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File free federal and state tax return 2. File free federal and state tax return   Roth IRAs Table of Contents What's New for 2013 What's New for 2014 Reminders Introduction What Is a Roth IRA? When Can a Roth IRA Be Opened? Can You Contribute to a Roth IRA?How Much Can Be Contributed? When Can You Make Contributions? What if You Contribute Too Much? Can You Move Amounts Into a Roth IRA?Conversions Rollover From Employer's Plan Into a Roth IRA Military Death Gratuities and Servicemembers' Group Life Insurance (SGLI) Payments Rollover From a Roth IRA Rollover of Exxon Valdez Settlement Income Rollover of Airline Payments Are Distributions Taxable?What Are Qualified Distributions? Additional Tax on Early Distributions Ordering Rules for Distributions How Do You Figure the Taxable Part? Must You Withdraw or Use Assets?Minimum distributions. File free federal and state tax return Recognizing Losses on Investments Distributions After Owner's Death What's New for 2013 Roth IRA contribution limit. File free federal and state tax return  If contributions on your behalf are made only to Roth IRAs, your contribution limit for 2013 will generally be the lesser of: $5,500, or Your taxable compensation for the year. File free federal and state tax return If you were age 50 or older before 2014 and contributions on your behalf were made only to Roth IRAs, your contribution limit for 2013 will generally be the lesser of: $6,500, or Your taxable compensation for the year. File free federal and state tax return However, if your modified adjusted gross income (AGI) is above a certain amount, your contribution limit may be reduced. File free federal and state tax return For more information, see How Much Can Be Contributed? under Can You Contribute to a Roth IRA? in this chapter. File free federal and state tax return Modified AGI limit for Roth IRA contributions increased. File free federal and state tax return  For 2013, your Roth IRA contribution limit is reduced (phased out) in the following situations. File free federal and state tax return Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $178,000. File free federal and state tax return You cannot make a Roth IRA contribution if your modified AGI is $188,000 or more. File free federal and state tax return Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2013 and your modified AGI is at least $112,000. File free federal and state tax return You cannot make a Roth IRA contribution if your modified AGI is $127,000 or more. File free federal and state tax return Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. File free federal and state tax return You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more. File free federal and state tax return See Can You Contribute to a Roth IRA? in this chapter. File free federal and state tax return Net Investment Income Tax. File free federal and state tax return  For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), 457(b) plans, and IRAs). File free federal and state tax return However, these distributions are taken into account when determining the modified adjusted gross income threshold. File free federal and state tax return Distributions from a nonqualified retirement plan are included in net investment income. File free federal and state tax return See Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts, and its instructions for more information. File free federal and state tax return What's New for 2014 Modified AGI limit for Roth IRA contributions increased. File free federal and state tax return  For 2014, your Roth IRA contribution limit is reduced (phased out) in the following situations. File free federal and state tax return Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $181,000. File free federal and state tax return You cannot make a Roth IRA contribution if your modified AGI is $191,000 or more. File free federal and state tax return Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2014 and your modified AGI is at least $114,000. File free federal and state tax return You cannot make a Roth IRA contribution if your modified AGI is $129,000 or more. File free federal and state tax return Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. File free federal and state tax return You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more. File free federal and state tax return Reminders Deemed IRAs. File free federal and state tax return  For plan years beginning after 2002, a qualified employer plan (retirement plan) can maintain a separate account or annuity under the plan (a deemed IRA) to receive voluntary employee contributions. File free federal and state tax return If the separate account or annuity otherwise meets the requirements of an IRA, it will be subject only to IRA rules. File free federal and state tax return An employee's account can be treated as a traditional IRA or a Roth IRA. File free federal and state tax return For this purpose, a “qualified employer plan” includes: A qualified pension, profit-sharing, or stock bonus plan (section 401(a) plan), A qualified employee annuity plan (section 403(a) plan), A tax-sheltered annuity plan (section 403(b) plan), and A deferred compensation plan (section 457 plan) maintained by a state, a political subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state. File free federal and state tax return Designated Roth accounts. File free federal and state tax return  Designated Roth accounts are separate accounts under 401(k), 403(b), or 457(b) plans that accept elective deferrals that are referred to as Roth contributions. File free federal and state tax return These elective deferrals are included in your income, but qualified distributions from these accounts are not included in your income. File free federal and state tax return Designated Roth accounts are not IRAs and should not be confused with Roth IRAs. File free federal and state tax return Contributions, up to their respective limits, can be made to Roth IRAs and designated Roth accounts according to your eligibility to participate. File free federal and state tax return A contribution to one does not impact your eligibility to contribute to the other. File free federal and state tax return See Publication 575, for more information on designated Roth accounts. File free federal and state tax return Introduction Regardless of your age, you may be able to establish and make nondeductible contributions to an individual retirement plan called a Roth IRA. File free federal and state tax return Contributions not reported. File free federal and state tax return   You do not report Roth IRA contributions on your return. File free federal and state tax return What Is a Roth IRA? A Roth IRA is an individual retirement plan that, except as explained in this chapter, is subject to the rules that apply to a traditional IRA (defined next). File free federal and state tax return It can be either an account or an annuity. File free federal and state tax return Individual retirement accounts and annuities are described in chapter 1 under How Can a Traditional IRA Be Opened. File free federal and state tax return To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is opened. File free federal and state tax return A deemed IRA can be a Roth IRA, but neither a SEP IRA nor a SIMPLE IRA can be designated as a Roth IRA. File free federal and state tax return Unlike a traditional IRA, you cannot deduct contributions to a Roth IRA. File free federal and state tax return But, if you satisfy the requirements, qualified distributions (discussed later) are tax free. File free federal and state tax return Contributions can be made to your Roth IRA after you reach age 70½ and you can leave amounts in your Roth IRA as long as you live. File free federal and state tax return Traditional IRA. File free federal and state tax return   A traditional IRA is any IRA that is not a Roth IRA or SIMPLE IRA. File free federal and state tax return Traditional IRAs are discussed in chapter 1. File free federal and state tax return When Can a Roth IRA Be Opened? You can open a Roth IRA at any time. File free federal and state tax return However, the time for making contributions for any year is limited. File free federal and state tax return See When Can You Make Contributions , later under Can You Contribute to a Roth IRA. File free federal and state tax return Can You Contribute to a Roth IRA? Generally, you can contribute to a Roth IRA if you have taxable compensation (defined later) and your modified AGI (defined later) is less than: $188,000 for married filing jointly or qualifying widow(er), $127,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and $10,000 for married filing separately and you lived with your spouse at any time during the year. File free federal and state tax return You may be able to claim a credit for contributions to your Roth IRA. File free federal and state tax return For more information, see chapter 4. File free federal and state tax return Is there an age limit for contributions?   Contributions can be made to your Roth IRA regardless of your age. File free federal and state tax return Can you contribute to a Roth IRA for your spouse?   