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Amend Tax

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Amend Tax

Amend tax 8. Amend tax   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. Amend tax Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. Amend tax 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. Amend tax 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. Amend tax Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. Amend tax This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible. Amend tax A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Amend tax An exchange is a transfer of property for other property or services. Amend tax Determining Gain or Loss You usually realize a gain or loss when you sell or exchange property. Amend tax If the amount you realize from a sale or exchange of property is more than its adjusted basis, you will have a gain. Amend tax If the adjusted basis of the property is more than the amount you realize, you will have a loss. Amend tax Basis and adjusted basis. Amend tax   The basis of property you buy is usually its cost. Amend tax The adjusted basis of property is basis plus certain additions and minus certain deductions. Amend tax See chapter 6 for more information about basis and adjusted basis. Amend tax Amount realized. Amend tax   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. Amend tax 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. Amend tax   If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Publication 544. Amend tax Amount recognized. Amend tax   Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. Amend tax A recognized gain is a gain you must include in gross income and report on your income tax return. Amend tax A recognized loss is a loss you deduct from gross income. Amend tax However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. Amend tax See Like-Kind Exchanges next. Amend tax Also, a loss from the disposition of property held for personal use is not deductible. Amend tax Like-Kind Exchanges Certain exchanges of property are not taxable. Amend tax This means any gain from the exchange is not recognized, and any loss cannot be deducted. Amend tax Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. Amend tax The exchange of property for the same kind of property is the most common type of nontaxable exchange. Amend tax To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. Amend tax Qualifying property. Amend tax Like-kind property. Amend tax These two requirements are discussed later. Amend tax Multiple-party transactions. Amend tax   The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. Amend tax Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section. Amend tax Receipt of title from third party. Amend tax   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. Amend tax Basis of property received. Amend tax   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. Amend tax See chapter 6 for more information. Amend tax Money paid. Amend tax   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. Amend tax The basis of the property received is the basis of the property given up, increased by the money paid. Amend tax Example. Amend tax You traded an old tractor with an adjusted basis of $15,000 for a new one. Amend tax The new tractor costs $300,000. Amend tax You were allowed $80,000 for the old tractor and paid $220,000 cash. Amend tax 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). Amend tax 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. Amend tax 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. Amend tax Reporting the exchange. Amend tax   Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. Amend tax The Instructions for Form 8824 explain how to report the details of the exchange. Amend tax   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. Amend tax You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. Amend tax See chapter 9 for more information. Amend tax Qualifying property. Amend tax   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. Amend tax Machinery, buildings, land, trucks, breeding livestock, rental houses, and certain mutual ditch, reservoir, or irrigation company stock are examples of property that may qualify. Amend tax Nonqualifying property. Amend tax   The rules for like-kind exchanges do not apply to exchanges of the following property. Amend tax Property you use for personal purposes, such as your home and family car. Amend tax Stock in trade or other property held primarily for sale, such as crops and produce. Amend tax Stocks, bonds, or notes. Amend tax However, see Qualifying property above. Amend tax Other securities or evidences of indebtedness, such as accounts receivable. Amend tax Partnership interests. Amend tax However, you may have a nontaxable exchange under other rules. Amend tax See Other Nontaxable Exchanges in chapter 1 of Publication 544. Amend tax Like-kind property. Amend tax   To qualify as a nontaxable exchange, the properties exchanged must be of like kind. Amend tax Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Amend tax Generally, real property exchanged for real property qualifies as an exchange of like-kind property. Amend tax For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange. Amend tax   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. Amend tax An exchange of a tractor for acreage, however, is not an exchange of like-kind property. Amend tax The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. Amend tax For example, the exchange of a bull for a cow is not a like-kind exchange. Amend tax 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. Amend tax    Note. Amend tax Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. Amend tax Personal property. Amend tax   Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. Amend tax Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. Amend tax Property classified in any General Asset Class may not be classified within a Product Class. Amend tax Assets that are not in the same class will qualify as like-kind property if they are of the same nature or character. Amend tax General Asset Classes. Amend tax   General Asset Classes describe the types of property frequently used in many businesses. Amend tax They include, but are not limited to, the following property. Amend tax Office furniture, fixtures, and equipment (asset class 00. Amend tax 11). Amend tax Information systems, such as computers and peripheral equipment (asset class 00. Amend tax 12). Amend tax Data handling equipment except computers (asset class 00. Amend tax 13). Amend tax Automobiles and taxis (asset class 00. Amend tax 22). Amend tax Light general purpose trucks (asset class 00. Amend tax 241). Amend tax Heavy general purpose trucks (asset class 00. Amend tax 242). Amend tax Tractor units for use over-the-road (asset class 00. Amend tax 26). Amend tax Trailers and trailer-mounted containers (asset class 00. Amend tax 27). Amend tax Industrial steam and electric generation and/or distribution systems (asset class 00. Amend tax 4). Amend tax Product Classes. Amend tax   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). Amend tax The latest version of the manual can be accessed at www. Amend tax census. Amend tax gov/eos/www/naics/. Amend tax Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at  www. Amend tax ntis. Amend tax gov/products/naics. Amend tax aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. Amend tax A CD-ROM version with search and retrieval software is also available from NTIS. Amend tax    NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business. Amend tax Partially nontaxable exchange. Amend tax   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. Amend tax 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. Amend tax A loss is not deductible. Amend tax Example 1. Amend tax 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. Amend tax 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). Amend tax However, only $10,000, the cash received, is recognized (included in income). Amend tax Example 2. Amend tax Assume the same facts as in Example 1, except that, instead of money, you received a tractor with a FMV of $10,000. Amend tax Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property). Amend tax Example 3. Amend tax Assume in Example 1 that the FMV of the land you received was only $15,000. Amend tax Your $5,000 loss is not recognized. Amend tax Unlike property given up. Amend tax   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. Amend tax The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property. Amend tax Like-kind exchanges between related persons. Amend tax   Special rules apply to like-kind exchanges between related persons. Amend tax These rules affect both direct and indirect exchanges. Amend tax Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Amend tax The gain or loss on the original exchange must be recognized as of the date of the later disposition. Amend tax The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. Amend tax Related persons. Amend tax   Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc. Amend tax ), 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. Amend tax   For the complete list of related