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E File State Taxes

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E File State Taxes

E file state taxes 7. E file state taxes   Interest Income Table of Contents Reminder Introduction Useful Items - You may want to see: General InformationSSN for joint account. E file state taxes Custodian account for your child. E file state taxes Penalty for failure to supply SSN. E file state taxes Reporting backup withholding. E file state taxes Savings account with parent as trustee. E file state taxes Interest not reported on Form 1099-INT. E file state taxes Nominees. E file state taxes Incorrect amount. E file state taxes Information reporting requirement. E file state taxes Taxable InterestInterest subject to penalty for early withdrawal. E file state taxes Money borrowed to invest in certificate of deposit. E file state taxes U. E file state taxes S. E file state taxes Savings Bonds Education Savings Bond Program U. E file state taxes S. E file state taxes Treasury Bills, Notes, and Bonds Bonds Sold Between Interest Dates Insurance State or Local Government Obligations Original Issue Discount (OID) When To Report Interest IncomeConstructive receipt. E file state taxes How To Report Interest IncomeSchedule B (Form 1040A or 1040). E file state taxes Reporting tax-exempt interest. E file state taxes U. E file state taxes S. E file state taxes savings bond interest previously reported. E file state taxes Reminder Foreign-source income. E file state taxes  If you are a U. E file state taxes S. E file state taxes citizen with interest income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt by U. E file state taxes S. E file state taxes law. E file state taxes This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer. E file state taxes Introduction This chapter discusses the following topics. E file state taxes Different types of interest income. E file state taxes What interest is taxable and what interest is nontaxable. E file state taxes When to report interest income. E file state taxes How to report interest income on your tax return. E file state taxes In general, any interest you receive or that is credited to your account and can be withdrawn is taxable income. E file state taxes Exceptions to this rule are discussed later in this chapter. E file state taxes You may be able to deduct expenses you have in earning this income on Schedule A (Form 1040) if you itemize your deductions. E file state taxes See Money borrowed to invest in certificate of deposit , later, and chapter 28. E file state taxes Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 1212 Guide to Original Issue Discount (OID) Instruments Form (and Instructions) Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends 8815 Exclusion of Interest From Series EE and I U. E file state taxes S. E file state taxes Savings Bonds Issued After 1989 8818 Optional Form To Record Redemption of Series EE and I U. E file state taxes S. E file state taxes Savings Bonds Issued After 1989 General Information A few items of general interest are covered here. E file state taxes Recordkeeping. E file state taxes You should keep a list showing sources and interest amounts received during the year. E file state taxes Also, keep the forms you receive showing your interest income (Forms 1099-INT, for example) as an important part of your records. E file state taxes Tax on unearned income of certain children. E file state taxes    Part of a child's 2013 unearned income may be taxed at the parent's tax rate. E file state taxes If so, Form 8615, Tax for Certain Children Who Have Unearned Income, must be completed and attached to the child's tax return. E file state taxes If not, Form 8615 is not required and the child's income is taxed at his or her own tax rate. E file state taxes   Some parents can choose to include the child's interest and dividends on the parent's return. E file state taxes If you can, use Form 8814, Parents' Election To Report Child's Interest and Dividends, for this purpose. E file state taxes   For more information about the tax on unearned income of children and the parents' election, see chapter 31. E file state taxes Beneficiary of an estate or trust. E file state taxes   Interest you receive as a beneficiary of an estate or trust is generally taxable income. E file state taxes You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. E file state taxes , from the fiduciary. E file state taxes Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040. E file state taxes Social security number (SSN). E file state taxes   You must give your name and SSN or individual tax identification number (ITIN) to any person required by federal tax law to make a return, statement, or other document that relates to you. E file state taxes This includes payers of interest. E file state taxes If you do not give your SSN or ITIN to the payer of interest, you may have to pay a penalty. E file state taxes SSN for joint account. E file state taxes   If the funds in a joint account belong to one person, list that person's name first on the account and give that person's SSN to the payer. E file state taxes (For information on who owns the funds in a joint account, see Joint accounts , later. E file state taxes ) If the joint account contains combined funds, give the SSN of the person whose name is listed first on the account. E file state taxes This is because only one name and SSN can be shown on Form 1099. E file state taxes   These rules apply both to joint ownership by a married couple and to joint ownership by other individuals. E file state taxes For example, if you open a joint savings account with your child using funds belonging to the child, list the child's name first on the account and give the child's SSN. E file state taxes Custodian account for your child. E file state taxes   If your child is the actual owner of an account that is recorded in your name as custodian for the child, give the child's SSN to the payer. E file state taxes For example, you must give your child's SSN to the payer of interest on an account owned by your child, even though the interest is paid to you as custodian. E file state taxes Penalty for failure to supply SSN. E file state taxes   If you do not give your SSN to the payer of interest, you may have to pay a penalty. E file state taxes See Failure to supply SSN under Penalties in chapter 1. E file state taxes Backup withholding also may apply. E file state taxes Backup withholding. E file state taxes   Your interest income is generally not subject to regular withholding. E file state taxes However, it may be subject to backup withholding to ensure that income tax is collected on the income. E file state taxes Under backup withholding, the payer of interest must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate. E file state taxes   Backup withholding may also be required if the IRS has determined that you underreported your interest or dividend income. E file state taxes For more information, see Backup Withholding in chapter 4. E file state taxes Reporting backup withholding. E file state taxes   If backup withholding is deducted from your interest income, the payer must give you a Form 1099-INT for the year indicating the amount withheld. E file state taxes The Form 1099-INT will show any backup withholding as “Federal income tax withheld. E file state taxes ” Joint accounts. E file state taxes   If two or more persons hold property (such as a savings account or bond) as joint tenants, tenants by the entirety, or tenants in common, each person's share of any interest from the property is determined by local law. E file state taxes Income from property given to a child. E file state taxes   Property you give as a parent to your child under the Model Gifts of Securities to Minors Act, the Uniform Gifts to Minors Act, or any similar law becomes the child's property. E file state taxes   Income from the property is taxable to the child, except that any part used to satisfy a legal obligation to support the child is taxable to the parent or guardian having that legal obligation. E file state taxes Savings account with parent as trustee. E file state taxes   Interest income from a savings account opened for a minor child, but placed in the name and subject to the order of the parents as trustees, is taxable to the child if, under the law of the state in which the child resides, both of the following are true. E file state taxes The savings account legally belongs to the child. E file state taxes The parents are not legally permitted to use any of the funds to support the child. E file state taxes Form 1099-INT. E file state taxes   Interest income is generally reported to you on Form 1099-INT, or a similar statement, by banks, savings and loans, and other payers of interest. E file state taxes This form shows you the interest you received during the year. E file state taxes Keep this form for your records. E file state taxes You do not have to attach it to your tax return. E file state taxes   Report on your tax return the total interest income you receive for the tax year. E file state taxes Interest not reported on Form 1099-INT. E file state taxes   Even if you do not receive Form 1099-INT, you must still report all of your interest income. E file state taxes For example, you may receive distributive shares of interest from partnerships or S corporations. E file state taxes This interest is reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deduction, Credits, etc. E file state taxes , or Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. E file state taxes Nominees. E file state taxes   Generally, if someone receives interest as a nominee for you, that person must give you a Form 1099-INT showing the interest received on your behalf. E file state taxes   If you receive a Form 1099-INT that includes amounts belonging to another person, see the discussion on nominee distributions under How To Report Interest Income in chapter 1 of Publication 550, or Schedule B (Form 1040A or 1040) instructions. E file state taxes Incorrect amount. E file state taxes   If you receive a Form 1099-INT that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. E file state taxes The new Form 1099-INT you receive will be marked “Corrected. E file state taxes ” Form 1099-OID. E file state taxes   Reportable interest income also may be shown on Form 1099-OID, Original Issue Discount. E file state taxes For more information about amounts shown on this form, see Original Issue Discount (OID) , later in this chapter. E file state taxes Exempt-interest dividends. E file state taxes   Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. E file state taxes (However, see Information reporting requirement , next. E file state taxes ) Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. E file state taxes You do not reduce your basis for distributions that are exempt-interest dividends. E file state taxes Information reporting requirement. E file state taxes   Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file. E file state taxes This is an information reporting requirement and does not change the exempt-interest dividends into taxable income. E file state taxes Note. E file state taxes Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. E file state taxes See Alternative Minimum Tax (AMT) in chapter 30 for more information. E file state taxes Chapter 1 of Publication 550 contains a discussion on private activity bonds under State or Local Government Obligations. E file state taxes Interest on VA dividends. E file state taxes   Interest on insurance dividends left on deposit with the Department of Veterans Affairs (VA) is not taxable. E file state taxes This includes interest paid on dividends on converted United States Government Life Insurance and on National Service Life Insurance policies. E file state taxes Individual retirement arrangements (IRAs). E file state taxes   Interest on a Roth IRA generally is not taxable. E file state taxes Interest on a traditional IRA is tax deferred. E file state taxes You generally do not include it in your income until you make withdrawals from the IRA. E file state taxes See chapter 17. E file state taxes Taxable Interest Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. E file state taxes The following are some sources of taxable interest. E file state taxes Dividends that are actually interest. E file state taxes   Certain distributions commonly called dividends are actually interest. E file state taxes You must report as interest so-called “dividends” on deposits or on share accounts in: Cooperative banks, Credit unions, Domestic building and loan associations, Domestic savings and loan associations, Federal savings and loan associations, and Mutual savings banks. E file state taxes  The “dividends” will be shown as interest income on Form 1099-INT. E file state taxes Money market funds. E file state taxes   Money market funds pay dividends and are offered by nonbank financial institutions, such as mutual funds and stock brokerage houses. E file state taxes Generally, amounts you receive from money market funds should be reported as dividends, not as interest. E file state taxes Certificates of deposit and other deferred interest accounts. E file state taxes   If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the account. E file state taxes You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. E file state taxes The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. E file state taxes If interest is deferred for more than 1 year, see Original Issue Discount (OID) , later. E file state taxes Interest subject to penalty for early withdrawal. E file state taxes   If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. E file state taxes You must report the total amount of interest paid or credited to your account during the year, without subtracting the penalty. E file state taxes See Penalty on early withdrawal of savings in chapter 1 of Publication 550 for more information on how to report the interest and deduct the penalty. E file state taxes Money borrowed to invest in certificate of deposit. E file state taxes   The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. E file state taxes You must report the total interest you earn on the certificate in your income. E file state taxes If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income. E file state taxes See Interest Expenses in chapter 3 of Publication 550. E file state taxes Example. E file state taxes You deposited $5,000 with a bank and borrowed $5,000 from the bank to make up the $10,000 minimum deposit required to buy a 6-month certificate of deposit. E file state taxes The certificate earned $575 at maturity in 2013, but you received only $265, which represented the $575 you earned minus $310 