You can contribute to a Roth IRA for your spouse provided the contributions satisfy the Kay Bailey Hutchison Spousal IRA limit discussed in chapter 1 under How Much Can Be Contributed, you file jointly, and your modified AGI is less than $188,000. File free federal and state tax return Compensation. File free federal and state tax return   Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts received for providing personal services. File free federal and state tax return It also includes commissions, self-employment income, nontaxable combat pay, military differential pay, and taxable alimony and separate maintenance payments. File free federal and state tax return For more information, see What Is Compensation? under Who Can Open a Traditional IRA? in chapter 1. File free federal and state tax return Modified AGI. File free federal and state tax return   Your modified AGI for Roth IRA purposes is your adjusted gross income (AGI) as shown on your return with some adjustments. File free federal and state tax return Use Worksheet 2-1 , later, to determine your modified AGI. File free federal and state tax return    Do not subtract conversion income when figuring your other AGI-based phaseouts and taxable income, such as your deduction for medical and dental expenses. File free federal and state tax return Subtract them from AGI only for the purpose of figuring your modified AGI for Roth IRA purposes. File free federal and state tax return How Much Can Be Contributed? The contribution limit for Roth IRAs generally depends on whether contributions are made only to Roth IRAs or to both traditional IRAs and Roth IRAs. File free federal and state tax return Worksheet 2-1. File free federal and state tax return Modified Adjusted Gross Income for Roth IRA Purposes Use this worksheet to figure your modified adjusted gross income for Roth IRA purposes. File free federal and state tax return 1. File free federal and state tax return Enter your adjusted gross income from Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37 1. File free federal and state tax return   2. File free federal and state tax return Enter any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA (included on Form 1040, line 15b, Form 1040A, line 11b, or Form 1040NR, line 16b) and a rollover from a qualified retirement plan to a Roth IRA (included on Form 1040, line 16b, Form 1040A, line 12b, or Form 1040NR, line 17b) 2. File free federal and state tax return   3. File free federal and state tax return Subtract line 2 from line 1 3. File free federal and state tax return   4. File free federal and state tax return Enter any traditional IRA deduction from Form 1040, line 32; Form 1040A, line 17; or Form 1040NR, line 32 4. File free federal and state tax return   5. File free federal and state tax return Enter any student loan interest deduction from Form 1040, line 33; Form 1040A, line 18; or Form 1040NR, line 33 5. File free federal and state tax return   6. File free federal and state tax return Enter any tuition and fees deduction from Form 1040, line 34, or Form 1040A, line 19 6. File free federal and state tax return   7. File free federal and state tax return Enter any domestic production activities deduction from Form 1040, line 35, or Form 1040NR, line 34 7. File free federal and state tax return   8. File free federal and state tax return Enter any foreign earned income exclusion and/or housing exclusion from Form 2555, line 45, or Form 2555-EZ, line 18 8. File free federal and state tax return   9. File free federal and state tax return Enter any foreign housing deduction from Form 2555, line 50 9. File free federal and state tax return   10. File free federal and state tax return Enter any excludable qualified savings bond interest from Form 8815, line 14 10. File free federal and state tax return   11. File free federal and state tax return Enter any excluded employer-provided adoption benefits from Form 8839, line 28 11. File free federal and state tax return   12. File free federal and state tax return Add the amounts on lines 3 through 11 12. File free federal and state tax return   13. File free federal and state tax return Enter: $188,000 if married filing jointly or qualifying widow(er), $10,000 if married filing separately and you lived with your spouse at any time during the year, or $127,000 for all others 13. File free federal and state tax return   Is the amount on line 12 more than the amount on line 13? If yes, see the note below. File free federal and state tax return  If no, the amount on line 12 is your modified adjusted gross income for Roth IRA purposes. File free federal and state tax return       Note. File free federal and state tax return If the amount on line 12 is more than the amount on line 13 and you have other income or loss items, such as social security income or passive activity losses, that are subject to AGI-based phaseouts, you can refigure your AGI solely for the purpose of figuring your modified AGI for Roth IRA purposes. File free federal and state tax return (If you receive social security benefits, use Worksheet 1 in Appendix B to refigure your AGI. File free federal and state tax return ) Then go to line 3 above in this Worksheet 2-1 to refigure your modified AGI. File free federal and state tax return If you do not have other income or loss items subject to AGI-based phaseouts, your modified adjusted gross income for Roth IRA purposes is the amount on line 12 above. File free federal and state tax return Roth IRAs only. File free federal and state tax return   If contributions are made only to Roth IRAs, your contribution limit generally is the lesser of: $5,500 ($6,500 if you are age 50 or older), or Your taxable compensation. File free federal and state tax return   However, if your modified AGI is above a certain amount, your contribution limit may be reduced, as explained later under Contribution limit reduced . File free federal and state tax return Roth IRAs and traditional IRAs. File free federal and state tax return   If contributions are made to both Roth IRAs and traditional IRAs established for your benefit, your contribution limit for Roth IRAs generally is the same as your limit would be if contributions were made only to Roth IRAs, but then reduced by all contributions for the year to all IRAs other than Roth IRAs. File free federal and state tax return Employer contributions under a SEP or SIMPLE IRA plan do not affect this limit. File free federal and state tax return   This means that your contribution limit is the lesser of: $5,500 ($6,500 if you are age 50 or older) minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs, or Your taxable compensation minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs. File free federal and state tax return   However, if your modified AGI is above a certain amount, your contribution limit may be reduced, as explained below under Contribution limit reduced . File free federal and state tax return   Simplified employee pensions (SEPs) are discussed in Publication 560. File free federal and state tax return Savings incentive match plans for employees (SIMPLEs) are discussed in chapter 3. File free federal and state tax return Repayment of reservist distributions. File free federal and state tax return   You can repay qualified reservist distributions even if the repayments would cause your total contributions to the Roth IRA to be more than the general limit on contributions. File free federal and state tax return However, the total repayments cannot be more than the amount of your distribution. File free federal and state tax return Note. File free federal and state tax return If you make repayments of qualified reservist distributions to a Roth IRA, increase your basis in the Roth IRA by the amount of the repayment. File free federal and state tax return For more information, see Qualified reservist repayments under How Much Can Be Contributed? in chapter 1. File free federal and state tax return Contribution limit reduced. File free federal and state tax return   If your modified AGI is above a certain amount, your contribution limit is gradually reduced. File free federal and state tax return Use Table 2-1, later, to determine if this reduction applies to you. File free federal and state tax return Table 2-1. File free federal and state tax return Effect of Modified AGI on Roth IRA Contribution This table shows whether your contribution to a Roth IRA is affected by the amount of your modified adjusted gross income (modified AGI). File free federal and state tax return IF you have taxable compensation and your filing status is . File free federal and state tax return . File free federal and state tax return . File free federal and state tax return AND your modified AGI is . File free federal and state tax return . File free federal and state tax return . File free federal and state tax return THEN . File free federal and state tax return . File free federal and state tax return . File free federal and state tax return married filing jointly or  qualifying widow(er) less than $178,000 you can contribute up to $5,500 ($6,500 if you are age 50 or older) as explained under How Much Can Be Contributed . File free federal and state tax return at least $178,000 but less than $188,000 the amount you can contribute is reduced as explained under Contribution limit reduced . File free federal and state tax return $188,000 or more you cannot contribute to a Roth IRA. File free federal and state tax return married filing separately and you lived with your spouse at any time during the year zero (-0-) you can contribute up to $5,500 ($6,500 if you are age 50 or older) as explained under