persons, see Related persons in chapter 2 of Publication 544. Amend tax Example. Amend tax You used a grey pickup truck in your farming business. Amend tax Your sister used a red pickup truck in her landscaping business. Amend tax In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. Amend tax At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. Amend tax The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. Amend tax 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). Amend tax 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). Amend tax However, because this was a like-kind exchange, you recognized no gain. Amend tax 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). Amend tax She recognized gain only to the extent of the money she received, $200. Amend tax 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). Amend tax In 2013, you sold the red pickup truck to a third party for $7,000. Amend tax Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Amend tax On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. Amend tax 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). Amend tax In addition, your sister must report on her tax return for 2013 the $6,000 balance of her gain on the 2012 exchange. Amend tax Her adjusted basis in the grey pickup truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized). Amend tax Exceptions to the rules for related persons. Amend tax   The following property dispositions are excluded from these rules. Amend tax Dispositions due to the death of either related person. Amend tax Involuntary conversions. Amend tax 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. Amend tax Multiple property exchanges. Amend tax   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. Amend tax However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. Amend tax Transfer and receive properties in two or more exchange groups. Amend tax Transfer or receive more than one property within a single exchange group. Amend tax   For more information, see Multiple Property Exchanges in chapter 1 of Publication 544. Amend tax Deferred exchange. Amend tax   A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. Amend tax 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. Amend tax The property you receive is replacement property. Amend tax The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. Amend tax In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met. Amend tax   For more information see Deferred Exchanges in chapter 1 of Publication 544. Amend tax 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. Amend tax This rule does not apply if the recipient is a nonresident alien. Amend tax 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. Amend tax 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. Amend tax The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. Amend tax 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. Amend tax This rule applies for determining loss as well as gain. Amend tax Any gain recognized on a transfer in trust increases the basis. Amend tax For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals. Amend tax 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). Amend tax You may also have a capital gain if your section 1231 transactions result in a net gain. Amend tax See Section 1231 Gains and Losses in  chapter 9. Amend tax 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). Amend tax Your net capital gains may be taxed at a lower tax rate than ordinary income. Amend tax See Capital Gains Tax Rates , later. Amend tax Your deduction for a net capital loss may be limited. Amend tax See Treatment of Capital Losses , later. Amend tax Capital Assets Almost everything you own and use for personal purposes or investment is a capital asset. Amend tax The following items are examples of capital assets. Amend tax A home owned and occupied by you and your family. Amend tax Household furnishings. Amend tax A car used for pleasure. Amend tax 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. Amend tax Stocks and bonds. Amend tax However, there are special rules for gains on qualified small business stock. Amend tax 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. Amend tax Personal-use property. Amend tax   Gain from a sale or exchange of personal-use property is a capital gain and is taxable. Amend tax Loss from the sale or exchange of personal-use property is not deductible. Amend tax You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Amend tax For information on casualties and thefts, see chapter 11. Amend tax 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. Amend tax The time you own an asset before disposing of it is the holding period. Amend tax If you hold a capital asset 1 year or less, the gain or loss resulting from its disposition is short term. Amend tax Report it in Part I of Schedule D (Form 1040). Amend tax If you hold a capital asset longer than 1 year, the gain or loss resulting from its disposition is long term. Amend tax Report it in Part II of Schedule D (Form 1040). Amend tax Holding period. Amend tax   To figure if you held property longer than 1 year, start counting on the day after the day you acquired the property. Amend tax The day you disposed of the property is part of your holding period. Amend tax Example. Amend tax If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. Amend tax 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. Amend tax Inherited property. Amend tax   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. Amend tax This rule does not apply to livestock used in a farm business. Amend tax See Holding period under Livestock , later. Amend tax Nonbusiness bad debt. Amend tax   A nonbusiness bad debt is a short-term capital loss, deductible in the year the debt becomes worthless. Amend tax See chapter 4 of Publication 550. Amend tax Nontaxable exchange. Amend tax   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. Amend tax That is, it begins on the same day as your holding period for the old property. Amend tax Gift. Amend tax   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. Amend tax Real property. Amend tax   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. Amend tax   However, taking possession of real property under an option agreement is not enough to start the holding period. Amend tax The holding period cannot start until there is an actual contract of sale. Amend tax The holding period of the seller cannot end before that time. Amend tax 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. Amend tax Net short-term capital gain or loss. Amend tax   Combine your short-term capital gains and losses. Amend tax Do this by adding all of your short-term capital gains. Amend tax Then add all of your short-term capital losses. Amend tax Subtract the lesser total from the greater. Amend tax The difference is your net short-term capital gain or loss. Amend tax Net long-term capital gain or loss. Amend tax   Follow the same steps to combine your long-term capital gains and losses. Amend tax The result is your net long-term capital gain or loss. Amend tax Net gain. Amend tax   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. Amend tax 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. Amend tax See Capital Gains Tax Rates , later. Amend tax Net loss. Amend tax   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. Amend tax But there are limits on how much loss you can deduct and when you can deduct it. Amend tax See Treatment of Capital Losses next. Amend tax 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. Amend tax 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). Amend tax If your other income is low, you may not be able to use the full $3,000. Amend tax The part of the $3,000 you cannot use becomes part of your capital loss carryover (discussed next). Amend tax Capital loss carryover. Amend tax   Generally, you have a capital loss carryover if either of the following situations applies to you. Amend tax Your net loss on Schedule D (Form 1040), is more than the yearly limit. Amend tax Your taxable income without your deduction for exemptions is less than zero. Amend tax 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. Amend tax    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). Amend tax 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. Amend tax These lower rates are called the maximum capital gains rates. Amend tax 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. Amend tax See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). Amend tax Also see Publication 550. Amend tax Noncapital Assets Noncapital assets include property such as inventory and depreciable property used in a trade or business. Amend tax A list of properties that are not capital assets is provided in the Instructions for Schedule D (Form 1040). Amend tax Property held for sale in the ordinary course of your farm business. Amend tax   Property you hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is a noncapital asset. Amend tax 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). Amend tax The treatment of this property is discussed in chapter 3. Amend tax Land and depreciable properties. Amend tax   Land and depreciable property you use in farming