interest charged on your $5,000 loan. E file state taxes The bank gives you a Form 1099-INT for 2013 showing the $575 interest you earned. E file state taxes The bank also gives you a statement showing that you paid $310 interest for 2013. E file state taxes You must include the $575 in your income. E file state taxes If you itemize your deductions on Schedule A (Form 1040), you can deduct $310, subject to the net investment income limit. E file state taxes Gift for opening account. E file state taxes   If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest. E file state taxes   For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. E file state taxes For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. E file state taxes The value is determined by the cost to the financial institution. E file state taxes Example. E file state taxes You open a savings account at your local bank and deposit $800. E file state taxes The account earns $20 interest. E file state taxes You also receive a $15 calculator. E file state taxes If no other interest is credited to your account during the year, the Form 1099-INT you receive will show $35 interest for the year. E file state taxes You must report $35 interest income on your tax return. E file state taxes Interest on insurance dividends. E file state taxes   Interest on insurance dividends left on deposit with an insurance company that can be withdrawn annually is taxable to you in the year it is credited to your account. E file state taxes However, if you can withdraw it only on the anniversary date of the policy (or other specified date), the interest is taxable in the year that date occurs. E file state taxes Prepaid insurance premiums. E file state taxes   Any increase in the value of prepaid insurance premiums, advance premiums, or premium deposit funds is interest if it is applied to the payment of premiums due on insurance policies or made available for you to withdraw. E file state taxes U. E file state taxes S. E file state taxes obligations. E file state taxes   Interest on U. E file state taxes S. E file state taxes obligations, such as U. E file state taxes S. E file state taxes Treasury bills, notes, and bonds, issued by any agency or instrumentality of the United States is taxable for federal income tax purposes. E file state taxes Interest on tax refunds. E file state taxes   Interest you receive on tax refunds is taxable income. E file state taxes Interest on condemnation award. E file state taxes   If the condemning authority pays you interest to compensate you for a delay in payment of an award, the interest is taxable. E file state taxes Installment sale payments. E file state taxes   If a contract for the sale or exchange of property provides for deferred payments, it also usually provides for interest payable with the deferred payments. E file state taxes That interest is taxable when you receive it. E file state taxes If little or no interest is provided for in a deferred payment contract, part of each payment may be treated as interest. E file state taxes See Unstated Interest and Original Issue Discount in Publication 537, Installment Sales. E file state taxes Interest on annuity contract. E file state taxes   Accumulated interest on an annuity contract you sell before its maturity date is taxable. E file state taxes Usurious interest. E file state taxes   Usurious interest is interest charged at an illegal rate. E file state taxes This is taxable as interest unless state law automatically changes it to a payment on the principal. E file state taxes Interest income on frozen deposits. E file state taxes   Exclude from your gross income interest on frozen deposits. E file state taxes A deposit is frozen if, at the end of the year, you cannot withdraw any part of the deposit because: The financial institution is bankrupt or insolvent, or The state where the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt or insolvent. E file state taxes   The amount of interest you must exclude is the interest that was credited on the frozen deposits minus the sum of: The net amount you withdrew from these deposits during the year, and The amount you could have withdrawn as of the end of the year (not reduced by any penalty for premature withdrawals of a time deposit). E file state taxes If you receive a Form 1099-INT for interest income on deposits that were frozen at the end of 2013, see Frozen deposits under How To Report Interest Income in chapter 1 of Publication 550, for information about reporting this interest income exclusion on your tax return. E file state taxes   The interest you exclude is treated as credited to your account in the following year. E file state taxes You must include it in income in the year you can withdraw it. E file state taxes Example. E file state taxes $100 of interest was credited on your frozen deposit during the year. E file state taxes You withdrew $80 but could not withdraw any more as of the end of the year. E file state taxes You must include $80 in your income and exclude $20 from your income for the year. E file state taxes You must include the $20 in your income for the year you can withdraw it. E file state taxes Bonds traded flat. E file state taxes   If you buy a bond at a discount when interest has been defaulted or when the interest has accrued but has not been paid, the transaction is described as trading a bond flat. E file state taxes The defaulted or unpaid interest is not income and is not taxable as interest if paid later. E file state taxes When you receive a payment of that interest, it is a return of capital that reduces the remaining cost basis of your bond. E file state taxes Interest that accrues after the date of purchase, however, is taxable interest income for the year it is received or accrued. E file state taxes See Bonds Sold Between Interest Dates , later, for more information. E file state taxes Below-market loans. E file state taxes   In general, a below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. E file state taxes See Below-Market Loans in chapter 1 of Publication 550 for more information. E file state taxes U. E file state taxes S. E file state taxes Savings Bonds This section provides tax information on U. E file state taxes S. E file state taxes savings bonds. E file state taxes It explains how to report the interest income on these bonds and how to treat transfers of these bonds. E file state taxes For other information on U. E file state taxes S. E file state taxes savings bonds, write to:  For series EE and I paper savings bonds: Bureau of the Public Debt Division of Customer Assistance P. E file state taxes O. E file state taxes Box 7012 Parkersburg, WV 26106-7012  For series EE and I electronic bonds: Bureau of the Public Debt Division of Customer Assistance P. E file state taxes O. E file state taxes Box 7015 Parkersburg, WV 26106–7015  For series HH/H: Bureau of the Public Debt Division of Customer Assistance P. E file state taxes O. E file state taxes Box 2186 Parkersburg, WV 26106-2186 Or, on the Internet, visit: www. E file state taxes treasurydirect. E file state taxes gov/indiv/indiv. E file state taxes htm. E file state taxes Accrual method taxpayers. E file state taxes   If you use an accrual method of accounting, you must report interest on U. E file state taxes S. E file state taxes savings bonds each year as it accrues. E file state taxes You cannot postpone reporting interest until you receive it or until the bonds mature. E file state taxes Accrual methods of accounting are explained in chapter 1 under Accounting Methods . E file state taxes Cash method taxpayers. E file state taxes   If you use the cash method of accounting, as most individual taxpayers do, you generally report the interest on U. E file state taxes S. E file state taxes savings bonds when you receive it. E file state taxes The cash method of accounting is explained in chapter 1 under Accounting Methods. E file state taxes But see Reporting options for cash method taxpayers , later. E file state taxes Series HH bonds. E file state taxes    These bonds were issued at face value. E file state taxes Interest is paid twice a year by direct deposit to your bank account. E file state taxes If you are a cash method taxpayer, you must report interest on these bonds as income in the year you receive it. E file state taxes   Series HH bonds were first offered in 1980 and last offered in August 2004. E file state taxes Before 1980, series H bonds were issued. E file state taxes Series H bonds are treated the same as series HH bonds. E file state taxes If you are a cash method taxpayer, you must report the interest when you receive it. E file state taxes   Series H bonds have a maturity period of 30 years. E file state taxes Series HH bonds mature in 20 years. E file state taxes The last series H bonds matured in 2009. E file state taxes Series EE and series I bonds. E file state taxes   Interest on these bonds is payable when you redeem the bonds. E file state taxes The difference between the purchase price and the redemption value is taxable interest. E file state taxes Series EE bonds. E file state taxes   Series EE bonds were first offered in January 1980 and have a maturity period of 30 years. E file state taxes   Before July 1980, series E bonds were issued. E file state taxes The original 10-year maturity period of series E bonds has been extended to 40 years for bonds issued before December 1965 and 30 years for bonds issued after November 1965. E file state taxes Paper series EE and series E bonds are issued at a discount. E file state taxes The face value is payable to you at maturity. E file state taxes Electronic series EE bonds are issued at their face value. E file state taxes The face value plus accrued interest is payable to you at maturity. E file state taxes As of January 1, 2012, paper savings bonds were no longer sold at financial institutions. E file state taxes   Owners of paper series EE bonds can convert them to electronic bonds. E file state taxes These converted bonds do not retain the denomination listed on the paper certificate but are posted at their purchase price (with accrued interest). E file state taxes Series I bonds. E file state taxes   Series I bonds were first offered in 1998. E file state taxes These are inflation-indexed bonds issued at their face amount with a maturity period of 30 years. E file state taxes The face value plus all accrued interest is payable to you at maturity. E file state taxes Reporting options for cash method taxpayers. E file state taxes   If you use the cash method of reporting income, you can report the interest on series EE, series E, and series I bonds in either of the following ways. E file state taxes Method 1. E file state taxes Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year they mature. E file state taxes (However, see Savings bonds traded , later. E file state taxes )  Note. E file state taxes Series EE bonds issued in 1983 matured in 2013. E file state taxes If you have used method 1, you generally must report the interest on these bonds on your 2013 return. E file state taxes The last series E bonds were issued in 1980 and matured in 2010. E file state taxes If you used method 1, you generally should have reported the interest on these bonds on your 2010 return. E file state taxes Method 2. E file state taxes Choose to report the increase in redemption value as interest each year. E file state taxes You must use the same method for all series EE, series E, and series I bonds you own. E file state taxes If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1. E file state taxes    If you plan to cash your bonds in the same year you will pay for higher education expenses, you may want to use method 1 because you may be able to exclude the interest from your income. E file state taxes To learn how, see Education Savings Bond Program, later. E file state taxes Change from method 1. E file state taxes   If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission from the IRS. E file state taxes In the year of change you must report all interest accrued to date and not previously reported for all your bonds. E file state taxes   Once you choose to report the interest each year, you must continue to do so for all series EE, series E, and series I bonds you own and for any you get later, unless you request permission to change, as explained next. E file state taxes Change from method 2. E file state taxes   To change from method 2 to method 1, you must request permission from the IRS. E file state taxes Permission for the change is automatically granted if you send the IRS a statement that meets all the following requirements. E file state taxes You have typed or printed the following number at the top: “131. E file state taxes ” It includes your name and social security number under “131. E file state taxes ” It includes the year of change (both the beginning and ending dates). E file state taxes It identifies the savings bonds for which you are requesting this change. E file state taxes It includes your agreement to: Report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, and Report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years. E file state taxes   You must attach this statement to your tax return for the year of change, which you must file by the due date (including extensions). E file state taxes   You can have an automatic extension of 6 months from the due date of your return for the year of change (excluding extensions) to file the statement with an amended return. E file state taxes On the statement, type or print “Filed pursuant to section 301. E file state taxes 9100-2. E file state taxes ” To get this extension, you must have filed your original return for the year of the change by the due date (including extensions). E file state taxes    By the date you file the original statement with your return, you must also send a signed copy to the address below. E file state taxes   Internal Revenue Service Attention: CC:IT&A (Automatic Rulings Branch) P. E file state taxes O. E file state taxes Box 7604 Benjamin Franklin Station Washington, DC 20044   If you use a private delivery service, send the signed copy to the address below. E file state taxes   Internal Revenue Service Attention: CC:IT&A (Automatic Rulings Branch) Room 5336 1111 Constitution Avenue, NW  Washington, DC 20224   Instead of filing this statement, you can request permission to change from method 2 to method 1 by filing Form 3115, Application for Change in Accounting Method. E file state taxes In that case, follow the form instructions for an automatic change. E file state taxes No user fee is required. E file state taxes Co-owners. E file state taxes   If a U. E file state taxes S. E file state taxes savings bond is issued in the names of co-owners, such as you and your