How Much Can Be Contributed . File free federal and state tax return more than zero (-0-) but less than $10,000 the amount you can contribute is reduced as explained under Contribution limit reduced . File free federal and state tax return $10,000 or more you cannot contribute to a Roth IRA. File free federal and state tax return single, head of household,  or married filing separately and you did not live with your spouse at any time during the year less than $112,000 you can contribute up to $5,500 ($6,500 if you are age 50 or older) as explained under How Much Can Be Contributed . File free federal and state tax return at least $112,000 but less than $127,000 the amount you can contribute is reduced as explained under Contribution limit reduced . File free federal and state tax return $127,000 or more you cannot contribute to a Roth IRA. File free federal and state tax return Figuring the reduction. File free federal and state tax return   If the amount you can contribute must be reduced, use Worksheet 2-2, later, to figure your reduced contribution limit. File free federal and state tax return Worksheet 2-2. File free federal and state tax return Determining Your Reduced Roth IRA Contribution Limit Before using this worksheet, check Table 2-1, earlier, to determine whether or not your Roth IRA contribution limit is reduced. File free federal and state tax return If it is, use this worksheet to determine how much it is reduced. File free federal and state tax return 1. File free federal and state tax return Enter your modified AGI for Roth IRA purposes (Worksheet 2-1, line 12) 1. File free federal and state tax return   2. File free federal and state tax return Enter: $178,000 if filing a joint return or qualifying widow(er), $-0- if married filing a separate return and you lived with your spouse at any time in 2013, or $112,000 for all others 2. File free federal and state tax return   3. File free federal and state tax return Subtract line 2 from line 1 3. File free federal and state tax return   4. File free federal and state tax return Enter: $10,000 if filing a joint return or qualifying widow(er) or married filing a separate return and you lived with your spouse at any time during the year, or $15,000 for all others 4. File free federal and state tax return   5. File free federal and state tax return Divide line 3 by line 4 and enter the result as a decimal (rounded to at least three places). File free federal and state tax return If the result is 1. File free federal and state tax return 000 or more, enter 1. File free federal and state tax return 000 5. File free federal and state tax return   6. File free federal and state tax return Enter the lesser of: $5,500 ($6,500 if you are age 50 or older), or Your taxable compensation 6. File free federal and state tax return   7. File free federal and state tax return Multiply line 5 by line 6 7. File free federal and state tax return   8. File free federal and state tax return Subtract line 7 from line 6. File free federal and state tax return Round the result up to the nearest $10. File free federal and state tax return If the result is less than $200, enter $200 8. File free federal and state tax return   9. File free federal and state tax return Enter contributions for the year to other IRAs 9. File free federal and state tax return   10. File free federal and state tax return Subtract line 9 from line 6 10. File free federal and state tax return   11. File free federal and state tax return Enter the lesser of line 8 or line 10. File free federal and state tax return This is your reduced Roth IRA contribution limit 11. File free federal and state tax return      Round your reduced contribution limit up to the nearest $10. File free federal and state tax return If your reduced contribution limit is more than $0, but less than $200, increase the limit to $200. File free federal and state tax return Example. File free federal and state tax return You are a 45-year-old, single individual with taxable compensation of $113,000. File free federal and state tax return You want to make the maximum allowable contribution to your Roth IRA for 2013. File free federal and state tax return Your modified AGI for 2013 is $113,000. File free federal and state tax return You have not contributed to any traditional IRA, so the maximum contribution limit before the modified AGI reduction is $5,500. File free federal and state tax return You figure your reduced Roth IRA contribution of $5,140 as shown on Worksheet 2-2. File free federal and state tax return Example—Illustrated, later. File free federal and state tax return   Worksheet 2-2. File free federal and state tax return Example—Illustrated Before using this worksheet, check Table 2-1, earlier, to determine whether or not your Roth IRA contribution limit is reduced. File free federal and state tax return If it is, use this worksheet to determine how much it is reduced. File free federal and state tax return 1. File free federal and state tax return Enter your modified AGI for Roth IRA purposes (Worksheet 2-1, line 12) 1. File free federal and state tax return 113,000 2. File free federal and state tax return Enter: $178,000 if filing a joint return or qualifying widow(er), $-0- if married filing a separate return and you lived with your spouse at any time in 2013, or $112,000 for all others 2. File free federal and state tax return 112,000 3. File free federal and state tax return Subtract line 2 from line 1 3. File free federal and state tax return 1,000 4. File free federal and state tax return Enter: $10,000 if filing a joint return or qualifying widow(er) or married filing a separate return and you lived with your spouse at any time during the year, or $15,000 for all others 4. File free federal and state tax return 15,000 5. File free federal and state tax return Divide line 3 by line 4 and enter the result as a decimal (rounded to at least three places). File free federal and state tax return If the result is 1. File free federal and state tax return 000 or more, enter 1. File free federal and state tax return 000 5. File free federal and state tax return . File free federal and state tax return 067 6. File free federal and state tax return Enter the lesser of: $5,500 ($6,500 if you are age 50 or older), or Your taxable compensation 6. File free federal and state tax return 5,500 7. File free federal and state tax return Multiply line 5 by line 6 7. File free federal and state tax return 369 8. File free federal and state tax return Subtract line 7 from line 6. File free federal and state tax return Round the result up to the nearest $10. File free federal and state tax return If the result is less than $200, enter $200 8. File free federal and state tax return 5,140 9. File free federal and state tax return Enter contributions for the year to other IRAs 9. File free federal and state tax return 0 10. File free federal and state tax return Subtract line 9 from line 6 10. File free federal and state tax return 5,500 11. File free federal and state tax return Enter the lesser of line 8 or line 10. File free federal and state tax return This is your reduced Roth IRA contribution limit 11. File free federal and state tax return 5,140 When Can You Make Contributions? You can make contributions to a Roth IRA for a year at any time during the year or by the due date of your return for that year (not including extensions). File free federal and state tax return You can make contributions for 2013 by the due date (not including extensions) for filing your 2013 tax return. File free federal and state tax return This means that most people can make contributions for 2013 by April 15, 2014. File free federal and state tax return What if You Contribute Too Much? A 6% excise tax applies to any excess contribution to a Roth IRA. File free federal and state tax return Excess contributions. File free federal and state tax return   These are the contributions to your Roth IRAs for a year that equal the total of: Amounts contributed for the tax year to your Roth IRAs (other than amounts properly and timely rolled over from a Roth IRA or properly converted from a traditional IRA or rolled over from a qualified retirement plan, as described later) that are more than your contribution limit for the year (explained earlier under How Much Can Be Contributed? ), plus Any excess contributions for the preceding year, reduced by the total of: Any distributions out of your Roth IRAs for the year, plus Your contribution limit for the year minus your contributions to all your IRAs for the year. File free federal and state tax return Withdrawal of excess contributions. File free federal and state tax return   For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. File free federal and state tax return This treatment only applies if any earnings on the contributions are also withdrawn. File free federal and state tax return The earnings are considered earned and received in the year the excess contribution was made. File free federal and state tax return   If you timely filed your 2013 tax return without withdrawing a contribution that you made in 2013, you can still have the contribution returned to you within 6 months of the due date of your 2013 tax return, excluding extensions. File free federal and state tax return If you do, file an amended return with “Filed pursuant to section 301. File free federal and state tax return 9100-2” written at the top. File