are not capital assets. Amend tax Noncapital assets also include livestock held for draft, breeding, dairy, or sporting purposes. Amend tax 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. Amend tax The sales of these business assets are reported on Form 4797. Amend tax See chapter 9 for more information. Amend tax 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. Amend tax Ordinary property or obligations are those that cannot produce capital gain or loss if sold or exchanged. Amend tax 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. Amend tax 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. Amend tax A forward contract is generally similar to a futures contract except that the terms are not standardized and the contract is not exchange traded. Amend tax Businesses may enter into commodity futures contracts or forward contracts and may acquire options on commodity futures contracts as either of the following. Amend tax Hedging transactions. Amend tax Transactions that are not hedging transactions. Amend tax 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. Amend tax There is a limit on the amount of capital losses you can deduct each year. Amend tax Hedging transactions are not subject to the mark-to-market rules. Amend tax 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. Amend tax 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. Amend tax The gain or loss on the termination of these hedges is generally ordinary gain or loss. Amend tax 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. Amend tax 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. Amend tax Examples include fuel and feed. Amend tax If you have numerous transactions in the commodity futures market during the year, you must be able to show which transactions are hedging transactions. Amend tax Clearly identify a hedging transaction on your books and records before the end of the day you entered into the transaction. Amend tax It may be helpful to have separate brokerage accounts for your hedging and speculation transactions. Amend tax Retain the identification of each hedging transaction with your books and records. Amend tax Also, identify the item(s) or aggregate risk that is being hedged in your records. Amend tax 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. Amend tax 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. Amend tax Accounting methods for hedging transactions. Amend tax   The accounting method you use for a hedging transaction must clearly reflect income. Amend tax 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. Amend tax There are requirements and limits on the method you can use for certain hedging transactions. Amend tax See Regulations section 1. Amend tax 446-4(e) for those requirements and limits. Amend tax   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. Amend tax Cash method. Amend tax Farm-price method. Amend tax Unit-livestock-price method. Amend tax   Once you adopt a method, you must apply it consistently and must have IRS approval before changing it. Amend tax   Your books and records must describe the accounting method used for each type of hedging transaction. Amend tax They must also contain any additional identification necessary to verify the application of the accounting method you used for the transaction. Amend tax You must make the additional identification no more than 35 days after entering into the hedging transaction. Amend tax Example of a hedging transaction. Amend tax   You file your income tax returns on the cash method. Amend tax On July 2 you anticipate a yield of 50,000 bushels of corn this year. Amend tax The December futures price is $5. Amend tax 75 a bushel, but there are indications that by harvest time the price will drop. Amend tax To protect yourself against a drop in the price, you enter into the following hedging transaction. Amend tax You sell ten December futures contracts of 5,000 bushels each for a total of 50,000 bushels of corn at $5. Amend tax 75 a bushel. Amend tax   The price did not drop as anticipated but rose to $6 a bushel. Amend tax In November, you sell your crop at a local elevator for $6 a bushel. Amend tax You also close out your futures position by buying ten December contracts for $6 a bushel. Amend tax You paid a broker's commission of $1,400 ($70 per contract) for the complete in and out position in the futures market. Amend tax   The result is that the price of corn rose 25 cents a bushel and the actual selling price is $6 a bushel. Amend tax Your loss on the hedge is 25 cents a bushel. Amend tax In effect, the net selling price of your corn is $5. Amend tax 75 a bushel. Amend tax   Report the results of your futures transactions and your sale of corn separately on Schedule F. Amend tax See the instructions for the 2013 Schedule F (Form 1040). Amend tax   The loss on your futures transactions is $13,900, figured as follows. Amend tax July 2 - Sold December corn futures (50,000 bu. Amend tax @$5. Amend tax 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Amend tax @$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. Amend tax   The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. Amend tax × $6). Amend tax Report it on Schedule F, Part I, line 2, as income from sales of products you raised. Amend tax   Assume you were right and the price went down 25 cents a bushel. Amend tax In effect, you would still net $5. Amend tax 75 a bushel, figured as follows. Amend tax Sold cash corn, per bushel $5. Amend tax 50 Gain on hedge, per bushel . Amend tax 25 Net price, per bushel $5. Amend tax 75       The gain on your futures transactions would have been $11,100, figured as follows. Amend tax July 2 - Sold December corn futures (50,000 bu. Amend tax @$5. Amend tax 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Amend tax @$5. Amend tax 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. Amend tax   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. Amend tax Livestock This part discusses the sale or exchange of livestock used in your farm business. Amend tax Gain or loss from the sale or exchange of this livestock may qualify as a section 1231 gain or loss. Amend tax However, any part of the gain that is ordinary income from the recapture of depreciation is not included as section 1231 gain. Amend tax See chapter 9 for more information on section 1231 gains and losses and the recapture of depreciation under section 1245. Amend tax The rules discussed here do not apply to the sale of livestock held primarily for sale to customers. Amend tax The sale of this livestock is reported on Schedule F. Amend tax See chapter 3. Amend tax Also, special rules apply to sales or exchanges caused by weather-related conditions. Amend tax See chapter 3. Amend tax Holding period. Amend tax   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). Amend tax Livestock. Amend tax   For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. Amend tax Also, for section 1231 transactions, livestock does not include chickens, turkeys, pigeons, geese, emus, ostriches, rheas, or other birds, fish, frogs, reptiles, etc. Amend tax Livestock used in farm business. Amend tax   If livestock is held primarily for draft, breeding, dairy, or sporting purposes, it is used in your farm business. Amend tax The purpose for which an animal is held ordinarily is determined by a farmer's actual use of the animal. Amend tax 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. Amend tax 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. Amend tax Example 1. Amend tax You discover an animal that you intend to use for breeding purposes is sterile. Amend tax You dispose of it within a reasonable time. Amend tax This animal was held for breeding purposes. Amend tax Example 2. Amend tax 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. Amend tax These young animals were held for breeding or dairy purposes. Amend tax 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. Amend tax See Sales Caused by Weather-Related Conditions in chapter 3. Amend tax Example 3. Amend tax You are in the business of raising hogs for slaughter. Amend tax Customarily, before selling your sows, you obtain a single litter of pigs that you will raise for sale. Amend tax You sell the brood sows after obtaining the litter. Amend tax 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. Amend tax Example 4. Amend tax You are in the business of raising registered cattle for sale to others for use as breeding cattle. Amend tax The business practice is to breed the cattle before sale to establish their fitness as registered breeding cattle. Amend tax Your use of the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. Amend tax Such use does not demonstrate that you are holding the cattle for breeding purposes. Amend tax 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. Amend tax The same applies to hog and sheep breeders. Amend tax Example 5. Amend tax You breed, raise, and train horses for racing purposes. Amend tax Every year you cull horses from your racing stable. Amend tax 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. Amend tax These horses are all considered held for sporting purposes. Amend tax Figuring gain or loss on the cash method. Amend tax   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. Amend