child or you and your spouse, interest on the bond is generally taxable to the co-owner who bought the bond. E file state taxes One co-owner's funds used. E file state taxes    If you used your funds to buy the bond, you must pay the tax on the interest. E file state taxes This is true even if you let the other co-owner redeem the bond and keep all the proceeds. E file state taxes Under these circumstances, the co-owner who redeemed the bond will receive a Form 1099-INT at the time of redemption and must provide you with another Form 1099-INT showing the amount of interest from the bond taxable to you. E file state taxes The co-owner who redeemed the bond is a “nominee. E file state taxes ” See Nominee distributions under How To Report Interest Income in chapter 1 of Publication 550 for more information about how a person who is a nominee reports interest income belonging to another person. E file state taxes Both co-owners' funds used. E file state taxes   If you and the other co-owner each contribute part of the bond's purchase price, the interest is generally taxable to each of you, in proportion to the amount each of you paid. E file state taxes Community property. E file state taxes   If you and your spouse live in a community property state and hold bonds as community property, one-half of the interest is considered received by each of you. E file state taxes If you file separate returns, each of you generally must report one-half of the bond interest. E file state taxes For more information about community property, see Publication 555. E file state taxes Table 7-1. E file state taxes   These rules are also shown in Table 7-1. E file state taxes Ownership transferred. E file state taxes   If you bought series E, series EE, or series I bonds entirely with your own funds and had them reissued in your co-owner's name or beneficiary's name alone, you must include in your gross income for the year of reissue all interest that you earned on these bonds and have not previously reported. E file state taxes But, if the bonds were reissued in your name alone, you do not have to report the interest accrued at that time. E file state taxes   This same rule applies when bonds (other than bonds held as community property) are transferred between spouses or incident to divorce. E file state taxes Purchased jointly. E file state taxes   If you and a co-owner each contributed funds to buy series E, series EE, or series I bonds jointly and later have the bonds reissued in the co-owner's name alone, you must include in your gross income for the year of reissue your share of all the interest earned on the bonds that you have not previously reported. E file state taxes The former co-owner does not have to include in gross income at the time of reissue his or her share of the interest earned that was not reported before the transfer. E file state taxes This interest, however, as well as all interest earned after the reissue, is income to the former co-owner. E file state taxes   This income-reporting rule also applies when the bonds are reissued in the name of your former co-owner and a new co-owner. E file state taxes But the new co-owner will report only his or her share of the interest earned after the transfer. E file state taxes   If bonds that you and a co-owner bought jointly are reissued to each of you separately in the same proportion as your contribution to the purchase price, neither you nor your co-owner has to report at that time the interest earned before the bonds were reissued. E file state taxes    Table 7-1. E file state taxes Who Pays the Tax on U. E file state taxes S. E file state taxes Savings Bond Interest IF . E file state taxes . E file state taxes . E file state taxes THEN the interest must be reported by . E file state taxes . E file state taxes . E file state taxes you buy a bond in your name and the name of another person as co-owners, using only your own funds you. E file state taxes you buy a bond in the name of another person, who is the sole owner of the bond the person for whom you bought the bond. E file state taxes you and another person buy a bond as co-owners, each contributing part of the purchase price both you and the other co-owner, in proportion to the amount each paid for the bond. E file state taxes you and your spouse, who live in a community property state, buy a bond that is community property you and your spouse. E file state taxes If you file separate returns, both you and your spouse generally report one-half of the interest. E file state taxes Example 1. E file state taxes You and your spouse each spent an equal amount to buy a $1,000 series EE savings bond. E file state taxes The bond was issued to you and your spouse as co-owners. E file state taxes You both postpone reporting interest on the bond. E file state taxes You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. E file state taxes At that time neither you nor your spouse has to report the interest earned to the date of reissue. E file state taxes Example 2. E file state taxes You bought a $1,000 series EE savings bond entirely with your own funds. E file state taxes The bond was issued to you and your spouse as co-owners. E file state taxes You both postpone reporting interest on the bond. E file state taxes You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. E file state taxes You must report half the interest earned to the date of reissue. E file state taxes Transfer to a trust. E file state taxes   If you own series E, series EE, or series I bonds and transfer them to a trust, giving up all rights of ownership, you must include in your income for that year the interest earned to the date of transfer if you have not already reported it. E file state taxes However, if you are considered the owner of the trust and if the increase in value both before and after the transfer continues to be taxable to you, you can continue to defer reporting the interest earned each year. E file state taxes You must include the total interest in your income in the year you cash or dispose of the bonds or the year the bonds finally mature, whichever is earlier. E file state taxes   The same rules apply to previously unreported interest on series EE or series E bonds if the transfer to a trust consisted of series HH or series H bonds you acquired in a trade for the series EE or series E bonds. E file state taxes See Savings bonds traded , later. E file state taxes Decedents. E file state taxes   The manner of reporting interest income on series E, series EE, or series I bonds, after the death of the owner (decedent), depends on the accounting and income-reporting methods previously used by the decedent. E file state taxes This is explained in chapter 1 of Publication 550. E file state taxes Savings bonds traded. E file state taxes   If you postponed reporting the interest on your series EE or series E bonds, you did not recognize taxable income when you traded the bonds for series HH or series H bonds, unless you received cash in the trade. E file state taxes (You cannot trade series I bonds for series HH bonds. E file state taxes After August 31, 2004, you cannot trade any other series of bonds for series HH bonds. E file state taxes ) Any cash you received is income up to the amount of the interest earned on the bonds traded. E file state taxes When your series HH or series H bonds mature, or if you dispose of them before maturity, you report as interest the difference between their redemption value and your cost. E file state taxes Your cost is the sum of the amount you paid for the traded series EE or series E bonds plus any amount you had to pay at the time of the trade. E file state taxes Example. E file state taxes You traded series EE bonds (on which you postponed reporting the interest) for $2,500 in series HH bonds and $223 in cash. E file state taxes You reported the $223 as taxable income on your tax return. E file state taxes At the time of the trade, the series EE bonds had accrued interest of $523 and a redemption value of $2,723. E file state taxes You hold the series HH bonds until maturity, when you receive $2,500. E file state taxes You must report $300 as interest income in the year of maturity. E file state taxes This is the difference between their redemption value, $2,500, and your cost, $2,200 (the amount you paid for the series EE bonds). E file state taxes (It is also the difference between the accrued interest of $523 on the series EE bonds and the $223 cash received on the trade. E file state taxes ) Choice to report interest in year of trade. E file state taxes   You could have chosen to treat all of the previously unreported accrued interest on the series EE or series E bonds traded for series HH bonds as income in the year of the trade. E file state taxes If you made this choice, it is treated as a change from method 1. E file state taxes See Change from method 1 under Series EE and series I bonds, earlier. E file state taxes Form 1099-INT for U. E file state taxes S. E file state taxes savings bonds interest. E file state taxes   When you cash a bond, the bank or other payer that redeems it must give you a Form 1099-INT if the interest part of the payment you receive is $10 or more. E file state taxes Box 3 of your Form 1099-INT should show the interest as the difference between the amount you received and the amount paid for the bond. E file state taxes However, your Form 1099-INT may show more interest than you have to include on your income tax return. E file state taxes For example, this may happen if any of the following are true. E file state taxes You chose to report the increase in the redemption value of the bond each year. E file state taxes The interest shown on your Form 1099-INT will not be reduced by amounts previously included in income. E file state taxes You received the bond from a decedent. E file state taxes The interest shown on your Form 1099-INT will not be reduced by any interest reported by the decedent before death, or on the decedent's final return, or by the estate on the estate's income tax return. E file state taxes Ownership of the bond was transferred. E file state taxes The interest shown on your Form 1099-INT will not be reduced by interest that accrued before the transfer. E file state taxes You were named as a co-owner, and the other co-owner contributed funds to buy the bond. E file state taxes The interest shown on your Form 1099-INT will not be reduced by the amount you received as nominee for the other co-owner. E file state taxes (See Co-owners , earlier in this chapter, for more information about the reporting requirements. E file state taxes ) You received the bond in a taxable distribution from a retirement or profit-sharing plan. E file state taxes The interest shown on your Form 1099-INT will not be reduced by the interest portion of the amount taxable as a distribution from the plan and not taxable as interest. E file state taxes (This amount is generally shown on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. E file state taxes , for the year of distribution. E file state taxes )   For more information on including the correct amount of interest on your return, see How To Report Interest Income , later. E file state taxes Publication 550 includes examples showing how to report these amounts. E file state taxes    Interest on U. E file state taxes S. E file state taxes savings bonds is exempt from state and local taxes. E file state taxes The Form 1099-INT you receive will indicate the amount that is for U. E file state taxes S. E file state taxes savings bond interest in box 3. E file state taxes Education Savings Bond Program You may be able to exclude from income all or part of the interest you receive on the redemption of qualified U. E file state taxes S. E file state taxes savings bonds during the year if you pay qualified higher educational expenses during the same year. E file state taxes This exclusion is known as the Education Savings Bond Program. E file state taxes You do not qualify for this exclusion if your filing status is married filing separately. E file state taxes Form 8815. E file state taxes   Use Form 8815 to figure your exclusion. E file state taxes Attach the form to your Form 1040 or Form 1040A. E file state taxes Qualified U. E file state taxes S. E file state taxes savings bonds. E file state taxes   A qualified U. E file state taxes S. E file state taxes savings bond is a series EE bond issued after 1989 or a series I bond. E file state taxes The bond must be issued either in your name (sole owner) or in your and your spouse's names (co-owners). E file state taxes You must be at least 24 years old before the bond's issue date. E file state taxes For example, a bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or child. E file state taxes    The issue date of a bond may be earlier than the date the bond is purchased because the issue date assigned to a bond is the first day of the month in which it is purchased. E file state taxes Beneficiary. E file state taxes   You can designate any individual (including a child) as a beneficiary of the bond. E file state taxes Verification by IRS. E file state taxes   If you claim the exclusion, the IRS will check it by using bond redemption information from the Department of the Treasury. E file state taxes Qualified expenses. E file state taxes   Qualified higher educational expenses are tuition and fees required for you, your spouse, or your dependent (for whom you claim an exemption) to attend an eligible educational institution. E file state taxes   Qualified expenses include any contribution you make to a qualified tuition program or to a Coverdell education savings account. E file state taxes   Qualified expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program. E file state taxes Eligible educational institutions. E file state taxes   These institutions include most public, private, and nonprofit universities, colleges, and vocational schools that are accredited and eligible to participate in student aid programs run by the U. E file state taxes S. E file state taxes Department of Education. E file state taxes Reduction for certain benefits. E file state taxes   You must reduce your qualified higher educational expenses by all of the following tax-free benefits. E file state taxes Tax-free part of scholarships and fellowships (see Scholarships and fellowships in chapter 12). E file state taxes Expenses used to figure the tax-free portion of distributions from a Coverdell ESA. E file state taxes Expenses used to figure the tax-free portion of distributions from a qualified tuition program. E file state taxes Any tax-free payments (other than gifts or inheritances) received for educational expenses, such as Veterans' educational assistance benefits, Qualified tuition reductions, or Employer-provided educational