free federal and state tax return Report any related earnings on the amended return and include an explanation of the withdrawal. File free federal and state tax return Make any other necessary changes on the amended return. File free federal and state tax return Applying excess contributions. File free federal and state tax return    If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year. File free federal and state tax return Can You Move Amounts Into a Roth IRA? You may be able to convert amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA. File free federal and state tax return You may be able to roll over amounts from a qualified retirement plan to a Roth IRA. File free federal and state tax return You may be able to recharacterize contributions made to one IRA as having been made directly to a different IRA. File free federal and state tax return You can roll amounts over from a designated Roth account or from one Roth IRA to another Roth IRA. File free federal and state tax return Conversions You can convert a traditional IRA to a Roth IRA. File free federal and state tax return The conversion is treated as a rollover, regardless of the conversion method used. File free federal and state tax return Most of the rules for rollovers, described in chapter 1 under Rollover From One IRA Into Another , apply to these rollovers. File free federal and state tax return However, the 1-year waiting period does not apply. File free federal and state tax return Conversion methods. File free federal and state tax return   You can convert amounts from a traditional IRA to a Roth IRA in any of the following three ways. File free federal and state tax return Rollover. File free federal and state tax return You can receive a distribution from a traditional IRA and roll it over (contribute it) to a Roth IRA within 60 days after the distribution. File free federal and state tax return Trustee-to-trustee transfer. File free federal and state tax return You can direct the trustee of the traditional IRA to transfer an amount from the traditional IRA to the trustee of the Roth IRA. File free federal and state tax return Same trustee transfer. File free federal and state tax return If the trustee of the traditional IRA also maintains the Roth IRA, you can direct the trustee to transfer an amount from the traditional IRA to the Roth IRA. File free federal and state tax return Same trustee. File free federal and state tax return   Conversions made with the same trustee can be made by redesignating the traditional IRA as a Roth IRA, rather than opening a new account or issuing a new contract. File free federal and state tax return Income. File free federal and state tax return   You must include in your gross income distributions from a traditional IRA that you would have had to include in income if you had not converted them into a Roth IRA. File free federal and state tax return These amounts are normally included in income on your return for the year that you converted them from a traditional IRA to a Roth IRA. File free federal and state tax return If you must include any amount in your gross income, you may have to increase your withholding or make estimated tax payments. File free federal and state tax return See Publication 505, Tax Withholding and Estimated Tax. File free federal and state tax return More information. File free federal and state tax return   For more information on conversions, see Converting From Any Traditional IRA Into a Roth IRA in chapter 1. File free federal and state tax return Rollover From Employer's Plan Into a Roth IRA You can roll over into a Roth IRA all or part of an eligible rollover distribution you receive from your (or your deceased spouse's): Employer's qualified pension, profit-sharing, or stock bonus plan (including a 401(k) plan); Annuity plan; Tax-sheltered annuity plan (section 403(b) plan); or Governmental deferred compensation plan (section 457 plan). File free federal and state tax return Any amount rolled over is subject to the same rules for converting a traditional IRA into a Roth IRA. File free federal and state tax return See Converting From Any Traditional IRA Into a Roth IRA in chapter 1. File free federal and state tax return Also, the rollover contribution must meet the rollover requirements that apply to the specific type of retirement plan. File free federal and state tax return Rollover methods. File free federal and state tax return   You can roll over amounts from a qualified retirement plan to a Roth IRA in one of the following ways. File free federal and state tax return Rollover. File free federal and state tax return You can receive a distribution from a qualified retirement plan and roll it over (contribute) to a Roth IRA within 60 days after the distribution. File free federal and state tax return Since the distribution is paid directly to you, the payer generally must withhold 20% of it. File free federal and state tax return Direct rollover option. File free federal and state tax return Your employer's qualified plan must give you the option to have any part of an eligible rollover distribution paid directly to a Roth IRA. File free federal and state tax return Generally, no tax is withheld from any part of the designated distribution that is directly paid to the trustee of the Roth IRA. File free federal and state tax return Rollover by nonspouse beneficiary. File free federal and state tax return   If you are a designated beneficiary (other than a surviving spouse) of a deceased employee, you can roll over all or part of an eligible rollover distribution from one of the types of plans listed above into a Roth IRA. File free federal and state tax return You must make the rollover by a direct trustee-to-trustee transfer into an inherited Roth IRA. File free federal and state tax return   You will determine your required minimum distributions in years after you make the rollover based on whether the employee died before his or her required beginning date for taking distributions from the plan. File free federal and state tax return For more information, see Distributions after the employee’s death under Tax on Excess Accumulation in Publication 575. File free federal and state tax return Income. File free federal and state tax return   You must include in your gross income distributions from a qualified retirement plan that you would have had to include in income if you had not rolled them over into a Roth IRA. File free federal and state tax return You do not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions (after-tax contributions) to the plan that were taxable to you when paid. File free federal and state tax return These amounts are normally included in income on your return for the year of the rollover from the qualified employer plan to a Roth IRA. File free federal and state tax return If you must include any amount in your gross income, you may have to increase your withholding or make estimated tax payments. File free federal and state tax return See Publication 505, Tax Withholding and Estimated Tax. File free federal and state tax return For more information on eligible rollover distributions from qualified retirement plans and withholding, see Rollover From Employer's Plan Into an IRA in chapter 1. File free federal and state tax return Military Death Gratuities and Servicemembers' Group Life Insurance (SGLI) Payments If you received a military death gratuity or SGLI payment with respect to a death from injury that occurred after October 6, 2001, you can contribute (roll over) all or part of the amount received to your Roth IRA. File free federal and state tax return The contribution is treated as a qualified rollover contribution. File free federal and state tax return The amount you can roll over to your Roth IRA cannot exceed the total amount that you received reduced by any part of that amount that was contributed to a Coverdell ESA or another Roth IRA. File free federal and state tax return Any military death gratuity or SGLI payment contributed to a Roth IRA is disregarded for purposes of the 1-year waiting period between rollovers. File free federal and state tax return The rollover must be completed before the end of the 1-year period beginning on the date you received the payment. File free federal and state tax return The amount contributed to your Roth IRA is treated as part of your cost basis (investment in the contract) in the Roth IRA that is not taxable when distributed. File free federal and state tax return Rollover From a Roth IRA You can withdraw, tax free, all or part of the assets from one Roth IRA if you contribute them within 60 days to another Roth IRA. File free federal and state tax return Most of the rules for rollovers, described in chapter 1 under Rollover From One IRA Into Another , apply to these rollovers. File free federal and state tax return However, rollovers from retirement plans other than Roth IRAs are disregarded for purposes of the 1-year waiting period between rollovers. File free federal and state tax return A rollover from a Roth IRA to an employer retirement plan is not allowed. File free federal and state tax return A rollover from a designated Roth account can only be made to another designated Roth account or to a Roth IRA. File free federal and state tax return If you roll over an amount from one Roth IRA to another Roth IRA, the 5-year period used to determine qualified distributions does not change. File