tax Raised livestock. Amend tax   Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. Amend tax Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expenses. Amend tax The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised. Amend tax However, see Uniform Capitalization Rules in chapter 6. Amend tax Purchased livestock. Amend tax   The gross sales price minus your adjusted basis and any expenses of sale is the gain or loss. Amend tax Example. Amend tax A farmer sold a breeding cow on January 8, 2013, for $1,250. Amend tax Expenses of the sale were $125. Amend tax The cow was bought July 2, 2009, for $1,300. Amend tax Depreciation (not less than the amount allowable) was $867. Amend tax 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. Amend tax Any gain realized on the disposition of converted wetland or highly erodible cropland is treated as ordinary income. Amend tax Any loss on the disposition of such property is treated as a long-term capital loss. Amend tax Converted wetland. Amend tax   This is generally land that was drained or filled to make the production of agricultural commodities possible. Amend tax 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. Amend tax   A wetland (before conversion) is land that meets all the following conditions. Amend tax 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. Amend tax 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. Amend tax It supports, under normal circumstances, mostly plants that grow in saturated soil. Amend tax Highly erodible cropland. Amend tax   This is cropland subject to erosion that you used at any time for farming purposes other than grazing animals. Amend tax Generally, highly erodible cropland is land currently classified by the Department of Agriculture as Class IV, VI, VII, or VIII under its classification system. Amend tax 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. Amend tax Successor. Amend tax   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. Amend tax Timber Standing timber you held as investment property is a capital asset. Amend tax Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. Amend tax If you held the timber primarily for sale to customers, it is not a capital asset. Amend tax Gain or loss on its sale is ordinary business income or loss. Amend tax It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). Amend tax See the Instructions for Schedule F (Form 1040). Amend tax 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. Amend tax Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc. Amend tax , are ordinary farm income and expenses reported on Schedule F. Amend tax 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. Amend tax Timber considered cut. Amend tax   Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Amend tax This is true whether the timber is cut under contract or whether you cut it yourself. Amend tax Christmas trees. Amend tax   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. Amend tax They qualify for both rules discussed below. Amend tax Election to treat cutting as a sale or exchange. Amend tax   Under the general rule, the cutting of timber results in no gain or loss. Amend tax It is not until a sale or exchange occurs that gain or loss is realized. Amend tax 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. Amend tax 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. Amend tax Any later sale results in ordinary business income or loss. Amend tax See the example below. Amend tax   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. Amend tax Making the election. Amend tax   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. Amend tax You do not have to make the election in the first year you cut the timber. Amend tax You can make it in any year to which the election would apply. Amend tax If the timber is partnership property, the election is made on the partnership return. Amend tax This election cannot be made on an amended return. Amend tax   Once you have made the election, it remains in effect for all later years unless you revoke it. Amend tax Election under section 631(a) may be revoked. Amend tax   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. Amend tax The prior election (and revocation) is disregarded for purposes of making a subsequent election. Amend tax See Form T (Timber), Forest Activities Schedule, for more information. Amend tax Gain or loss. Amend tax   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. Amend tax   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. Amend tax 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. Amend tax 611-3. Amend tax   Depletion of timber is discussed in chapter 7. Amend tax Example. Amend tax   In April 2013, you owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Amend tax It had an adjusted basis for depletion of $40 per MBF. Amend tax You are a calendar year taxpayer. Amend tax On January 1, 2013, the timber had a FMV of $350 per MBF. Amend tax It was cut in April for sale. Amend tax On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Amend tax You report the difference between the FMV and your adjusted basis for depletion as a gain. Amend tax 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. Amend tax You figure your gain as follows. Amend tax 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. Amend tax Outright sales of timber. Amend tax   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). Amend tax 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). Amend tax Cutting contract. Amend tax   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Amend tax You are the owner of the timber. Amend tax You held the timber longer than 1 year before its disposal. Amend tax You kept an economic interest in the timber. Amend tax   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. Amend tax   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. Amend tax Include this amount on Form 4797 along with your other section 1231 gains or losses. Amend tax Date of disposal. Amend tax   The date of disposal is the date the timber is cut. Amend tax 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. Amend tax   This election applies only to figure the holding period of the timber. Amend tax It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Amend tax   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Amend tax The statement must identify the advance payments subject to the election and the contract under which they were made. Amend tax   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). Amend tax Attach the statement to the amended return and write “Filed pursuant to section 301. Amend tax 9100-2” at the top of the statement. Amend tax File the amended return at the same address the original return was filed. Amend tax Owner. Amend tax   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. Amend tax 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. Amend tax Tree stumps. Amend tax   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. Amend tax Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Amend tax However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Amend tax Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Amend tax   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Amend tax 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). Amend tax If you have a gain from the sale, you may be allowed to exclude the gain on your home. Amend tax For more information, see Publication 523, Selling Your Home. Amend tax The gain on the sale of your business property is taxable. Amend tax A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. Amend tax Your taxable gain or loss on the sale of property used in your farm business is taxed under the rules for section 1231 transactions. Amend tax See chapter 9. Amend tax Losses from personal-use property, other than casualty or theft losses, are not deductible. Amend tax 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. Amend tax See chapter 10 for information about installment sales. Amend tax When you sell your farm, the gain or loss on each asset is figured separately. Amend tax The tax treatment of gain or loss on the sale of each asset is determined by the classification of the asset. Amend tax Each of the assets sold must be classified as one of the following. Amend tax Capital asset held 1 year or less. Amend tax Capital asset held longer than 1 year. Amend tax 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 ). Amend tax 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). Amend tax 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. Amend tax Allocation of consideration paid for a farm. Amend tax   The sale of a farm for a lump sum is considered a sale of each individual asset rather than a single asset. Amend tax The residual method is required only if the group of assets sold constitutes a trade or business. Amend tax This method determines gain or loss from the transfer of each asset. Amend tax It also determines the buyer's basis in the business assets. Amend tax For more information, see Sale of a Business in chapter 2 of Publication 544. Amend tax Property used in farm operation. Amend tax   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. Amend tax Recognized