assistance. E file state taxes Any expense used in figuring the American Opportunity and lifetime learning credits. E file state taxes Amount excludable. E file state taxes   If the total proceeds (interest and principal) from the qualified U. E file state taxes S. E file state taxes savings bonds you redeem during the year are not more than your adjusted qualified higher educational expenses for the year, you may be able to exclude all of the interest. E file state taxes If the proceeds are more than the expenses, you may be able to exclude only part of the interest. E file state taxes   To determine the excludable amount, multiply the interest part of the proceeds by a fraction. E file state taxes The numerator of the fraction is the qualified higher educational expenses you paid during the year. E file state taxes The denominator of the fraction is the total proceeds you received during the year. E file state taxes Example. E file state taxes In February 2013, Mark and Joan, a married couple, cashed a qualified series EE U. E file state taxes S. E file state taxes savings bond they bought in April 1997. E file state taxes They received proceeds of $8,372 representing principal of $5,000 and interest of $3,372. E file state taxes In 2013, they paid $4,000 of their daughter's college tuition. E file state taxes They are not claiming an education credit for that amount, and their daughter does not have any tax-free educational assistance. E file state taxes They can exclude $1,611 ($3,372 × ($4,000 ÷ $8,372)) of interest in 2013. E file state taxes They must pay tax on the remaining $1,761 ($3,372 − $1,611) interest. E file state taxes Modified adjusted gross income limit. E file state taxes   The interest exclusion is limited if your modified adjusted gross income (modified AGI) is: $74,700 to $89,700 for taxpayers filing single or head of household, and $112,050 to $142,050 for married taxpayers filing jointly or for a qualifying widow(er) with dependent child. E file state taxes You do not qualify for the interest exclusion if your modified AGI is equal to or more than the upper limit for your filing status. E file state taxes   Modified AGI, for purposes of this exclusion, is adjusted gross income (Form 1040, line 37, or Form 1040A, line 21) figured before the interest exclusion, and modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion and deduction, Exclusion of income for bona fide residents of American Samoa, Exclusion for income from Puerto Rico, Exclusion for adoption benefits received under an employer's adoption assistance program, Deduction for tuition and fees, Deduction for student loan interest, and Deduction for domestic production activities. E file state taxes   Use the Line 9 Worksheet in the Form 8815 instructions to figure your modified AGI. E file state taxes If you claim any of the exclusion or deduction items listed above (except items 6, 7, and 8), add the amount of the exclusion or deduction (except items 6, 7, and 8) to the amount on line 5 of the worksheet, and enter the total on Form 8815, line 9, as your modified AGI. E file state taxes   If you have investment interest expense incurred to earn royalties and other investment income, see Education Savings Bond Program in chapter 1 of Publication 550. E file state taxes Recordkeeping. E file state taxes If you claim the interest exclusion, you must keep a written record of the qualified U. E file state taxes S. E file state taxes savings bonds you redeem. E file state taxes Your record must include the serial number, issue date, face value, and total redemption proceeds (principal and interest) of each bond. E file state taxes You can use Form 8818 to record this information. E file state taxes You should also keep bills, receipts, canceled checks, or other documentation that shows you paid qualified higher educational expenses during the year. E file state taxes U. E file state taxes S. E file state taxes Treasury Bills, Notes, and Bonds Treasury bills, notes, and bonds are direct debts (obligations) of the U. E file state taxes S. E file state taxes Government. E file state taxes Taxation of interest. E file state taxes   Interest income from Treasury bills, notes, and bonds is subject to federal income tax but is exempt from all state and local income taxes. E file state taxes You should receive Form 1099-INT showing the interest (in box 3) paid to you for the year. E file state taxes   Payments of principal and interest generally will be credited to your designated checking or savings account by direct deposit through the TreasuryDirect® system. E file state taxes Treasury bills. E file state taxes   These bills generally have a 4-week, 13-week, 26-week, or 52-week maturity period. E file state taxes They are generally issued at a discount in the amount of $100 and multiples of $100. E file state taxes The difference between the discounted price you pay for the bills and the face value you receive at maturity is interest income. E file state taxes Generally, you report this interest income when the bill is paid at maturity. E file state taxes If you paid a premium for a bill (more than the face value), you generally report the premium as a section 171 deduction when the bill is paid at maturity. E file state taxes Treasury notes and bonds. E file state taxes   Treasury notes have maturity periods of more than 1 year, ranging up to 10 years. E file state taxes Maturity periods for Treasury bonds are longer than 10 years. E file state taxes Both generally are issued in denominations of $100 to $1 million and generally pay interest every 6 months. E file state taxes Generally, you report this interest for the year paid. E file state taxes For more information, see U. E file state taxes S. E file state taxes Treasury Bills, Notes, and Bonds in chapter 1 of Publication 550. E file state taxes For other information on Treasury notes or bonds, write to:  Bureau of the Public Debt P. E file state taxes O. E file state taxes Box 7015 Parkersburg, WV 26106-7015 Or, on the Internet, visit: www. E file state taxes treasurydirect. E file state taxes gov/indiv/indiv. E file state taxes htm. E file state taxes For information on series EE, series I, and series HH savings bonds, see U. E file state taxes S. E file state taxes Savings Bonds , earlier. E file state taxes Treasury inflation-protected securities (TIPS). E file state taxes   These securities pay interest twice a year at a fixed rate, based on a principal amount adjusted to take into account inflation and deflation. E file state taxes For the tax treatment of these securities, see Inflation-Indexed Debt Instruments under Original Issue Discount (OID), in Publication 550. E file state taxes Bonds Sold Between Interest Dates If you sell a bond between interest payment dates, part of the sales price represents interest accrued to the date of sale. E file state taxes You must report that part of the sales price as interest income for the year of sale. E file state taxes If you buy a bond between interest payment dates, part of the purchase price represents interest accrued before the date of purchase. E file state taxes When that interest is paid to you, treat it as a return of your capital investment, rather than interest income, by reducing your basis in the bond. E file state taxes See Accrued interest on bonds under How To Report Interest Income in chapter 1 of Publication 550 for information on reporting the payment. E file state taxes Insurance Life insurance proceeds paid to you as beneficiary of the insured person are usually not taxable. E file state taxes But if you receive the proceeds in installments, you must usually report a part of each installment payment as interest income. E file state taxes For more information about insurance proceeds received in installments, see Publication 525, Taxable and Nontaxable Income. E file state taxes Annuity. E file state taxes   If you buy an annuity with life insurance proceeds, the annuity payments you receive are taxed as pension and annuity income from a nonqualified plan, not as interest income. E file state taxes See chapter 10 for information on pension and annuity income from nonqualified plans. E file state taxes State or Local Government Obligations Interest on a bond used to finance government operations generally is not taxable if the bond is issued by a state, the District of Columbia, a possession of the United States, or any of their political subdivisions. E file state taxes Bonds issued after 1982 (including tribal economic development bonds issued after February 17, 2009) by an Indian tribal government are treated as issued by a state. E file state taxes Interest on these bonds is generally tax exempt if the bonds are part of an issue of which substantially all proceeds are to be used in the exercise of any essential government function. E file state taxes For information on federally guaranteed bonds, mortgage revenue bonds, arbitrage bonds, private activity bonds, qualified tax credit bonds, and Build America bonds, see State or Local Government Obligations in chapter 1 of Publication 550. E file state taxes Information reporting requirement. E file state taxes   If you must file a tax return, you are required to show any tax-exempt interest you received on your return. E file state taxes This is an information reporting requirement only. E file state taxes It does not change tax-exempt interest to taxable interest. E file state taxes Original Issue Discount (OID) Original issue discount (OID) is a form of interest. E file state taxes You generally include OID in your income as it accrues over the term of the debt instrument, whether or not you receive any payments from the issuer. E file state taxes A debt instrument generally has OID when the instrument is issued for a price that is less than its stated redemption price at maturity. E file state taxes OID is the difference between the stated redemption price at maturity and the issue price. E file state taxes All debt instruments that pay no interest before maturity are presumed to be issued at a discount. E file state taxes Zero coupon bonds are one example of these instruments. E file state taxes The OID accrual rules generally do not apply to short-term obligations (those with a fixed maturity date of 1 year or less from date of issue). E file state taxes See Discount on Short-Term Obligations in chapter 1 of Publication 550. E file state taxes De minimis OID. E file state taxes   You can treat the discount as zero if it is less than one-fourth of 1% (. E file state taxes 0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. E file state taxes This small discount is known as “de minimis” OID. E file state taxes Example 1. E file state taxes You bought a 10-year bond with a stated redemption price at maturity of $1,000, issued at $980 with OID of $20. E file state taxes One-fourth of 1% of $1,000 (stated redemption price) times 10 (the number of full years from the date of original issue to maturity) equals $25. E file state taxes Because the $20 discount is less than $25, the OID is treated as zero. E file state taxes (If you hold the bond at maturity, you will recognize $20 ($1,000 − $980) of capital gain. E file state taxes ) Example 2. E file state taxes The facts are the same as in Example 1, except that the bond was issued at $950. E file state taxes The OID is $50. E file state taxes Because the $50 discount is more than the $25 figured in Example 1, you must include the OID in income as it accrues over the term of the bond. E file state taxes Debt instrument bought after original issue. E file state taxes   If you buy a debt instrument with de minimis OID at a premium, the discount is not includible in income. E file state taxes If you buy a debt instrument with de minimis OID at a discount, the discount is reported under the market discount rules. E file state taxes See Market Discount Bonds in chapter 1 of Publication 550. E file state taxes Exceptions to reporting OID. E file state taxes   The OID rules discussed in this chapter do not apply to the following debt instruments. E file state taxes Tax-exempt obligations. E file state taxes (However, see Stripped tax-exempt obligations under Stripped Bonds and Coupons in chapter 1 of Publication 550). E file state taxes U. E file state taxes S. E file state taxes savings bonds. E file state taxes Short-term debt instruments (those with a fixed maturity date of not more than 1 year from the date of issue). E file state taxes Obligations issued by an individual before March 2, 1984. E file state taxes Loans between individuals if all the following are true. E file state taxes The lender is not in the business of lending money. E file state taxes The amount of the loan, plus the amount of any outstanding prior loans between the same individuals, is $10,000 or less. E file state taxes Avoiding any federal tax is not one of the principal purposes of the loan. E file state taxes Form 1099-OID. E file state taxes   The issuer of the debt instrument (or your broker if you held the instrument through a broker) should give you Form 1099-OID, or a similar statement, if the total OID for the calendar year is $10 or more. E file state taxes Form 1099-OID will show, in box 1, the amount of OID for the part of the year that you held the bond. E file state taxes It also will show, in box 2, the stated interest you must include in your income. E file state taxes A copy of Form 1099-OID will be sent to the IRS. E file state taxes Do not file your copy with your return. E file state taxes Keep it for your records. E file state taxes   In most cases, you must report the entire amount in boxes 1 and 2 of Form 1099-OID as interest income. E file state taxes But see Refiguring OID shown on Form 1099-OID, later in this discussion, for more information. E file state taxes Form 1099-OID not received. E file state taxes   If you had OID for the year but did not receive a Form 1099-OID, you can find tables on IRS. E file state taxes gov that list total OID on certain debt instruments and have information that will help you figure OID. E file state taxes For the latest OID tables, go to www. E file state taxes irs. E file state taxes gov and enter “OID tables” in the Search box. E file state taxes If your debt instrument is not listed, consult the issuer for further information about the accrued OID for the year. E file state taxes Nominee. E file state taxes   If someone else is the holder of record (the registered owner) of an OID instrument belonging to you and receives a Form 1099-OID on your behalf, that person must give you a Form 1099-OID. E file state taxes Refiguring OID shown on Form 1099-OID. E file state taxes   You must refigure the OID shown in box 1 or box 8 of Form 1099-OID if either of the following apply. E file state taxes You bought the debt instrument