free federal and state tax return The 5-year period begins with the first taxable year for which the contribution was made to the initial Roth IRA. File free federal and state tax return See What are Qualified Distributions , later. File free federal and state tax return Rollover of Exxon Valdez Settlement Income If you are a qualified taxpayer (defined in chapter 1, earlier) and you received qualified settlement income (defined in chapter 1, earlier), you can contribute all or part of the amount received to an eligible retirement plan which includes a Roth IRA. File free federal and state tax return The rules for contributing qualified settlement income to a Roth IRA are the same as the rules for contributing qualified settlement income to a traditional IRA with the following exception. File free federal and state tax return Qualified settlement income that is contributed to a Roth IRA, or to a designated Roth account, will be: Included in your taxable income for the year the qualified settlement income was received, and Treated as part of your cost basis (investment in the contract) in the Roth IRA that is not taxable when distributed. File free federal and state tax return For more information, see Rollover of Exxon Valdez Settlement Income in chapter 1. File free federal and state tax return Rollover of Airline Payments If you are a qualified airline employee (defined next), you may contribute any portion of an airline payment (defined below) you receive to a Roth IRA. File free federal and state tax return The contribution must be made within 180 days from the date you received the payment. File free federal and state tax return The contribution will be treated as a qualified rollover contribution. File free federal and state tax return The rollover contribution is included in income to the extent it would be included in income if it were not part of the rollover contribution. File free federal and state tax return Also, any reduction in the airline payment amount on account of employment taxes shall be disregarded when figuring the amount you can contribute to your Roth IRA. File free federal and state tax return Qualified airline employee. File free federal and state tax return    A current or former employee of a commercial airline carrier who was a participant in a qualified defined benefit plan maintained by the carrier which was terminated or became subject to restrictions under Section 402(b) of the Pension Protection Act of 2006. File free federal and state tax return These provisions also apply to surviving spouses of qualified airline employees. File free federal and state tax return Airline payment. File free federal and state tax return    An airline payment is any payment of money or other property that is paid to a qualified airline employee from a commercial airline carrier. File free federal and state tax return The payment also must be made both: Under the approval of an order of federal bankruptcy court in a case filed after September 11, 2001, and before January 1, 2007, and In respect of the qualified airline employee’s interest in a bankruptcy claim against the airline carrier, any note of the carrier (or amount paid in lieu of a note being issued), or any other fixed obligation of the carrier to pay a lump sum amount. File free federal and state tax return Any reduction in the airline payment amount on account of employment taxes shall be disregarded when figuring the amount you can roll over to your traditional IRA. File free federal and state tax return Also, an airline payment shall not include any amount payable on the basis of the airline carrier’s future earnings or profits. File free federal and state tax return Are Distributions Taxable? You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). File free federal and state tax return You also do not include distributions from your Roth IRA that you roll over tax free into another Roth IRA. File free federal and state tax return You may have to include part of other distributions in your income. File free federal and state tax return See Ordering Rules for Distributions , later. File free federal and state tax return Basis of distributed property. File free federal and state tax return   The basis of property distributed from a Roth IRA is its fair market value (FMV) on the date of distribution, whether or not the distribution is a qualified distribution. File free federal and state tax return Withdrawals of contributions by due date. File free federal and state tax return   If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. File free federal and state tax return If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. File free federal and state tax return The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions. File free federal and state tax return What Are Qualified Distributions? A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements. File free federal and state tax return It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and The payment or distribution is: Made on or after the date you reach age 59½, Made because you are disabled (defined earlier), Made to a beneficiary or to your estate after your death, or One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit). File free federal and state tax return Additional Tax on Early Distributions If you receive a distribution that is not a qualified distribution, you may have to pay the 10% additional tax on early distributions as explained in the following paragraphs. File free federal and state tax return Distributions of conversion and certain rollover contributions within 5-year period. File free federal and state tax return   If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. File free federal and state tax return You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). File free federal and state tax return A separate 5-year period applies to each conversion and rollover. File free federal and state tax return See Ordering Rules for Distributions , later, to determine the recapture amount, if any. File free federal and state tax return   The 5-year period used for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion and rollover, and is not necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution. File free federal and state tax return See What Are Qualified Distributions , earlier. File free federal and state tax return   For example, if a calendar-year taxpayer makes a conversion contribution on February 25, 2013, and makes a regular contribution for 2012 on the same date, the 5-year period for the conversion begins January 1, 2013, while the 5-year period for the regular contribution begins on January 1, 2012. File free federal and state tax return   Unless one of the exceptions listed later applies, you must pay the additional tax on the portion of the distribution attributable to the part of the conversion or rollover contribution that you had to include in income because of the conversion or rollover. File free federal and state tax return   You must pay the 10% additional tax in the year of the distribution, even if you had included the conversion or rollover contribution in an earlier year. File free federal and state tax return You also must pay the additional tax on any portion of the distribution attributable to earnings on contributions. File free federal and state tax return Other early distributions. File free federal and state tax return   Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that are not qualified distributions. File free federal and state tax return Exceptions. File free federal and state tax return   You may not have to pay the 10% additional tax in the following situations. File free federal and state tax return You have reached age 59½. File free federal and state tax return You are totally and permanently disabled. File free federal and state tax return You are the beneficiary of a deceased IRA owner. File free federal and state tax return You use the distribution to buy, build, or rebuild a first home. File free federal and state tax return The distributions are part of a series of substantially equal payments. File free federal and state tax return You have unreimbursed medical expenses that are more than 10% (or 7. File free federal and state tax return 5% if you or your spouse was born before January 2, 1949) of your adjusted gross income (defined earlier) for the year. File free federal and state tax return You are paying medical insurance premiums during a period of unemployment. File free federal and state tax return The distributions are not more than your qualified higher education expenses. File free federal and state tax return The distribution is due to an IRS levy of the qualified plan. File free federal and state tax return The distribution is a qualified reservist distribution. File free federal and state tax return Most of these exceptions are discussed earlier in chapter 1 under Early Distributions . File free federal and state tax return Please click here for the text description of the image. File free federal and state tax return Is Roth Distributions a Qualified Distribution? Ordering Rules for Distributions If you receive a distribution from your Roth IRA that is not a qualified distribution, part of it may be taxable. File free federal and state tax return There is a set order in which contributions (including conversion contributions and rollover contributions from qualified retirement plans) and