gains and losses on business property must be reported on your return for the year of the sale. Amend tax If the property was held longer than 1 year, it may qualify for section 1231 treatment (see chapter 9). Amend tax Example. Amend tax You sell your farm, including your main home, which you have owned since December 2001. Amend tax You realize gain on the sale as follows. Amend tax   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. Amend tax 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. Amend tax Treat the balance as section 1231 gain. Amend tax 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 . Amend tax Partial sale. Amend tax   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. Amend tax You cannot wait until you have sold enough of the farm to recover its entire cost before reporting gain or loss. Amend tax For a detailed discussion on installment sales, see Publication 544. Amend tax Adjusted basis of the part sold. Amend tax   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. Amend tax , on the part sold. Amend tax 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 . Amend tax Example. Amend tax You bought a 600-acre farm for $700,000. Amend tax The farm included land and buildings. Amend tax The purchase contract designated $600,000 of the purchase price to the land. Amend tax You later sold 60 acres of land on which you had installed a fence. Amend tax 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. Amend tax Use this amount to determine your gain or loss on the sale of the 60 acres. Amend tax Assessed values for local property taxes. Amend tax   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. Amend tax Example. Amend tax Assume that in the preceding example there was no breakdown of the $700,000 purchase price between land and buildings. Amend tax 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. Amend tax The assessed valuation of the land is 3/4 (75%) of the total assessed valuation. Amend tax Multiply the $700,000 total purchase price by 75% to figure basis of $525,000 for the 600 acres of land. Amend tax The unadjusted basis of the 60 acres you sold would then be $52,500 (1/10 of $525,000). Amend tax Sale of your home. Amend tax   Your home is a capital asset and not property used in the trade or business of farming. Amend tax 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. Amend tax Your home includes the immediate surroundings and outbuildings relating to it that are not used for business purposes. Amend tax   If you use part of your home for business, you must make an appropriate adjustment to the basis for depreciation allowed or allowable. Amend tax For more information on basis, see chapter 6. Amend tax More information. Amend tax   For more information on selling your home, see Publication 523. Amend tax Gain from condemnation. Amend tax   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. Amend tax 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. Amend tax 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. Amend tax The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Amend tax This is true even if you voluntarily return the property to the lender. Amend tax You may also realize ordinary income from cancellation of debt if the loan balance is more than the FMV of the property. Amend tax Buyer's (borrower's) gain or loss. Amend tax   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. Amend tax The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Amend tax See Determining Gain or Loss , earlier. Amend tax Worksheet 8-1. Amend tax Worksheet for Foreclosures andRepossessions Part 1. Amend tax Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Amend tax Complete this part only if you were personally liable for the debt. Amend tax Otherwise, go to Part 2. Amend tax   1. Amend tax 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. Amend tax Enter the Fair Market Value of the transferred property   3. Amend tax Ordinary income from cancellation of debt upon foreclosure or repossession. Amend tax * Subtract line 2 from line 1. Amend tax If zero or less, enter -0-   Part 2. Amend tax Figure your gain or loss from foreclosure or repossession. Amend tax   4. Amend tax If you completed Part 1, enter the smaller of line 1 or line 2. Amend tax If you did not complete Part 1, enter the outstanding debt immediately before the transfer of property   5. Amend tax Enter any proceeds you received from the foreclosure sale   6. Amend tax Add lines 4 and 5   7. Amend tax Enter the adjusted basis of the transferred property   8. Amend tax Gain or loss from foreclosure or repossession. Amend tax Subtract line 7  from line 6   * The income may not be taxable. Amend tax See Cancellation of debt . Amend tax    You can use Worksheet 8-1 to figure your gain or loss from a foreclosure or repossession. Amend tax Amount realized on a nonrecourse debt. Amend tax   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. Amend tax 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. Amend tax Example 1. Amend tax Ann paid $200,000 for land used in her farming business. Amend tax She paid $15,000 down and borrowed the remaining $185,000 from a bank. Amend tax Ann is not personally liable for the loan (nonrecourse debt), but pledges the land as security. Amend tax The bank foreclosed on the loan 2 years after Ann stopped making payments. Amend tax When the bank foreclosed, the balance due on the loan was $180,000 and the FMV of the land was $170,000. Amend tax The amount Ann realized on the foreclosure was $180,000, the debt canceled by the foreclosure. Amend tax She figures her gain or loss on Form 4797, Part I, by comparing the amount realized ($180,000) with her adjusted basis ($200,000). Amend tax She has a $20,000 deductible loss. Amend tax Example 2. Amend tax Assume the same facts as in Example 1 except the FMV of the land was $210,000. Amend tax The result is the same. Amend tax The amount Ann realized on the foreclosure is $180,000, the debt canceled by the foreclosure. Amend tax Because her adjusted basis is $200,000, she has a deductible loss of $20,000, which she reports on Form 4797, Part I. Amend tax Amount realized on a recourse debt. Amend tax   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. Amend tax   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. Amend tax The amount realized does not include the canceled debt that is your income from cancellation of debt. Amend tax See Cancellation of debt , later. Amend tax Example 3. Amend tax Assume the same facts as in Example 1 above except Ann is personally liable for the loan (recourse debt). Amend tax In this case, the amount she realizes is $170,000. Amend tax This is the canceled debt ($180,000) up to the FMV of the land ($170,000). Amend tax Ann figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($200,000). Amend tax She has a $30,000 deductible loss, which she figures on Form 4797, Part I. Amend tax She is also treated as receiving ordinary income from cancellation of debt. Amend tax That income is $10,000 ($180,000 − $170,000). Amend tax This is the part of the canceled debt not included in the amount realized. Amend tax She reports this as other income on Schedule F, line 8. Amend tax Seller's (lender's) gain or loss on repossession. Amend tax   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. Amend tax For more information, see Repossession in Publication 537, Installment Sales. Amend tax Cancellation of debt. Amend tax   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. Amend tax This income is separate from any gain or loss realized from the foreclosure or repossession. Amend tax Report the income from cancellation of a business debt on Schedule F, line 8. Amend tax Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Amend tax    You can use Worksheet 8-1 to figure your income from cancellation of debt. Amend tax   However, income from cancellation of debt is not taxed if any of the following apply. Amend tax The cancellation is intended as a gift. Amend tax The debt is qualified farm debt (see chapter 3). Amend tax The debt is qualified real property business debt (see chapter 5 of Publication 334). Amend tax You are insolvent or bankrupt (see  chapter 3). Amend tax The debt is qualified principal residence indebtedness (see chapter 3). Amend tax   Use Form 982 to report the income exclusion. Amend tax Abandonment The abandonment of property is a disposition of property. Amend tax 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. Amend tax Business or investment property. Amend tax   Loss from abandonment of business or investment property is deductible as a loss. Amend tax Loss from abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Amend tax If your adjusted basis is more than the amount you realize (if any), then you have a loss. Amend tax If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Amend tax This rule also applies to leasehold improvements the lessor made for the lessee. Amend tax 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 . Amend tax   If the abandoned property is secured by debt, special rules apply. Amend tax 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). Amend tax For more information, see chapter 3 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). Amend tax The abandonment loss is deducted in the tax year in which the loss is sustained. Amend tax Report the loss on Form 4797, Part II, line 10. Amend tax Personal-use property. Amend tax   You cannot deduct any loss from abandonment of your home or other property held for personal use. Amend tax Canceled debt. Amend tax   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. Amend tax This income is separate from any loss realized from abandonment of the property. Amend tax Report income from cancellation of a debt related to a business or rental activity as business or rental income. Amend tax Report income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Amend tax   However, income from cancellation of debt is not taxed in certain circumstances. Amend tax See Cancellation of debt earlier under Foreclosure or Repossession . Amend tax Forms 1099-A and 1099-C. Amend tax   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. Amend tax 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. Amend tax 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. Amend tax For foreclosures, repossessions, abandonments of property, and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Amend tax Prev  Up  Next   Home   More Online Publications