after its original issue and paid a premium or an acquisition premium. E file state taxes The debt instrument is a stripped bond or a stripped coupon (including certain zero coupon instruments). E file state taxes For information about figuring the correct amount of OID to include in your income, see Figuring OID on Long-Term Debt Instruments in Publication 1212. E file state taxes Refiguring periodic interest shown on Form 1099-OID. E file state taxes   If you disposed of a debt instrument or acquired it from another holder during the year, see Bonds Sold Between Interest Dates , earlier, for information about the treatment of periodic interest that may be shown in box 2 of Form 1099-OID for that instrument. E file state taxes Certificates of deposit (CDs). E file state taxes   If you buy a CD with a maturity of more than 1 year, you must include in income each year a part of the total interest due and report it in the same manner as other OID. E file state taxes   This also applies to similar deposit arrangements with banks, building and loan associations, etc. E file state taxes , including: Time deposits, Bonus plans, Savings certificates, Deferred income certificates, Bonus savings certificates, and Growth savings certificates. E file state taxes Bearer CDs. E file state taxes   CDs issued after 1982 generally must be in registered form. E file state taxes Bearer CDs are CDs not in registered form. E file state taxes They are not issued in the depositor's name and are transferable from one individual to another. E file state taxes   Banks must provide the IRS and the person redeeming a bearer CD with a Form 1099-INT. E file state taxes More information. E file state taxes   See chapter 1 of Publication 550 for more information about OID and related topics, such as market discount bonds. E file state taxes When To Report Interest Income When to report your interest income depends on whether you use the cash method or an accrual method to report income. E file state taxes Cash method. E file state taxes   Most individual taxpayers use the cash method. E file state taxes If you use this method, you generally report your interest income in the year in which you actually or constructively receive it. E file state taxes However, there are special rules for reporting the discount on certain debt instruments. E file state taxes See U. E file state taxes S. E file state taxes Savings Bonds and Original Issue Discount (OID) , earlier. E file state taxes Example. E file state taxes On September 1, 2011, you loaned another individual $2,000 at 12%, compounded annually. E file state taxes You are not in the business of lending money. E file state taxes The note stated that principal and interest would be due on August 31, 2013. E file state taxes In 2013, you received $2,508. E file state taxes 80 ($2,000 principal and $508. E file state taxes 80 interest). E file state taxes If you use the cash method, you must include in income on your 2013 return the $508. E file state taxes 80 interest you received in that year. E file state taxes Constructive receipt. E file state taxes   You constructively receive income when it is credited to your account or made available to you. E file state taxes You do not need to have physical possession of it. E file state taxes For example, you are considered to receive interest, dividends, or other earnings on any deposit or account in a bank, savings and loan, or similar financial institution, or interest on life insurance policy dividends left to accumulate, when they are credited to your account and subject to your withdrawal. E file state taxes This is true even if they are not yet entered in your passbook. E file state taxes   You constructively receive income on the deposit or account even if you must: Make withdrawals in multiples of even amounts, Give a notice to withdraw before making the withdrawal, Withdraw all or part of the account to withdraw the earnings, or Pay a penalty on early withdrawals, unless the interest you are to receive on an early withdrawal or redemption is substantially less than the interest payable at maturity. E file state taxes Accrual method. E file state taxes   If you use an accrual method, you report your interest income when you earn it, whether or not you have received it. E file state taxes Interest is earned over the term of the debt instrument. E file state taxes Example. E file state taxes If, in the previous example, you use an accrual method, you must include the interest in your income as you earn it. E file state taxes You would report the interest as follows: 2011, $80; 2012, $249. E file state taxes 60; and 2013, $179. E file state taxes 20. E file state taxes Coupon bonds. E file state taxes   Interest on coupon bonds is taxable in the year the coupon becomes due and payable. E file state taxes It does not matter when you mail the coupon for payment. E file state taxes How To Report Interest Income Generally, you report all your taxable interest income on Form 1040, line 8a; Form 1040A, line 8a; or Form 1040EZ, line 2. E file state taxes You cannot use Form 1040EZ if your taxable interest income is more than $1,500. E file state taxes Instead, you must use Form 1040A or Form 1040. E file state taxes Form 1040A. E file state taxes   You must complete Schedule B (Form 1040A or 1040), Part I, if you file Form 1040A and any of the following are true. E file state taxes Your taxable interest income is more than $1,500. E file state taxes You are claiming the interest exclusion under the Education Savings Bond Program (discussed earlier). E file state taxes You received interest from a seller-financed mortgage, and the buyer used the property as a home. E file state taxes You received a Form 1099-INT for U. E file state taxes S. E file state taxes savings bond interest that includes amounts you reported before 2013. E file state taxes You received, as a nominee, interest that actually belongs to someone else. E file state taxes You received a Form 1099-INT for interest on frozen deposits. E file state taxes You are reporting OID in an amount less than the amount shown on Form 1099-OID. E file state taxes You received a Form 1099-INT for interest on a bond you bought between interest payment dates. E file state taxes You acquired taxable bonds after 1987 and choose to reduce interest income from the bonds by any amortizable bond premium (see Bond Premium Amortization in chapter 3 of Publication 550). E file state taxes List each payer's name and the amount of interest income received from each payer on line 1. E file state taxes If you received a Form 1099-INT or Form 1099-OID from a brokerage firm, list the brokerage firm as the payer. E file state taxes   You cannot use Form 1040A if you must use Form 1040, as described next. E file state taxes Form 1040. E file state taxes   You must use Form 1040 instead of Form 1040A or Form 1040EZ if: You forfeited interest income because of the early withdrawal of a time deposit; You acquired taxable bonds after 1987, you choose to reduce interest income from the bonds by any amortizable bond premium, and you are deducting the excess of bond premium amortization for the accrual period over the qualified stated interest for the period (see Bond Premium Amortization in chapter 3 of Publication 550); or You received tax-exempt interest from private activity bonds issued after August 7, 1986. E file state taxes Schedule B (Form 1040A or 1040). E file state taxes   You must complete Schedule B (Form 1040A or 1040), Part I, if you file Form 1040 and any of the following apply. E file state taxes Your taxable interest income is more than $1,500. E file state taxes You are claiming the interest exclusion under the Education Savings Bond Program (discussed earlier). E file state taxes You received interest from a seller-financed mortgage, and the buyer used the property as a home. E file state taxes You received a Form 1099-INT for U. E file state taxes S. E file state taxes savings bond interest that includes amounts you reported before 2013. E file state taxes You received, as a nominee, interest that actually belongs to someone else. E file state taxes You received a Form 1099-INT for interest on frozen deposits. E file state taxes You received a Form 1099-INT for interest on a bond you bought between interest payment dates. E file state taxes You are reporting OID in an amount less than the amount shown on Form 1099-OID. E file state taxes Statement (2) in the preceding list under Form 1040 is true. E file state taxes In Part I, line 1, list each payer's name and the amount received from each. E file state taxes If you received a Form 1099-INT or Form 1099-OID from a brokerage firm, list the brokerage firm as the payer. E file state taxes Reporting tax-exempt interest. E file state taxes   Total your tax-exempt interest (such as interest or accrued OID on certain state and municipal bonds, including tax-exempt interest on zero coupon municipal bonds) and exempt-interest dividends from a mutual fund as shown on Form 1099-INT, box 8, and on Form 1099-DIV, box 10. E file state taxes Add these amounts to any other tax-exempt interest you received. E file state taxes Report the total on line 8b of Form 1040A or 1040. E file state taxes   If you file Form 1040EZ, enter “TEI” and the amount in the space to the left of line 2. E file state taxes Do not add tax-exempt interest in the total on Form 1040EZ, line 2. E file state taxes   Form 1099-INT, box 9, and Form 1099-DIV, box 11, show the tax-exempt interest subject to the alternative minimum tax on Form 6251. E file state taxes These amounts are already included in the amounts on Form 1099-INT, box 8, and Form 1099-DIV, box 10. E file state taxes Do not add the amounts in Form 1099-INT, box 9 and Form 1099-DIV, box 11 to, or subtract them from, the amounts on Form 1099-INT, box 8, and Form 1099-DIV, box 10. E file state taxes    Do not report interest from an individual retirement account (IRA) as tax-exempt interest. E file state taxes Form 1099-INT. E file state taxes   Your taxable interest income, except for interest from U. E file state taxes S. E file state taxes savings bonds and Treasury obligations, is shown in box 1 of Form 1099-INT. E file state taxes Add this amount to any other taxable interest income you received. E file state taxes You must report all of your taxable interest income even if you do not receive a Form 1099-INT. E file state taxes Generally, contact your financial institution if you do not receive a Form 1099-INT by February 15. E file state taxes Your identifying number may be truncated on any paper Form 1099-INT you receive. E file state taxes   If you forfeited interest income because of the early withdrawal of a time deposit, the deductible amount will be shown on Form 1099-INT in box 2. E file state taxes See Penalty on early withdrawal of savings in chapter 1 of Publication 550. E file state taxes   Box 3 of Form 1099-INT shows the interest income you received from U. E file state taxes S. E file state taxes savings bonds, Treasury bills, Treasury notes, and Treasury bonds. E file state taxes Add the amount shown in box 3 to any other taxable interest income you received, unless part of the amount in box 3 was previously included in your interest income. E file state taxes If part of the amount shown in box 3 was previously included in your interest income, see U. E file state taxes S. E file state taxes savings bond interest previously reported , later. E file state taxes   Box 4 of Form 1099-INT will contain an amount if you were subject to backup withholding. E file state taxes Report the amount from box 4 on Form 1040EZ, line 7; on Form 1040A, line 36; or Form 1040, line 62 (federal income tax withheld). E file state taxes   Box 5 of Form 1099-INT shows investment expenses you may be able to deduct as an itemized deduction. E file state taxes See chapter 28 for more information about investment expenses. E file state taxes   If there are entries in boxes 6 and 7 of Form 1099-INT, you must file Form 1040. E file state taxes You may be able to take a credit for the amount shown in box 6 unless you deduct this amount on line 8 of Schedule A (Form 1040). E file state taxes To take the credit, you may have to file Form 1116, Foreign Tax Credit. E file state taxes For more information, see Publication 514, Foreign Tax Credit for Individuals. E file state taxes U. E file state taxes S. E file state taxes savings bond interest previously reported. E file state taxes   If you received a Form 1099-INT for U. E file state taxes S. E file state taxes savings bond interest, the form may show interest you do not have to report. E file state taxes See Form 1099-INT for U. E file state taxes S. E file state taxes savings bonds interest , earlier, under U. E file state taxes S. E file state taxes Savings Bonds. E file state taxes   On Schedule B (Form 1040A or 1040), Part I, line 1, report all the interest shown on your Form 1099-INT. E file state taxes Then follow these steps. E file state taxes Several lines above line 2, enter a subtotal of all interest listed on line 1. E file state taxes Below the subtotal enter “U. E file state taxes S. E file state taxes Savings Bond Interest Previously Reported” and enter amounts previously reported or interest accrued before you received the bond. E file state taxes Subtract these amounts from the subtotal and enter the result on line 2. E file state taxes More information. E file state taxes   For more information about how to report interest income, see chapter 1 of Publication 550 or the instructions for the form you must file. E file state taxes Prev  Up  Next   Home   More Online Publications