earnings are considered to be distributed from your Roth IRA. File free federal and state tax return For these purposes, disregard the withdrawal of excess contributions and the earnings on them (discussed earlier under What if You Contribute Too Much ). File free federal and state tax return Order the distributions as follows. File free federal and state tax return Regular contributions. File free federal and state tax return Conversion and rollover contributions, on a first-in, first-out basis (generally, total conversions and rollovers from the earliest year first). File free federal and state tax return See Aggregation (grouping and adding) rules, later. File free federal and state tax return Take these conversion and rollover contributions into account as follows: Taxable portion (the amount required to be included in gross income because of the conversion or rollover) first, and then the Nontaxable portion. File free federal and state tax return Earnings on contributions. File free federal and state tax return Disregard rollover contributions from other Roth IRAs for this purpose. File free federal and state tax return Aggregation (grouping and adding) rules. File free federal and state tax return   Determine the taxable amounts distributed (withdrawn), distributions, and contributions by grouping and adding them together as follows. File free federal and state tax return Add all distributions from all your Roth IRAs during the year together. File free federal and state tax return Add all regular contributions made for the year (including contributions made after the close of the year, but before the due date of your return) together. File free federal and state tax return Add this total to the total undistributed regular contributions made in prior years. File free federal and state tax return Add all conversion and rollover contributions made during the year together. File free federal and state tax return For purposes of the ordering rules, in the case of any conversion or rollover in which the conversion or rollover distribution is made in 2013 and the conversion or rollover contribution is made in 2014, treat the conversion or rollover contribution as contributed before any other conversion or rollover contributions made in 2014. File free federal and state tax return Add any recharacterized contributions that end up in a Roth IRA to the appropriate contribution group for the year that the original contribution would have been taken into account if it had been made directly to the Roth IRA. File free federal and state tax return   Disregard any recharacterized contribution that ends up in an IRA other than a Roth IRA for the purpose of grouping (aggregating) both contributions and distributions. File free federal and state tax return Also disregard any amount withdrawn to correct an excess contribution (including the earnings withdrawn) for this purpose. File free federal and state tax return Example. File free federal and state tax return On October 15, 2009, Justin converted all $80,000 in his traditional IRA to his Roth IRA. File free federal and state tax return His Forms 8606 from prior years show that $20,000 of the amount converted is his basis. File free federal and state tax return Justin included $60,000 ($80,000 − $20,000) in his gross income. File free federal and state tax return On February 23, 2013, Justin made a regular contribution of $5,000 to a Roth IRA. File free federal and state tax return On November 8, 2013, at age 60, Justin took a $7,000 distribution from his Roth IRA. File free federal and state tax return The first $5,000 of the distribution is a return of Justin's regular contribution and is not includible in his income. File free federal and state tax return The next $2,000 of the distribution is not includible in income because it was included previously. File free federal and state tax return Figuring your recapture amount. File free federal and state tax return   If you had an early distribution from your Roth IRAs in 2013, you must allocate the early distribution by using the Recapture Amount—Allocation Chart, later. File free federal and state tax return Recapture Amount—Allocation Chart Enter the amount from your 2013 Form 8606, line 19   Before you begin: You will need your prior year Form(s) 8606 and income tax return(s) if you entered an amount on any line(s) as indicated below. File free federal and state tax return   You will now allocate the amount you entered above (2013 Form 8606, line 19) in the order shown, to the amounts on the lines listed below (to the extent a prior year distribution was not allocable to the amount). File free federal and state tax return The maximum amount you can enter on each line below is the amount entered on the referenced lines of the form for that year. File free federal and state tax return Note. File free federal and state tax return Once you have allocated the full amount from your 2013 Form 8606, line 19, STOP. File free federal and state tax return See the Example , earlier. File free federal and state tax return Tax Year Your Form 2013 Form 8606, line 20   Form 8606, line 22   1998 Form 8606, line 16   Form 8606, line 15   1999 Form 8606, line 16   Form 8606, line 15   2000 Form 8606, line 16   Form 8606, line 15   2001 Form 8606, line 18   Form 8606, line 17   2002 Form 8606, line 18   Form 8606, line 17   2003 Form 8606, line 18   Form 8606, line 17   2004 Form 8606, line 18   Form 8606, line 17   2005 Form 8606, line 18   Form 8606, line 17   2006 Form 8606, line 18   Form 8606, line 17   2007 Form 8606, line 18   Form 8606, line 17   2008 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2009 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2010 Form 8606, lines 18 and 23   Form 8606, lines 17 and 22   2011 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2012 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2013 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2013 Form 8606, line 25       *Only include those amounts rolled over to a Roth IRA. File free federal and state tax return  **Only include any contributions (usually Form 1099-R, box 5) that were taxable to you when made and rolled over to a Roth IRA. File free federal and state tax return Amount to include on Form 5329, line 1. File free federal and state tax return   Include on line 1 of your 2013 Form 5329 the following four amounts from the Recapture Amount—Allocation Chart that you filled out. File free federal and state tax return The amount you allocated to line 20 of your 2013 Form 8606. File free federal and state tax return The amount(s) allocated to your 2009 through 2013 Forms 8606, line 18, and your 2010 Form 8606, line 23. File free federal and state tax return The amount(s) allocated to your 2009, 2011, 2012, and 2013 Forms 1040, line 16b; Forms 1040A, line 12b; and Forms 1040NR, line 17b. File free federal and state tax return The amount from your 2013 Form 8606, line 25. File free federal and state tax return   Also, include any amount you allocated to line 20 of your 2013 Form 8606 on your 2013 Form 5329, line 2, and enter exception number 09. File free federal and state tax return Example. File free federal and state tax return Ishmael, age 32, opened a Roth IRA in 2000. File free federal and state tax return He made the maximum contributions to it every year. File free federal and state tax return In addition, he made the following transactions into his Roth IRA. File free federal and state tax return In 2005, he converted $10,000 from his traditional IRA into his Roth IRA. File free federal and state tax return He filled out a 2005 Form 8606 and attached it with his 2005 Form 1040. File free federal and state tax return He entered $0 on line 17 of Form 8606 because he took a deduction for all the contributions to the traditional IRA, therefore he has no basis. File free federal and state tax return He entered $10,000 on line 18 of Form 8606. File free federal and state tax return In 2011, he rolled over the entire balance of his qualified retirement plan, $20,000, into a Roth IRA when he changed jobs. File free federal and state tax return He used a 2011 Form 1040 to file his taxes. File free federal and state tax return He entered $20,000 on line 16a of Form 1040 because that was the amount reported in box 1 of his 2011 Form 1099-R. File free federal and state tax return Box 5 of his 2011 Form 1099-R reported $0 since he did not make any after-tax contributions to the qualified retirement plan. File free federal and state tax return He entered $20,000 on line 16b of Form 1040 since that is the taxable amount that was rolled over in 2011. File free federal and state tax return The total balance in his Roth IRA as of January 1, 2013 was $105,000 ($50,000 in contributions from 2000 through 2012 + $10,000 from the 2005 conversion + $20,000 from the 2011 rollover + $25,000 from earnings). File free federal and state tax return He has not taken any early distribution from his Roth IRA before 2013. File free federal and state tax return In 2013, he made the maximum contribution of $5,500 to his Roth IRA. File free federal and state tax return In August of 2013, he took a $85,500 early distribution from his Roth IRA to use as a down payment on the purchase of his first home. File free federal and state tax return See his filled out Illustrated Recapture Amount—Allocation Chart, later, to see how he allocated the amounts from the above transactions. File