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The Amend Tax

Amend tax 4. Amend tax   Deductions Table of Contents Standard DeductionStandard Deduction for Dependents Itemized DeductionsMedical and Dental Expenses Most taxpayers have a choice of taking a standard deduction or itemizing their deductions. Amend tax You benefit from the standard deduction if your standard deduction is more than the total of your allowable itemized deductions. Amend tax If you have a choice, you should use the method that gives you the lower tax. Amend tax Standard Deduction The standard deduction amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another taxpayer. Amend tax Generally, the standard deduction amounts are adjusted each year for inflation. Amend tax In most cases, you can use Worksheet 4-1 to figure your standard deduction amount. Amend tax Persons not eligible for the standard deduction. Amend tax   Your standard deduction is zero and you should itemize any deductions you have if: You are married and filing a separate return, and your spouse itemizes deductions, You are filing a tax return for a short tax year because of a change in your annual accounting period, or You are a nonresident or dual-status alien during the year. Amend tax You are considered a dual-status alien if you were both a nonresident alien and a resident alien during the year. Amend tax   If you are a nonresident alien who is married to a U. Amend tax S. Amend tax citizen or resident alien at the end of the year, you can choose to be treated as a U. Amend tax S. Amend tax resident. Amend tax See Publication 519, U. Amend tax S. Amend tax Tax Guide for Aliens. Amend tax If you make this choice, you can take the standard deduction. Amend tax Decedent's final return. Amend tax   The amount of the standard deduction for a decedent's final tax return is the same as it would have been had the decedent continued to live. Amend tax However, if the decedent was not 65 or older at the time of death, the higher standard deduction for age cannot be claimed. Amend tax Higher standard deduction for age (65 or older). Amend tax   If you do not itemize deductions, you are entitled to a higher standard deduction if you are age 65 or older at the end of the year. Amend tax You are considered age 65 on the day before your 65th birthday. Amend tax Therefore, you can take a higher standard deduction for 2013 if you were born before January 2, 1949. Amend tax Higher standard deduction for blindness. Amend tax   If you are blind on the last day of the year and you do not itemize deductions, you are entitled to a higher standard deduction. Amend tax You qualify for this benefit if you are totally or partly blind. Amend tax Not totally blind. Amend tax   If you are not totally blind, you must get a certified statement from an eye doctor (ophthalmologist or optometrist) that: You cannot see better than 20/200 in the better eye with glasses or contact lenses, or Your field of vision is not more than 20 degrees. Amend tax   If your eye condition will never improve beyond these limits, the statement should include this fact. Amend tax You must keep the statement in your records. Amend tax   If your vision can be corrected beyond these limits only by contact lenses that you can wear only briefly because of pain, infection, or ulcers, you can take the higher standard deduction for blindness if you otherwise qualify. Amend tax Spouse 65 or older or blind. Amend tax   You can take the higher standard deduction if your spouse is age 65 or older or blind and: You file a joint return, or You file a separate return and can claim an exemption for your spouse because your spouse had no gross income and an exemption for your spouse could not be claimed by another taxpayer. Amend tax    You cannot claim the higher standard deduction for an individual other than yourself and your spouse. Amend tax Example. Amend tax This example illustrates how to determine your standard deduction using Worksheet 4-1. Amend tax Bill and Lisa are filing a joint return for 2013. Amend tax Both are over age 65. Amend tax Neither is blind, and neither can be claimed as a dependent. Amend tax They do not itemize deductions, so they use Worksheet 4-1. Amend tax Because they are married filing jointly, they enter $12,200 on line 1. Amend tax They check the “No” box on line 2, so they also enter $12,200 on line 4. Amend tax Because they are both over age 65, they enter $2,400 ($1,200 × 2) on line 5. Amend tax They enter $14,600 ($12,200 + $2,400) on line 6, so their standard deduction is $14,600. Amend tax Standard Deduction for Dependents The standard deduction for an individual for whom an exemption can be claimed on another person's tax return is generally limited to the greater of: $1,000, or The individual's earned income for the year plus $350 (but not more than the regular standard deduction amount, generally $6,100). Amend tax However, the standard deduction may be higher if the individual is 65 or older or blind. Amend tax If an exemption for you (or your spouse if you are filing jointly) can be claimed on someone else's return, use Worksheet 4-1, if applicable, to determine your standard deduction. Amend tax Worksheet 4-1. Amend tax 2013 Standard Deduction Worksheet Caution. Amend tax If you are married filing separately and your spouse itemizes deductions, or if you are a dual-status alien, do not complete this worksheet. Amend tax If you were born before January 2, 1949, and/or blind, check the correct number of boxes below. Amend tax Put the total number of boxes checked in box c and go to line 1. Amend tax a. Amend tax You   Born before  January 2, 1949     Blind b. Amend tax Your spouse, if claiming  spouse's exemption   Born before January 2, 1949     Blind c. Amend tax Total boxes checked             1. Amend tax Enter the amount shown below for your filing status. Amend tax               Single or married filing separately — $6,100 Married filing jointly or Qualifying widow(er) — $12,200 Head of household — $8,950   1. Amend tax           2. Amend tax Can you (or your spouse if filing jointly) be claimed as a dependent on someone else's return?  No. Amend tax Skip line 3; enter the amount from line 1 on line 4. Amend tax   Yes. Amend tax Go to line 3. Amend tax         3. Amend tax Is your earned income* more than $650?               Yes. Amend tax Add $350 to your earned income. Amend tax Enter the total   3. Amend tax         No. Amend tax Enter $1,000 4. Amend tax Enter the smaller of line 1 or line 3 4. Amend tax   5. Amend tax If born before January 2, 1949, or blind, multiply the number in box c by $1,200 ($1,500 if single or head of household). Amend tax Enter the result here. Amend tax Otherwise, enter -0- 5. Amend tax   6. Amend tax Add lines 4 and 5. Amend tax This is your standard deduction for 2013. Amend tax 6. Amend tax   * Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. Amend tax It also includes any amount received as a scholarship that you must include in your income. Amend tax Generally, your earned income is the total of the amount(s) you reported on Form 1040, lines 7, 12, and 18, minus the amount, if any, on line 27 (or the amount you reported on Form 1040A, line 7). Amend tax Itemized Deductions Some individuals should itemize their deductions because it will save them money. Amend tax Others should itemize because they do not qualify for the standard deduction. Amend tax See the discussion under Standard Deduction , earlier, to decide if it would be to your advantage to itemize deductions. Amend tax You may be subject to a limit on some of your itemized deductions if your adjusted gross income is more than $150,000. Amend tax For more information, see Overall limitation, later. Amend tax Medical and dental expenses, some taxes, certain interest expenses, charitable contributions, casualty and theft losses, and certain other miscellaneous expenses may be itemized as deductions on Schedule A (Form 1040). Amend tax You may benefit from itemizing your deductions on Schedule