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E file state taxes 2. E file state taxes   Depreciation of Rental Property Table of Contents The BasicsWhat Rental Property Can Be Depreciated? When Does Depreciation Begin and End? Depreciation Methods Basis of Depreciable Property Claiming the Special Depreciation Allowance MACRS DepreciationDepreciation Systems Property Classes Under GDS Recovery Periods Under GDS Conventions Figuring Your Depreciation Deduction Figuring MACRS Depreciation Under ADS Claiming the Correct Amount of Depreciation You recover the cost of income producing property through yearly tax deductions. E file state taxes You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. E file state taxes Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. E file state taxes You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment, as an expense. E file state taxes You can deduct depreciation only on the part of your property used for rental purposes. E file state taxes Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. E file state taxes You may have to use Form 4562 to figure and report your depreciation. E file state taxes See Which Forms To Use in chapter 3. E file state taxes Also see Publication 946. E file state taxes Section 179 deduction. E file state taxes   The section 179 deduction is a means of recovering part or all of the cost of certain qualifying property in the year you place the property in service. E file state taxes This deduction is not allowed for property used in connection with residential rental property. E file state taxes See chapter 2 of Publication 946. E file state taxes Alternative minimum tax (AMT). E file state taxes   If you use accelerated depreciation, you may be subject to the AMT. E file state taxes Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). E file state taxes   The prescribed depreciation methods for rental real estate are not accelerated, so the depreciation deduction is not adjusted for the AMT. E file state taxes However, accelerated methods are generally used for other property connected with rental activities (for example, appliances and wall-to-wall carpeting). E file state taxes   To find out if you are subject to the AMT, see the Instructions for Form 6251. E file state taxes The Basics The following section discusses the information you will need to have about the rental property and the decisions to be made before figuring your depreciation deduction. E file state taxes What Rental Property Can Be Depreciated? You can depreciate your property if it meets all the following requirements. E file state taxes You own the property. E file state taxes You use the property in your business or income-producing activity (such as rental property). E file state taxes The property has a determinable useful life. E file state taxes The property is expected to last more than one year. E file state taxes Property you own. E file state taxes   To claim depreciation, you usually must be the owner of the property. E file state taxes You are considered as owning property even if it is subject to a debt. E file state taxes Rented property. E file state taxes   Generally, if you pay rent for property, you cannot depreciate that property. E file state taxes Usually, only the owner can depreciate it. E file state taxes However, if you make permanent improvements to leased property, you may be able to depreciate the improvements. E file state taxes See Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. E file state taxes Cooperative apartments. E file state taxes   If you are a tenant-stockholder in a cooperative housing corporation and rent your cooperative apartment to others, you can deduct depreciation on your stock in the corporation. E file state taxes See chapter 4, Special Situations. E file state taxes Property having a determinable useful life. E file state taxes   To be depreciable, your property must have a determinable useful life. E file state taxes This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. E file state taxes What Rental Property Cannot Be Depreciated? Certain property cannot be depreciated. E file state taxes This includes land and certain excepted property. E file state taxes Land. E file state taxes   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. E file state taxes But if it does, the loss is accounted for upon disposition. E file state taxes The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. E file state taxes   Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. E file state taxes These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property. E file state taxes Example. E file state taxes You built a new house to use as a rental and paid for grading, clearing, seeding, and planting bushes and trees. E file state taxes Some of the bushes and trees were planted right next to the house, while others were planted around the outer border of the lot. E file state taxes If you replace the house, you would have to destroy the bushes and trees right next to it. E file state taxes These bushes and trees are closely associated with the house, so they have a determinable useful life. E file state taxes Therefore, you can depreciate them. E file state taxes Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. E file state taxes Excepted property. E file state taxes   Even if the property meets all the requirements listed earlier under What Rental Property Can Be Depreciated , you cannot depreciate the following property. E file state taxes Property placed in service and disposed of (or taken out of business use) in the same year. E file state taxes Equipment used to build capital improvements. E file state taxes You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. E file state taxes For more information, see chapter 1 of Publication 946. E file state taxes When Does Depreciation Begin and End? You begin to depreciate your rental property when you place it in service for the production of income. E file state taxes You stop depreciating it either when you have fully recovered your cost or other basis, or when you retire it from service, whichever happens first. E file state taxes Placed in Service You place property in service in a rental activity when it is ready and available for a specific use in that activity. E file state taxes Even if you are not using the property, it is in service when it is ready and available for its specific use. E file state taxes Example 1. E file state taxes On November 22 of last year, you purchased a dishwasher for your rental property. E file state taxes The appliance was delivered on December 7, but was not installed and ready for use until January 3 of this year. E file state taxes Because the dishwasher was not ready for use last year, it is not considered placed in service until this year. E file state taxes If the appliance had been installed and ready for use when it was delivered in December of last year, it would have been considered placed in service in December, even if it was not actually used until this year. E file state taxes Example 2. E file state taxes On April 6, you purchased a house to use as residential rental property. E file state taxes You made extensive repairs to the house and had it ready for rent on July 5. E file state taxes You began to advertise the house for rent in July and actually rented it beginning September 1. E file state taxes The house is considered placed in service in July when it was ready and available for rent. E file state taxes You can begin to depreciate the house in July. E file state taxes Example 3. E file state taxes You moved from your home in July. E file state taxes During August and September you made several repairs to the house. E file state taxes On October 1, you listed the property for rent with a real estate company, which rented it on December 1. E file state taxes The property is considered placed in service on October 1, the date when it was available for rent. E file state taxes Conversion to business use. E file state taxes   If you place property in service in a personal activity, you cannot claim depreciation. E file state taxes However, if you change the property's use to business or the production of income, you can begin to depreciate it at the time of the change. E file state taxes You place the property in service for business or income-producing use on the date of the change. E file state taxes Example. E file state taxes You bought a house and used it as your personal home several years before you converted it to rental property. E file state taxes Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. E file state taxes You can begin to claim depreciation in the year you converted it to rental property because at that time its use changed to the production of income. E file state taxes Idle Property Continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle (not in use). E file state taxes For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it is not available for rent. E file state taxes Cost or Other Basis Fully Recovered You must stop depreciating property when the total of your yearly depreciation deductions equals your cost or other basis of your property. E file state taxes For this purpose, your yearly depreciation deductions include any depreciation that you were allowed to claim, even if you did not claim it. E file state taxes See Basis of Depreciable Property , later. E file state taxes Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. E file state taxes You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. E file state taxes You sell or exchange the property. E file state taxes You convert the property to personal use. E file state taxes You abandon the property. E file state taxes The property is destroyed. E file state taxes Depreciation Methods Generally, you must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate residential rental property placed in service after 1986. E file state taxes If you placed rental property in service before 1987, you are using one of the following methods. E file state taxes ACRS (Accelerated Cost Recovery System) for property placed in service after 1980 but before 1987. E file state taxes Straight line or declining balance method over the useful life of property placed in service before 1981. E file state taxes See MACRS Depreciation , later, for more information. E file state taxes Rental property placed in service before 2013. E file state taxes   Continue to use the same method of figuring depreciation that you used in the past. E file state taxes Use of real property changed. E file state taxes   Generally, you must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing use after 1986. E file state taxes This includes your residence that you changed to rental use. E file state taxes See Property Owned or Used in 1986 in Publication 946, chapter 1, for those situations in which MACRS is not allowed. E file state taxes Improvements made after 1986. E file state taxes   Treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. E file state taxes As a result, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. E file state taxes For more information about improvements, see Additions or improvements to property , later in this chapter under Recovery Periods Under GDS. E file state taxes This publication discusses MACRS depreciation only. E file state taxes If you need information about depreciating property placed in service before 1987, see Publication 534. E file state taxes Basis of Depreciable Property The basis of property used in a rental activity is generally its adjusted basis when you place it in service in that activity. E file state taxes This is its cost or other basis when you acquired it, adjusted for certain items occurring before you place it in service in the rental activity. E file state taxes If you depreciate your property under MACRS, you may also have to reduce your basis by certain deductions and credits with respect to the property. E file state taxes Basis and adjusted basis are explained in the following discussions. E file state taxes If you used the property for personal purposes before changing it to rental use, its basis for depreciation is the lesser of its adjusted basis or its fair market value when you change it to rental use. E file state taxes See Basis of Property Changed to Rental Use in chapter 4. E file state taxes Cost Basis The basis of property you buy is usually its cost. E file state taxes The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. E file state taxes Your cost also includes amounts you pay for: Sales tax charged on the purchase (but see Exception next), Freight charges to obtain the property, and Installation and testing charges. E file state taxes Exception. E file state taxes   If you deducted state and local general sales taxes as an itemized deduction on Schedule A (Form 1040), do not include those sales taxes as part of your cost basis. E file state taxes Such taxes were deductible before 1987 and after 2003. E file state taxes Loans with low or no interest. E file state taxes   If you buy property on any time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, less the amount considered to be unstated interest. E file state taxes See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. E file state taxes Real property. E file state taxes   If you buy real property, such as a building and land, certain fees and other expenses you pay are part of your cost basis in the property. E file state taxes Real estate taxes. E file state taxes   If you buy real property and agree to pay real estate taxes on it that were owed by the seller and the seller does not reimburse you, the taxes you pay are treated as part of your basis in the property. E file state taxes You cannot deduct them as taxes paid. E file state taxes   If you reimburse the seller for real estate taxes the seller paid for you, you can usually deduct that amount. E file state taxes Do not include that amount in your basis in the property. E file state taxes Settlement fees and other costs. E file state taxes   The following settlement fees and closing costs for buying the property are part of your basis in the property. E file state taxes Abstract fees. E file state taxes Charges for installing utility services. E file state taxes Legal fees. E file state taxes Recording fees. E file state taxes Surveys. E file state taxes Transfer taxes. E file state taxes Title insurance. E file state taxes Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. E file state taxes   The following are settlement fees and closing costs you cannot include in your basis in the property. E file state taxes Fire insurance premiums. E file state taxes Rent or other charges relating to occupancy of the property before closing. E file state taxes Charges connected with getting or refinancing a loan, such as: Points (discount points, loan origination fees), Mortgage insurance premiums, Loan assumption fees, Cost of a credit report, and Fees for an appraisal required by a lender. E file state taxes   Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. E file state taxes Assumption of a mortgage. E file state taxes   If you buy property and become liable for an existing mortgage on the property, your basis is the amount you pay for the property plus the amount remaining to be paid on the mortgage. E file state taxes Example. E file state taxes You buy a building for $60,000 cash and assume a mortgage of $240,000 on it. E file state taxes Your basis is $300,000. E file state taxes Separating cost of land and buildings. E file state taxes   If you buy buildings and your cost includes the cost of the land on which they stand, you must divide the cost between the land and the buildings to figure the basis for depreciation of the buildings. E file state taxes The part of the cost that you allocate to each asset is the ratio of the fair market value of that asset to the fair market value of the whole property at the time