free federal and state tax return Based on his allocation, he would enter $20,000 on his 2013 Form 5329, line 1 (see Amount to include on Form 5329, line 1 , above). File free federal and state tax return He should also report $10,000 on his 2013 Form 5329, line 2, and enter exception 09 since that amount is not subject to the 10% additional tax on early distributions. File free federal and state tax return Illustrated Recapture Amount—Allocation Chart Enter the amount from your 2013 Form 8606, line 19 $85,500 Before you begin: You will need your prior year Form(s) 8606 and income tax return(s) if you entered an amount on any line(s) as indicated below. File free federal and state tax return   You will now allocate the amount you entered above (2013 Form 8606, line 19) in the order shown, to the amounts on the lines listed below (to the extent a prior year distribution was not allocable to the amount). File free federal and state tax return The maximum amount you can enter on each line below is the amount entered on the referenced lines of the form for that year. File free federal and state tax return Note. File free federal and state tax return Once you have allocated the full amount from your 2013 Form 8606, line 19, STOP. File free federal and state tax return See the Example , earlier. File free federal and state tax return Tax Year Your Form 2013 Form 8606, line 20 $10,000 Form 8606, line 22 $55,500 1998 Form 8606, line 16   Form 8606, line 15   1999 Form 8606, line 16   Form 8606, line 15   2000 Form 8606, line 16   Form 8606, line 15   2001 Form 8606, line 18   Form 8606, line 17   2002 Form 8606, line 18   Form 8606, line 17   2003 Form 8606, line 18   Form 8606, line 17   2004 Form 8606, line 18   Form 8606, line 17   2005 Form 8606, line 18 $10,000 Form 8606, line 17 $-0- 2006 Form 8606, line 18   Form 8606, line 17   2007 Form 8606, line 18   Form 8606, line 17   2008 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2009 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2010 Form 8606, lines 18 and 23   Form 8606, lines 17 and 22   2011 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b* $10,000 Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2012 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2013 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2013 Form 8606, line 25       *Only include those amounts rolled over to a Roth IRA. File free federal and state tax return  **Only include any contributions (usually Form 1099-R, box 5) that were taxable to you when made and rolled over to a Roth IRA. File free federal and state tax return How Do You Figure the Taxable Part? To figure the taxable part of a distribution that is not a qualified distribution, complete Form 8606, Part III. File free federal and state tax return Must You Withdraw or Use Assets? You are not required to take distributions from your Roth IRA at any age. File free federal and state tax return The minimum distribution rules that apply to traditional IRAs do not apply to Roth IRAs while the owner is alive. File free federal and state tax return However, after the death of a Roth IRA owner, certain of the minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs as explained later under Distributions After Owner's Death . File free federal and state tax return Minimum distributions. File free federal and state tax return   You cannot use your Roth IRA to satisfy minimum distribution requirements for your traditional IRA. File free federal and state tax return Nor can you use distributions from traditional IRAs for required distributions from Roth IRAs. File free federal and state tax return See Distributions to beneficiaries , later. File free federal and state tax return Recognizing Losses on Investments If you have a loss on your Roth IRA investment, you can recognize the loss on your income tax return, but only when all the amounts in all of your Roth IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis. File free federal and state tax return Your basis is the total amount of contributions in your Roth IRAs. File free federal and state tax return You claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A (Form 1040). File free federal and state tax return Any such losses are added back to taxable income for purposes of calculating the alternative minimum tax. File free federal and state tax return Distributions After Owner's Death If a Roth IRA owner dies, the minimum distribution rules that apply to traditional IRAs apply to Roth IRAs as though the Roth IRA owner died before his or her required beginning date. File free federal and state tax return See When Can You Withdraw or Use Assets? in chapter 1. File free federal and state tax return Distributions to beneficiaries. File free federal and state tax return   Generally, the entire interest in the Roth IRA must be distributed by the end of the fifth calendar year after the year of the owner's death unless the interest is payable to a designated beneficiary over the life or life expectancy of the designated beneficiary. File free federal and state tax return (See When Must You Withdraw Assets? (Required Minimum Distributions) in chapter 1. File free federal and state tax return )   If paid as an annuity, the entire interest must be payable over a period not greater than the designated beneficiary's life expectancy and distributions must begin before the end of the calendar year following the year of death. File free federal and state tax return Distributions from another Roth IRA cannot be substituted for these distributions unless the other Roth IRA was inherited from the same decedent. File free federal and state tax return   If the sole beneficiary is the spouse, he or she can either delay distributions until the decedent would have reached age 70½ or treat the Roth IRA as his or her own. File free federal and state tax return Combining with other Roth IRAs. File free federal and state tax return   A beneficiary can combine an inherited Roth IRA with another Roth IRA maintained by the beneficiary only if the beneficiary either: Inherited the other Roth IRA from the same decedent, or Was the spouse of the decedent and the sole beneficiary of the Roth IRA and elects to treat it as his or her own IRA. File free federal and state tax return Distributions that are not qualified distributions. File free federal and state tax return   If a distribution to a beneficiary is not a qualified distribution, it is generally includible in the beneficiary's gross income in the same manner as it would have been included in the owner's income had it been distributed to the IRA owner when he or she was alive. File free federal and state tax return   If the owner of a Roth IRA dies before the end of: The 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for the owner's benefit, or The 5-year period starting with the year of a conversion contribution from a traditional IRA or a rollover from a qualified retirement plan to a Roth IRA, each type of contribution is divided among multiple beneficiaries according to the pro-rata share of each. File free federal and state tax return See Ordering Rules for Distributions , earlier in this chapter under Are Distributions Taxable. File free federal and state tax return Example. File free federal and state tax return When Ms. File free federal and state tax return Hibbard died in 2013, her Roth IRA contained regular contributions of $4,000, a conversion contribution of $10,000 that was made in 2009, and earnings of $2,000. File free federal and state tax return No distributions had been made from her IRA. File free federal and state tax return She had no basis in the conversion contribution in 2009. File free federal and state tax return When she established this Roth IRA (her first) in 2009, she named each of her four children as equal beneficiaries. File free federal and state tax return Each child will receive one-fourth of each type of contribution and one-fourth of the earnings. File free federal and state tax return An immediate distribution of $4,000 to each child will be treated as $1,000 from regular contributions, $2,500 from conversion contributions, and $500 from earnings. File free federal and state tax return In this case, because the distributions are made before the end of the applicable 5-year period for a qualified distribution, each beneficiary includes $500 in income for 2013. File free federal and state tax return The 10% additional tax on early distributions does not apply because the distribution was made to the beneficiaries as a result of the death of the IRA owner. File free federal and state tax return If distributions from an inherited Roth IRA are less than the required minimum distribution for the year, discussed in chapter 1 under When Must You Withdraw Assets? (Required Minimum Distributions), you may have to pay a 50% excise tax for that year on the amount not distributed as required. File free federal and state tax return For the tax on excess accumulations (insufficient distributions), see Excess Accumulations (Insufficient Distributions) under What Acts Result in Penalties or Additional Taxes? in chapter 1. File free federal and state tax return If this applies to you, substitute “Roth IRA” for “traditional IRA” in that discussion. File free federal and state tax return Prev  Up  Next   Home   More Online Publications
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Understanding Your CP2030 Notice