A (Form 1040) if you: Cannot take the standard deduction, Had uninsured medical or dental expenses that are more than 10% of your adjusted gross income (or more than 7. Amend tax 5% of your adjusted gross income if either you or your spouse is age 65 or older), Paid interest on your home, Paid real estate or personal property taxes, Paid mortgage insurance premiums, Paid state and local income or general sales taxes, Had large unreimbursed employee business expenses or other miscellaneous deductions, Had large uninsured casualty or theft losses, Made large contributions to qualified charities (see Publication 526, Charitable Contributions), or Have total itemized deductions that are more than the standard deduction that applies to you. Amend tax See the Schedule A (Form 1040) instructions for more information. Amend tax Overall limitation. Amend tax   You may not be able to deduct all of your itemized deductions if your adjusted gross income is more than: $150,000, if married filing separately, $250,000, if single, $275,000, if head of household, or $300,000, if married filing jointly or qualifying widow(er). Amend tax  If your adjusted gross income exceeds the applicable amount, you will use the Itemized Deductions Worksheet in the Instructions for Schedule A (Form 1040) to figure your total itemized deductions. Amend tax Medical and Dental Expenses You can deduct certain medical and dental expenses you paid for yourself, your spouse, and your dependent(s) if you itemize your deductions on Schedule A (Form 1040). Amend tax Table 4-1 shows some common items that you can or cannot include in figuring your medical expense deduction. Amend tax For more information, see the following discussions of selected items, which are presented in alphabetical order. Amend tax A more extensive list of items and further details can be found in Publication 502, Medical and Dental Expenses. Amend tax Table 4-1. Amend tax Medical and Dental Expenses Checklist You can include: You cannot include: Bandages Capital expenses for equipment or improvements to your home needed for medical care (see Publication 502) Certain weight-loss expenses for obesity Diagnostic devices Expenses of an organ donor Eye surgery—to promote the correct function of the eye Guide dogs or other animals aiding the blind, deaf, and disabled Hospital services fees (lab work, therapy, nursing services, surgery, etc. Amend tax ) Lead-based paint removal (see Publication 502) Long-term care contracts, qualified (see Publication 502) Meals and lodging provided by a hospital during medical treatment Medical and hospital insurance premiums Medical services fees (from doctors, dentists, surgeons, specialists, and other medical practitioners) Medicare Part D premiums Oxygen equipment and oxygen Part of life-care fee paid to retirement home designated for medical care Prescription medicines (prescribed by a doctor) and insulin Psychiatric and psychological treatment Social security tax, Medicare tax, FUTA, and state employment tax for worker providing medical care (see Publication 502) Special items (artificial limbs, false teeth, eyeglasses, contact lenses, hearing aids, crutches, wheelchair, etc. Amend tax ) Special education for mentally or physically disabled persons (see Publication 502) Stop-smoking programs Transportation for needed medical care Treatment at a drug or alcohol center (includes meals and lodging provided by the center) Wages for nursing services (see Publication 502) Contributions to Archer MSAs (see Publication 969) Bottled water Diaper service Expenses for your general health (even if following your doctor's advice) such as: —Health club dues —Household help (even if recommended by a doctor) —Social activities, such as dancing or swimming lessons —Trip for general health improvement Flexible spending account reimbursements for medical expenses (if contributions were on a pretax basis) (see Publication 502) Funeral, burial, or cremation expenses Health savings account payments for medical expenses (see Publication 502) Illegal operation or treatment Life insurance or income protection policies, or policies providing payment for loss of life, limb, sight, etc. Amend tax Medical insurance included in a car insurance policy covering all persons injured in or by your car Medicine you buy without a prescription Nursing care for a healthy baby Prescription drugs you brought in (or ordered shipped) from another country, in most cases (see Publication 502) Surgery for purely cosmetic reasons (see Publication 502) Toothpaste, toiletries, cosmetics, etc. Amend tax Teeth whitening Weight-loss expenses not for the treatment of obesity or other disease You can deduct only the amount of your medical and dental expenses that is more than 10% of your adjusted gross income (or that is more than 7. Amend tax 5% of your adjusted gross income if you or your spouse is age 65 or older). Amend tax What to include. Amend tax   Generally, you can include only the medical and dental expenses you paid this year, regardless of when the services were provided. Amend tax If you pay medical expenses by check, the day you mail or deliver the check generally is the date of payment. Amend tax If you use a pay-by-phone or online account to pay your medical expenses, the date reported on the statement of the financial institution showing when payment was made is the date of payment. Amend tax You can include medical expenses you charge to your credit card in the year the charge is made. Amend tax It does not matter when you actually pay the amount charged. Amend tax Home Improvements You can include in medical expenses amounts you pay for home improvements if their main purpose is medical care for you, your spouse, or your dependent. Amend tax Only reasonable costs to accommodate a home to your disabled condition (or that of your spouse or your dependent(s) who live with you) are considered medical care. Amend tax Additional costs for personal motives, such as for architectural or aesthetic reasons, are not medical expenses. Amend tax Publication 502 contains additional information and examples, including a capital expense worksheet, to assist you in figuring the amount of the capital expense that you can include in your medical expenses. Amend tax Also, see Publication 502 for information about deductible operating and upkeep expenses related to such capital expense items, and for information about improvements, for medical reasons, to property rented by a person with disabilities. Amend tax Household Help You cannot include in medical expenses the cost of household help, even if such help is recommended by a doctor. Amend tax This is a personal expense that is not deductible. Amend tax However, you may be able to include certain expenses paid to a person providing nursing-type services. Amend tax For more information, see Nursing Services , later. Amend tax Also, certain maintenance or personal care services provided for qualified long-term care can be included in medical expenses. Amend tax For more information, see Qualified long-term care services under Long-Term Care, later. Amend tax Hospital Services You can include in medical expenses amounts you pay for the cost of inpatient care at a hospital or similar institution if a principal reason for being there is to receive medical care. Amend tax This includes amounts paid for meals and lodging. Amend tax Also, see Meals and Lodging , later. Amend tax Long-Term Care You can include in medical expenses amounts paid for qualified long-term care services and premiums paid for qualified long-term care insurance contracts. Amend tax Qualified long-term care services. Amend tax   Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance and personal care services (defined later) that are: Required by a chronically ill individual, and Provided under a plan of care prescribed by a licensed health care practitioner. Amend tax Chronically ill individual. Amend tax    An individual is chronically ill if, within the previous 12 months, a licensed health care practitioner has certified that the individual meets either of the following descriptions. Amend tax He or she is unable to perform at least two activities of daily living without substantial assistance from another individual for at least 90 days, due to a loss of functional capacity. Amend tax Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence. Amend tax He or she requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment. Amend tax Maintenance and personal care services. Amend tax    Maintenance or personal care services is care which has as its primary purpose the providing of a chronically ill individual with needed assistance with his or her disabilities (including protection from threats to health and safety due to severe cognitive impairment). Amend tax Qualified long-term care insurance contracts. Amend tax   A qualified long-term care insurance contract is an insurance contract that provides only coverage of qualified long-term care services. Amend tax The contract must: Be guaranteed renewable, Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed, Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract must be used only to reduce future premiums or increase future benefits, and Generally