you buy it. E file state taxes   If you are not certain of the fair market values of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes. E file state taxes Example. E file state taxes You buy a house and land for $200,000. E file state taxes The purchase contract does not specify how much of the purchase price is for the house and how much is for the land. E file state taxes The latest real estate tax assessment on the property was based on an assessed value of $160,000, of which $136,000 was for the house and $24,000 was for the land. E file state taxes You can allocate 85% ($136,000 ÷ $160,000) of the purchase price to the house and 15% ($24,000 ÷ $160,000) of the purchase price to the land. E file state taxes Your basis in the house is $170,000 (85% of $200,000) and your basis in the land is $30,000 (15% of $200,000). E file state taxes Basis Other Than Cost You cannot use cost as a basis for property that you received: In return for services you performed; In an exchange for other property; As a gift; From your spouse, or from your former spouse as the result of a divorce; or As an inheritance. E file state taxes If you received property in one of these ways, see Publication 551 for information on how to figure your basis. E file state taxes Adjusted Basis To figure your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service for business or the production of income. E file state taxes The result of these adjustments to the basis is the adjusted basis. E file state taxes Increases to basis. E file state taxes   You must increase the basis of any property by the cost of all items properly added to a capital account. E file state taxes These include the following. E file state taxes The cost of any additions or improvements made before placing your property into service as a rental that have a useful life of more than 1 year. E file state taxes Amounts spent after a casualty to restore the damaged property. E file state taxes The cost of extending utility service lines to the property. E file state taxes Legal fees, such as the cost of defending and perfecting title, or settling zoning issues. E file state taxes Additions or improvements. E file state taxes   Add to the basis of your property the amount an addition or improvement actually cost you, including any amount you borrowed to make the addition or improvement. E file state taxes This includes all direct costs, such as material and labor, but does not include your own labor. E file state taxes It also includes all expenses related to the addition or improvement. E file state taxes   For example, if you had an architect draw up plans for remodeling your property, the architect's fee is a part of the cost of the remodeling. E file state taxes Or, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence. E file state taxes   Keep separate accounts for depreciable additions or improvements made after you place the property in service in your rental activity. E file state taxes For information on depreciating additions or improvements, see Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. E file state taxes    The cost of landscaping improvements is usually treated as an addition to the basis of the land, which is not depreciable. E file state taxes However, see What Rental Property Cannot Be Depreciated, earlier. E file state taxes Assessments for local improvements. E file state taxes   Assessments for items which tend to increase the value of property, such as streets and sidewalks, must be added to the basis of the property. E file state taxes For example, if your city installs curbing on the street in front of your house, and assesses you and your neighbors for its cost, you must add the assessment to the basis of your property. E file state taxes Also add the cost of legal fees paid to obtain a decrease in an assessment levied against property to pay for local improvements. E file state taxes You cannot deduct these items as taxes or depreciate them. E file state taxes    However, you can deduct as taxes, charges or assessments for maintenance, repairs, or interest charges related to the improvements. E file state taxes Do not add them to your basis in the property. E file state taxes Deducting vs. E file state taxes capitalizing costs. E file state taxes   Do not add to your basis costs you can deduct as current expenses. E file state taxes However, there are certain costs you can choose either to deduct or to capitalize. E file state taxes If you capitalize these costs, include them in your basis. E file state taxes If you deduct them, do not include them in your basis. E file state taxes   The costs you may choose to deduct or capitalize include carrying charges, such as interest and taxes, that you must pay to own property. E file state taxes   For more information about deducting or capitalizing costs and how to make the election, see Carrying Charges in Publication 535, chapter 7. E file state taxes Decreases to basis. E file state taxes   You must decrease the basis of your property by any items that represent a return of your cost. E file state taxes These include the following. E file state taxes Insurance or other payment you receive as the result of a casualty or theft loss. E file state taxes Casualty loss not covered by insurance for which you took a deduction. E file state taxes Amount(s) you receive for granting an easement. E file state taxes Residential energy credits you were allowed before 1986, or after 2005, if you added the cost of the energy items to the basis of your home. E file state taxes Exclusion from income of subsidies for energy conservation measures. E file state taxes Special depreciation allowance claimed on qualified property. E file state taxes Depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. E file state taxes If you did not deduct enough or deducted too much in any year, see Depreciation under Decreases to Basis in Publication 551. E file state taxes   If your rental property was previously used as your main home, you must also decrease the basis by the following. E file state taxes Gain you postponed from the sale of your main home before May 7, 1997, if the replacement home was converted to your rental property. E file state taxes District of Columbia first-time homebuyer credit allowed on the purchase of your main home after August 4, 1997 and before January 1, 2012. E file state taxes Amount of qualified principal residence indebtedness discharged on or after January 1, 2007. E file state taxes Claiming the Special Depreciation Allowance For 2013, your residential rental property may qualify for a special depreciation allowance. E file state taxes This allowance is figured before you figure your regular depreciation deduction. E file state taxes See Publication 946, chapter 3, for details. E file state taxes Also see the Instructions for Form 4562, Line 14. E file state taxes If you qualify for, but choose not to take, a special depreciation allowance, you must attach a statement to your return. E file state taxes The details of this election are in Publication 946, chapter 3, and the Instructions for Form 4562, Line 14. E file state taxes MACRS Depreciation Most business and investment property placed in service after 1986 is depreciated using MACRS. E file state taxes This section explains how to determine which MACRS depreciation system applies to your property. E file state taxes It also discusses other information you need to know before you can figure depreciation under MACRS. E file state taxes This information includes the property's: Recovery class, Applicable recovery period, Convention, Placed-in-service date, Basis for depreciation, and Depreciation method. E file state taxes Depreciation Systems MACRS consists of two systems that determine how you depreciate your property—the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). E file state taxes You must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. E file state taxes Excluded Property You cannot use MACRS for certain personal property (such as furniture or appliances) placed in service in your rental property in 2013 if it had been previously placed in service before 1987 when MACRS became effective. E file state taxes In most cases, personal property is excluded from MACRS if you (or a person related to you) owned or used it in 1986 or if your tenant is a person (or someone related to the person) who owned or used it in 1986. E file state taxes However, the property is not excluded if your 2013 deduction under MACRS (using a half-year convention) is less than the deduction you would have under ACRS. E file state taxes For more information, see What Method Can You Use To Depreciate Your Property? in Publication 946, chapter 1. E file state taxes Electing ADS If you choose, you can use the ADS method for most property. E file state taxes Under ADS, you use the straight line method of depreciation. E file state taxes The election of ADS for one item in a class of property generally applies to all property in that class that is placed in service during the tax year of the election. E file state taxes However, the election applies on a property-by-property basis for residential rental property and nonresidential real property. E file state taxes If you choose to use ADS for your residential rental property, the election must be made in the first year the property is placed in service. E file state taxes Once you make this election, you can never revoke it. E file state taxes For property placed in service during 2013, you make the election to use ADS by entering the depreciation on Form 4562, Part III, Section C, line 20c. E file state taxes Property Classes Under GDS Each item of property that can be depreciated under MACRS is assigned to a property class, determined by its class life. E file state taxes The property class generally determines the depreciation method, recovery period, and convention. E file state taxes The property classes under GDS are: 3-year property, 5-year property, 7-year property, 10-year property, 15-year property, 20-year property, Nonresidential real property, and Residential rental property. E file state taxes Under MACRS, property that you placed in service during 2013 in your rental activities generally falls into one of the following classes. E file state taxes 5-year property. E file state taxes This class includes computers and peripheral equipment, office machinery (typewriters, calculators, copiers, etc. E file state taxes ), automobiles, and light trucks. E file state taxes This class also includes appliances, carpeting, furniture, etc. E file state taxes , used in a residential rental real estate activity. E file state taxes Depreciation on automobiles, other property used for transportation, computers and related peripheral equipment, and property of a type generally used for entertainment, recreation, or amusement is limited. E file state taxes See chapter 5 of Publication 946. E file state taxes 7-year property. E file state taxes This class includes office furniture and equipment (desks, file cabinets, etc. E file state taxes ). E file state taxes This class also includes any property that does not have a class life and that has not been designated by law as being in any other class. E file state taxes 15-year property. E file state taxes This class includes roads, fences, and shrubbery (if depreciable). E file state taxes Residential rental property. E file state taxes This class includes any real property that is a rental building or structure (including a mobile home) for which 80% or more of the gross rental income for the tax year is from dwelling units. E file state taxes It does not include a unit in a hotel, motel, inn, or other establishment where more than half of the units are used on a transient basis. E file state taxes If you live in any part of the building or structure, the gross rental income includes the fair rental value of the part you live in. E file state taxes The other property classes do not generally apply to property used in rental activities. E file state taxes These classes are not discussed in this publication. E file state taxes See Publication 946 for more information. E file state taxes Recovery Periods Under GDS The recovery period of property is the number of years over which you recover its cost or other basis. E file state taxes The recovery periods are generally longer under ADS than GDS. E file state taxes The recovery period of property depends on its property class. E file state taxes Under GDS, the recovery period of an asset is generally the same as its property class. E file state taxes Class lives and recovery periods for most assets are listed in Appendix B of Publication 946. E file state taxes See Table 2-1 for recovery periods of property commonly used in residential rental activities. E file state taxes Qualified Indian reservation property. E file state taxes   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations. E file state taxes For more information, see chapter 4 of Publication 946. E file state taxes Additions or improvements to property. E file state taxes   Treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes. E file state taxes   The property class and recovery period of the addition or improvement is the one that would apply to the original property if you had placed it in service at the same time as the addition or improvement. E file state taxes   The recovery period for an addition or improvement to property begins on the later of: The date the addition or improvement is placed in service, or The date the property to which the addition or improvement was made is placed in service. E file state taxes Example. E file state taxes You own a residential rental house that you have been renting since 1986 and depreciating under ACRS. E file state taxes You built an addition onto the house and placed it in service in 2013. E file state taxes You must use MACRS for the addition. E file state taxes Under GDS, the addition is depreciated as residential rental property over 27. E file state taxes 5 years. E file state taxes Table 2-1. E file state taxes MACRS Recovery Periods for Property Used in Rental Activities   MACRS Recovery Period   Type of Property General Depreciation System Alternative Depreciation System   Computers and their peripheral equipment 5 years 5 years   Office machinery, such as: Typewriters Calculators Copiers 5 years 6 years   Automobiles 5 years 5 years   Light trucks 5 years 5 years   Appliances, such as: Stoves Refrigerators 5 years 9 years   Carpets 5 years 9 years   Furniture used in rental property 5 years 9 years   Office furniture and equipment, such as: Desks Files 7 years 10 years   Any property that does not have a class life and that has not been designated by law as being in any other class 7 years 12 years   Roads 15 years 