2008 taxes Show the SSN or ITIN and amount paid to each other recipient on an attached statement. Amend 2008 taxes Enter your total payments on line 31a. Amend 2008 taxes You must provide your spouse's SSN or ITIN. Amend 2008 taxes If you do not, you may have to pay a $50 penalty and your deduction may be disallowed. Amend 2008 taxes For more information on SSNs and ITINs, see Social Security Number (SSN) in chapter 1. Amend 2008 taxes How To Report Alimony Received Report alimony you received as income on Form 1040, line 11. Amend 2008 taxes You cannot use Form 1040A or Form 1040EZ. Amend 2008 taxes You must give the person who paid the alimony your SSN or ITIN. Amend 2008 taxes If you do not, you may have to pay a $50 penalty. Amend 2008 taxes Recapture Rule If your alimony payments decrease or end during the first 3 calendar years, you may be subject to the recapture rule. Amend 2008 taxes If you are subject to this rule, you have to include in income in the third year part of the alimony payments you previously deducted. Amend 2008 taxes Your spouse can deduct in the third year part of the alimony payments he or she previously included in income. Amend 2008 taxes The 3-year period starts with the first calendar year you make a payment qualifying as alimony under a decree of divorce or separate maintenance or a written separation agreement. Amend 2008 taxes Do not include any time in which payments were being made under temporary support orders. Amend 2008 taxes The second and third years are the next 2 calendar years, whether or not payments are made during those years. Amend 2008 taxes The reasons for a reduction or end of alimony payments that can require a recapture include: A change in your divorce or separation instrument, A failure to make timely payments, A reduction in your ability to provide support, or A reduction in your spouse's support needs. Amend 2008 taxes When to apply the recapture rule. Amend 2008 taxes   You are subject to the recapture rule in the third year if the alimony you pay in the third year decreases by more than $15,000 from the second year or the alimony you pay in the second and third years decreases significantly from the alimony you pay in the first year. Amend 2008 taxes   When you figure a decrease in alimony, do not include the following amounts. Amend 2008 taxes Payments made under a temporary support order. Amend 2008 taxes Payments required over a period of at least 3 calendar years that vary because they are a fixed part of your income from a business or property, or from compensation for employment or self-employment. Amend 2008 taxes Payments that decrease because of the death of either spouse or the remarriage of the spouse receiving the payments before the end of the third year. Amend 2008 taxes Figuring the recapture. Amend 2008 taxes   You can use Worksheet 1 in Publication 504 to figure recaptured alimony. Amend 2008 taxes Including the recapture in income. Amend 2008 taxes   If you must include a recapture amount in income, show it on Form 1040, line 11 (“Alimony received”). Amend 2008 taxes Cross out “received” and enter “recapture. Amend 2008 taxes ” On the dotted line next to the amount, enter your spouse's last name and SSN or ITIN. Amend 2008 taxes Deducting the recapture. Amend 2008 taxes   If you can deduct a recapture amount, show it on Form 1040, line 31a (“Alimony paid”). Amend 2008 taxes Cross out “paid” and enter “recapture. Amend 2008 taxes ” In the space provided, enter your spouse's SSN or ITIN. Amend 2008 taxes Prev  Up  Next   Home   More Online Publications