not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer, or the contract makes per diem or other periodic payments without regard to expenses. Amend tax   The amount of qualified long-term care premiums you can include is limited. Amend tax You can include the following as medical expenses on Schedule A (Form 1040). Amend tax Qualified long-term care premiums up to the following amounts. Amend tax Age 40 or under – $360. Amend tax Age 41 to 50 – $680. Amend tax Age 51 to 60 – $1,360. Amend tax Age 61 to 70 – $3,640. Amend tax Age 71 or over – $4,550. Amend tax Unreimbursed expenses for qualified long-term care services. Amend tax Note. Amend tax The limit on premiums is for each person. Amend tax Meals and Lodging You can include in medical expenses the cost of meals and lodging at a hospital or similar institution if your main reason for being there is to receive medical care. Amend tax You may be able to include in medical expenses the cost of lodging (but not meals) not provided in a hospital or similar institution. Amend tax You can include the cost of such lodging while away from home if all of the following requirements are met. Amend tax The lodging is primarily for, and essential to, medical care. Amend tax The medical care is provided by a doctor in a licensed hospital or in a medical care facility related to, or the equivalent of, a licensed hospital. Amend tax The lodging is not lavish or extravagant under the circumstances. Amend tax There is no significant element of personal pleasure, recreation, or vacation in the travel away from home. Amend tax The amount you include in medical expenses for lodging cannot be more than $50 per night for each person. Amend tax You can include lodging for a person traveling with the person receiving the medical care. Amend tax For example, if a parent is traveling with a sick child, up to $100 per night can be included as a medical expense for lodging. Amend tax (Meals are not included. Amend tax ) Nursing home. Amend tax   You can include in medical expenses the cost of medical care in a nursing home or a home for the aged for yourself, your spouse, or your dependent(s). Amend tax This includes the cost of meals and lodging in the home if a main reason for being there is to get medical care. Amend tax   Do not include the cost of meals and lodging if the reason for being in the home is personal. Amend tax However, you can include in medical expenses the part of the cost that is for medical or nursing care. Amend tax Medical Insurance Premiums You can include in medical expenses insurance premiums you pay for policies that cover medical care. Amend tax Policies can provide payment for: Hospitalization, surgical fees, X-rays, Prescription drugs and insulin, Dental care, Replacement of lost or damaged contact lenses, and Qualified long-term care insurance contracts (subject to the additional limits included in the discussion on qualified long-term care insurance contracts under Long-Term Care , earlier). Amend tax If you have a policy that provides payments for other than medical care, you can include the premiums for the medical care part of the policy if the charge for the medical part is reasonable. Amend tax The cost of the medical portion must be separately stated in the insurance contract or given to you in a separate statement. Amend tax Medicare Part A. Amend tax   If you are covered under social security (or if you are a government employee who paid Medicare tax), you are enrolled in Medicare Part A. Amend tax The payroll tax paid for Medicare Part A is not a medical expense. Amend tax If you are not covered under social security (or were not a government employee who paid Medicare tax), you can enroll voluntarily in Medicare Part A. Amend tax In this situation you can include the premiums you paid for Medicare Part A as a medical expense. Amend tax Medicare Part B. Amend tax   Medicare Part B is a supplemental medical insurance. Amend tax Premiums you pay for Medicare Part B are a medical expense. Amend tax If you applied for it at age 65 or after you became disabled, you can include in medical expenses the monthly premiums you paid. Amend tax If you were over age 65 or disabled when you first enrolled, check with your local Social Security Administration office, or go to their website at www. Amend tax SSA. Amend tax gov, to find out your premium. Amend tax Medicare Part D. Amend tax   Medicare Part D is a voluntary prescription drug insurance program for persons with Medicare Part A or Part B. Amend tax You can include as a medical expense premiums you pay for Medicare Part D. Amend tax Prepaid insurance premiums. Amend tax   Insurance premiums you pay before you are age 65 for medical care for yourself, your spouse, or your dependents after you reach age 65 are medical care expenses in the year paid if they are: Payable in equal yearly installments, or more often, and Payable for at least 10 years, or until you reach age 65 (but not for less than 5 years). Amend tax Medicines You can include in medical expenses amounts you pay for prescribed medicines and drugs. Amend tax A prescribed drug is one that requires a prescription by a doctor for its use by an individual. Amend tax You can also include amounts you pay for insulin. Amend tax Except for insulin, you cannot include in medical expenses amounts you pay for a drug that is not prescribed. Amend tax Imported medicines and drugs. Amend tax   If you import medicines or drugs from other countries, see Medicines and Drugs From Other Countries, under What Expenses Are Not Includible, in Publication 502. Amend tax Nursing Services You can include in medical expenses wages and other amounts you pay for nursing services. Amend tax The services need not be performed by a nurse as long as the services are of a kind generally performed by a nurse. Amend tax This includes services connected with caring for the patient's condition, such as giving medication or changing dressings, as well as bathing and grooming the patient. Amend tax These services can be provided in your home or another care facility. Amend tax Generally, only the amount spent for nursing services is a medical expense. Amend tax If the attendant also provides personal and household services, amounts paid to the attendant must be divided between the time spent performing household and personal services and the time spent for nursing services. Amend tax However, certain maintenance or personal care services provided for qualified long-term care can be included in medical expenses. Amend tax See Maintenance and personal care services under Qualified long-term care services, earlier. Amend tax Additionally, certain expenses for household services or for the care of a qualifying individual incurred to allow you to work may qualify for the child and dependent care credit. Amend tax See Child and Dependent Care Credit , later, and Publication 503, Child and Dependent Care Expenses. Amend tax You can also include in medical expenses part of the amount you pay for that attendant's meals. Amend tax Divide the food expense among the household members to find the cost of the attendant's food. Amend tax Then divide that cost in the same manner as in the preceding paragraph. Amend tax If you had to pay additional amounts for household upkeep because of the attendant, you can include the extra amounts with your medical expenses. Amend tax This includes extra rent or utilities you pay because you moved to a larger apartment to provide space for the attendant. Amend tax Employment taxes. Amend tax   You can include as a medical expense social security tax, FUTA, Medicare tax, and state employment taxes you pay for a nurse, attendant, or other person who provides medical care. Amend tax If the attendant also provides personal and household services, you can include as a medical expense only the amount of employment taxes paid for medical services as explained earlier under Nursing Services. Amend tax For information on employment tax responsibilities of household employers, see Publication 926, Household Employer's Tax Guide. Amend tax Transportation You can include in medical expenses amounts paid for transportation primarily for, and essential to, medical care. Amend tax Car expenses. Amend tax    You can include out-of-pocket expenses, such as the cost of gas and oil, when you use a car for medical reasons. Amend tax You cannot include depreciation, insurance, general repair, or maintenance expenses. Amend tax   If you do not want to use your actual expenses for 2013, you can use the standard medical mileage rate of 24 cents a mile. Amend tax   You can also include parking fees and tolls. Amend tax You can add these fees and tolls to your medical expenses whether you use actual expenses or use the standard mileage rate. Amend tax You can also include:    Bus, taxi, train, or plane fares or ambulance service, and Transportation expenses of a nurse or other person who can give injections, medications, or other treatment required by a patient who is traveling to get medical care and is unable to travel alone. Amend tax Do not include transportation expenses if, for purely personal reasons, you choose to travel to another city for an operation or other medical care prescribed by your doctor. Amend tax Prev  Up  Next   Home   More Online Publications