20 years   Shrubbery 15 years 20 years   Fences 15 years 20 years   Residential rental property (buildings or structures) and structural components such as furnaces, waterpipes, venting, etc. E file state taxes 27. E file state taxes 5 years 40 years   Additions and improvements, such as a new roof The same recovery period as that of the property to which the addition or improvement is made, determined as if the property were placed in service at the same time as the addition or improvement. E file state taxes   Conventions A convention is a method established under MACRS to set the beginning and end of the recovery period. E file state taxes The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property. E file state taxes Mid-month convention. E file state taxes    A mid-month convention is used for all residential rental property and nonresidential real property. E file state taxes Under this convention, you treat all property placed in service, or disposed of, during any month as placed in service, or disposed of, at the midpoint of that month. E file state taxes Mid-quarter convention. E file state taxes   A mid-quarter convention must be used if the mid-month convention does not apply and the total depreciable basis of MACRS property placed in service in the last 3 months of a tax year (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) is more than 40% of the total basis of all such property you place in service during the year. E file state taxes   Under this convention, you treat all property placed in service, or disposed of, during any quarter of a tax year as placed in service, or disposed of, at the midpoint of the quarter. E file state taxes Example. E file state taxes During the tax year, Tom Martin purchased the following items to use in his rental property. E file state taxes He elects not to claim the special depreciation allowance discussed earlier. E file state taxes A dishwasher for $400 that he placed in service in January. E file state taxes Used furniture for $100 that he placed in service in September. E file state taxes A refrigerator for $800 that he placed in service in October. E file state taxes Tom uses the calendar year as his tax year. E file state taxes The total basis of all property placed in service that year is $1,300. E file state taxes The $800 basis of the refrigerator placed in service during the last 3 months of his tax year exceeds $520 (40% × $1,300). E file state taxes Tom must use the mid-quarter convention instead of the half-year convention for all three items. E file state taxes Half-year convention. E file state taxes    The half-year convention is used if neither the mid-quarter convention nor the mid-month convention applies. E file state taxes Under this convention, you treat all property placed in service, or disposed of, during a tax year as placed in service, or disposed of, at the midpoint of that tax year. E file state taxes   If this convention applies, you deduct a half year of depreciation for the first year and the last year that you depreciate the property. E file state taxes You deduct a full year of depreciation for any other year during the recovery period. E file state taxes Figuring Your Depreciation Deduction You can figure your MACRS depreciation deduction in one of two ways. E file state taxes The deduction is substantially the same both ways. E file state taxes You can either: Actually compute the deduction using the depreciation method and convention that apply over the recovery period of the property, or Use the percentage from the MACRS percentage tables. E file state taxes In this publication we will use the percentage tables. E file state taxes For instructions on how to compute the deduction, see chapter 4 of Publication 946. E file state taxes Residential rental property. E file state taxes   You must use the straight line method and a mid-month convention for residential rental property. E file state taxes In the first year that you claim depreciation for residential rental property, you can claim depreciation only for the number of months the property is in use, and you must use the mid-month convention (explained under Conventions , earlier). E file state taxes 5-, 7-, or 15-year property. E file state taxes   For property in the 5- or 7-year class, use the 200% declining balance method and a half-year convention. E file state taxes However, in limited cases you must use the mid-quarter convention, if it applies. E file state taxes For property in the 15-year class, use the 150% declining balance method and a half-year convention. E file state taxes   You can also choose to use the 150% declining balance method for property in the 5- or 7-year class. E file state taxes The choice to use the 150% method for one item in a class of property applies to all property in that class that is placed in service during the tax year of the election. E file state taxes You make this election on Form 4562. E file state taxes In Part III, column (f), enter “150 DB. E file state taxes ” Once you make this election, you cannot change to another method. E file state taxes   If you use either the 200% or 150% declining balance method, you figure your deduction using the straight line method in the first tax year that the straight line method gives you an equal or larger deduction. E file state taxes   You can also choose to use the straight line method with a half-year or mid-quarter convention for 5-, 7-, or 15-year property. E file state taxes The choice to use the straight line method for one item in a class of property applies to all property in that class that is placed in service during the tax year of the election. E file state taxes You elect the straight line method on Form 4562. E file state taxes In Part III, column (f), enter “S/L. E file state taxes ” Once you make this election, you cannot change to another method. E file state taxes MACRS Percentage Tables You can use the percentages in Table 2-2, earlier, to compute annual depreciation under MACRS. E file state taxes The tables show the percentages for the first few years or until the change to the straight line method is made. E file state taxes See Appendix A of Publication 946 for complete tables. E file state taxes The percentages in Tables 2-2a, 2-2b, and 2-2c make the change from declining balance to straight line in the year that straight line will give a larger deduction. E file state taxes If you elect to use the straight line method for 5-, 7-, or 15-year property, or the 150% declining balance method for 5- or 7-year property, use the tables in Appendix A of Publication 946. E file state taxes How to use the percentage tables. E file state taxes   You must apply the table rates to your property's unadjusted basis (defined below) each year of the recovery period. E file state taxes   Once you begin using a percentage table to figure depreciation, you must continue to use it for the entire recovery period unless there is an adjustment to the basis of your property for a reason other than: Depreciation allowed or allowable, or An addition or improvement that is depreciated as a separate item of property. E file state taxes   If there is an adjustment for any reason other than (1) or (2), for example, because of a deductible casualty loss, you can no longer use the table. E file state taxes For the year of the adjustment and for the remaining recovery period, figure depreciation using the property's adjusted basis at the end of the year and the appropriate depreciation method, as explained earlier under Figuring Your Depreciation Deduction . E file state taxes See Figuring the Deduction Without Using the Tables in Publication 946, chapter 4. E file state taxes Unadjusted basis. E file state taxes   This is the same basis you would use to figure gain on a sale (see Basis of Depreciable Property , earlier), but without reducing your original basis by any MACRS depreciation taken in earlier years. E file state taxes   However, you do reduce your original basis by other amounts claimed on the property, including: Any amortization, Any section 179 deduction, and Any special depreciation allowance. E file state taxes For more information, see chapter 4 of Publication 946. E file state taxes Please click here for the text description of the image. E file state taxes Table 2-2 Tables 2-2a, 2-2b, and 2-2c. E file state taxes   The percentages in these tables take into account the half-year and mid-quarter conventions. E file state taxes Use Table 2-2a for 5-year property, Table 2-2b for 7-year property, and Table 2-2c for 15-year property. E file state taxes Use the percentage in the second column (half-year convention) unless you are required to use the mid-quarter convention (explained earlier). E file state taxes If you must use the mid-quarter convention, use the column that corresponds to the calendar year quarter in which you placed the property in service. E file state taxes Example 1. E file state taxes You purchased a stove and refrigerator and placed them in service in June. E file state taxes Your basis in the stove is $600 and your basis in the refrigerator is $1,000. E file state taxes Both are 5-year property. E file state taxes Using the half-year convention column in Table 2-2a, the depreciation percentage for Year 1 is 20%. E file state taxes For that year your depreciation deduction is $120 ($600 × . E file state taxes 20) for the stove and $200 ($1,000 × . E file state taxes 20) for the refrigerator. E file state taxes For Year 2, the depreciation percentage is 32%. E file state taxes That year's depreciation deduction will be $192 ($600 × . E file state taxes 32) for the stove and $320 ($1,000 × . E file state taxes 32) for the refrigerator. E file state taxes Example 2. E file state taxes Assume the same facts as in Example 1, except you buy the refrigerator in October instead of June. E file state taxes Since the refrigerator was placed in service in the last 3 months of the tax year, and its basis ($1,000) is more than 40% of the total basis of all property placed in service during the year ($1,600 × . E file state taxes 40 = $640), you are required to use the mid-quarter convention to figure depreciation on both the stove and refrigerator. E file state taxes Because you placed the refrigerator in service in October, you use the fourth quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 5%. E file state taxes Your depreciation deduction for the refrigerator is $50 ($1,000 x . E file state taxes 05). E file state taxes Because you placed the stove in service in June, you use the second quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 25%. E file state taxes For that year, your depreciation deduction for the stove is $150 ($600 x . E file state taxes 25). E file state taxes Table 2-2d. E file state taxes    Use this table when you are using the GDS 27. E file state taxes 5 year option for residential rental property. E file state taxes Find the row for the month that you placed the property in service. E file state taxes Use the percentages listed for that month to figure your depreciation deduction. E file state taxes The mid-month convention is taken into account in the percentages shown in the table. E file state taxes Continue to use the same row (month) under the column for the appropriate year. E file state taxes Example. E file state taxes You purchased a single family rental house for $185,000 and placed it in service on February 8. E file state taxes The sales contract showed that the building cost $160,000 and the land cost $25,000. E file state taxes Your basis for depreciation is its original cost, $160,000. E file state taxes This is the first year of service for your residential rental property and you decide to use GDS which has a recovery period of 27. E file state taxes 5 years. E file state taxes Using Table 2-2d, you find that the percentage for property placed in service in February of Year 1 is 3. E file state taxes 182%. E file state taxes That year's depreciation deduction is $5,091 ($160,000 x . E file state taxes 03182). E file state taxes Figuring MACRS Depreciation Under ADS Table 2–1, earlier, shows the ADS recovery periods for property used in rental activities. E file state taxes See Appendix B in Publication 946 for other property. E file state taxes If your property is not listed in Appendix B, it is considered to have no class life. E file state taxes Under ADS, personal property with no class life is depreciated using a recovery period of 12 years. E file state taxes Use the mid-month convention for residential rental property and nonresidential real property. E file state taxes For all other property, use the half-year or mid-quarter convention, as appropriate. E file state taxes See Publication 946 for ADS depreciation tables. E file state taxes Claiming the Correct Amount of Depreciation You should claim the correct amount of depreciation each tax year. E file state taxes If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. E file state taxes For more information, see Depreciation under Decreases to Basis in Publication 551. E file state taxes If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U. E file state taxes S. E file state taxes Individual Income Tax Return. E file state taxes If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. E file state taxes Filing an amended return. E file state taxes   You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. E file state taxes You claimed the incorrect amount because of a mathematical error made in any year. E file state taxes You claimed the incorrect amount because of a posting error made in any year. E file state taxes You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. E file state taxes You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. E file state taxes   Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return for the property used in your rental activity. E file state taxes This also occurs when you use the same impermissible method of determining depreciation (for example, using the wrong MACRS recovery period) in two or more consecutively filed tax returns. E file state taxes   If an amended return is allowed, you must file it by the later of the following dates. E file state taxes 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. E file state taxes A return filed before an unextended due date is considered filed on that due date. E file state taxes 2 years from the time you paid your tax for that year. E file state taxes Changing your accounting method. E file state taxes   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. E file state taxes In some instances, that consent is automatic. E file state taxes For more information, see Changing Your Accounting Method in Publication 946,  chapter 1. E file state taxes Prev  Up  Next   Home   More Online Publications