We are proposing changes in income, credits, and deductions reported on your U.S. Corporation Income Tax Return. We compared your information with items reported to us by banks, businesses and other payers.


What you need to do

  • Compare the information in the two columns - "Shown on return" and "Reported to IRS by others". Did you receive the income? If you received the income, was it reported on your tax return? IRS employees search the tax return to locate all income, but they may be unable to determine the source if some items are combined.
  • If it wasn't reported on your tax return, you don't need to file an amended return to report the income. Simply check the box indicating that you agree with all changes, sign and date the CP 2030 response page and return it with your check or money order made payable to the United States Treasury.
  • If you agree with the increase, but you can't pay the entire balance due, you may be able to request a payment plan. If you didn't report the income for another reason, please explain.
  • If you don't agree with the increase, check the box indicating that you don’t agree with some or all of the changes on the CP 2030 response page and return it with a signed statement explaining each item of discrepancy. If applicable, attach copies of documents to support the entries on the original return.

You may want to…

  • Send us the name, address and taxpayer identification number of the other party that received the income if it isn't yours.
  • Notify the payers to correct their records to show the name and taxpayer identification number of the person or business who actually received the income, so future reports to us are accurate.

Answers to Common Questions

Is this a bill?

No. We're asking you to verify the income, credits, and deductions reported on your tax return because they're different from the information we received from other sources. The CP 2030 is only a proposal that offers you an opportunity to disagree, partially agree, or agree with the proposed changes. We haven't charged any additional tax at this time.

Why did it take you so long to contact us about this?

Tax years generally end on Dec. 31, but we don't receive information from banks, businesses, and other payers until much later. Once we receive all the tax returns and payer information, we compare the information you reported with the information third party payers provided to us. It can take 8 months or more to complete this review.

Should I call with my response or mail it in?

If you have a simple response, such as directing us to a specific line on your original return where you reported the income, you can call a Customer Service Representative and provide the information. A toll-free number is listed in the top right hand corner of the notice.

A written response may be required if the issue is more involved, especially if you disagree with some of the proposed changes. You may want to mail copies of payer information documents such as Form(s) 1099 or Schedule(s) K-1. Include any other letters or documents that support your position. You should submit a written statement to fully explain any unusual tax situations.

I need more time to find my records and go through them all. Will you allow me additional time to respond?

Your response is due by the date shown on the notice or we'll use the proposed changes to continue processing the case. If you need more time to research your records, you can call the toll-free number at the top of your notice to request a 30 day extension. We may also provide additional time to respond if you have unusual circumstances. Additional interest and any applicable penalties will accrue on the account during the period of the extension if the tax increase is correct.

Do I have to pay the interest? Can you remove it?

The law requires us to charge interest on any tax that isn't paid by the return due date (Internal Revenue Code Section 6601).

The law doesn't permit us to reduce or remove interest for reasonable cause. However, in limited circumstances we may waive penalties. If you believe you qualify for penalty removal, you should include related information in your response.

What should I do to avoid problems like this in the future?

Keep accurate payment information from banks and other payers to verify you've received all payment information for filing your return. Review the documents to be sure they show your most current address.

Take the following actions when filing your tax return to avoid similar issues in the future:

  • Report specific income type on the correct line on the Form 1120, U.S. Corporation Income Tax Return. For example, rental income should be claimed on Form 1120, line 6 (Gross Rents). For additional information, please see the reporting instructions for Form 1120.
  • If you report income on a line not traditionally reserved for that type of income, provide a statement indicating where the income was reported. For example, your business is related to investment activity and you're reporting all interest income (including amounts reported to the IRS on Form 1099-INT, Interest Income) with your gross receipts on Form 1120, line 1.
  • Always attach a statement identifying the source of the amount reported on Form 1120, line 10 (Other Income).
  • Provide an attached statement explaining your percentage of gross proceeds (ex; reported to us on Form 1099-MISC) that you would be liable to claim on your tax return.
  • Generally, if you receive a Form 1099 for amounts that actually belong to another person, you are considered a nominee recipient. You must file a Form 1099 with the IRS (the same type of Form 1099 you received) for each of the other owners showing the amounts applicable to each.
Page Last Reviewed or Updated: 28-Feb-2014

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The File Free Federal And State Tax Return

File free federal and state tax return 6. File free federal and state tax return   Basis of Assets Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Cost BasisReal Property Allocating the Basis Uniform Capitalization Rules Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostTaxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Received as a Gift Property Transferred From a Spouse Inherited Property Property Distributed From a Partnership or Corporation Introduction Your basis is the amount of your investment in property for tax purposes. File free federal and state tax return Use basis to figure the gain or loss on the sale, exchange, or other disposition of property. File free federal and state tax return Also use basis to figure depreciation, amortization, depletion, and casualty losses. File free federal and state tax return If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. File free federal and state tax return Only the basis allocated to the business or investment use of the property can be depreciated. File free federal and state tax return Your original basis in property is adjusted (increased or decreased) by certain events. File free federal and state tax return For example, if you make improvements to the property, increase your basis. File free federal and state tax return If you take deductions for depreciation, or casualty losses, or claim certain credits, reduce your basis. File free federal and state tax return Keep accurate records of all items that affect the basis of your assets. File free federal and state tax return For information on keeping records, see chapter 1. File free federal and state tax return Topics - This chapter discusses: Cost basis Adjusted basis Basis other than cost Useful Items - You may want to see: Publication 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property See chapter 16 for information about getting publications and forms. File free federal and state tax return Cost Basis The basis of property you buy is usually its cost. File free federal and state tax return Cost is the amount you pay in cash, debt obligations, other property, or services. File free federal and state tax return Your cost includes amounts you pay for sales tax, freight, installation, and testing. File free federal and state tax return The basis of real estate and business assets will include other items, discussed later. File free federal and state tax return Basis generally does not include interest payments. File free federal and state tax return However, see Carrying charges and Capitalized interest in chapter 4 of Publication 535. File free federal and state tax return You also may have to capitalize (add to basis) certain other costs related to buying or producing property. File free federal and state tax return Under the uniform capitalization rules, discussed later, you may have to capitalize direct costs and certain indirect costs of producing property. File free federal and state tax return Loans with low or no interest. File free federal and state tax return   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus the amount considered to be unstated interest. File free federal and state tax return You generally have unstated interest if your interest rate is less than the applicable federal rate. File free federal and state tax return See the discussion of unstated interest in Publication 537, Installment Sales. File free federal and state tax return Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. File free federal and state tax return If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. File free federal and state tax return Some of these expenses are discussed next. File free federal and state tax return Lump sum purchase. File free federal and state tax return   If you buy improvements, such as buildings, and the land on which they stand for a lump sum, allocate your cost basis between the land and improvements. File free federal and state tax return Allocate the cost basis according to the respective fair market values (FMVs) of the land and improvements at the time of purchase. File free federal and state tax return Figure the basis of each asset by multiplying the lump sum by a fraction. File free federal and state tax return The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. File free federal and state tax return Fair market value (FMV). File free federal and state tax return   FMV is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. File free federal and state tax return Sales of similar property on or about the same date may help in figuring the FMV of the property. File free federal and state tax return If you are not certain of the FMV of the land and improvements, you can allocate the basis according to their assessed values for real estate tax purposes. File free federal and state tax return Real estate taxes. File free federal and state tax return   If you pay the real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. File free federal and state tax return   If you reimburse the seller for taxes the seller paid for you, you generally can deduct that amount as a tax expense. File free federal and state tax return Whether or not you reimburse the seller, do not include that amount in the basis of your property. File free federal and state tax return Settlement costs. File free federal and state tax return   Your basis includes the settlement fees and closing costs for buying the property. File free federal and state tax return See Publication 551 for a detailed list of items you can and cannot include in basis. File free federal and state tax return   Do not include fees and costs for getting a loan on the property. File free federal and state tax return Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. File free federal and state tax return Points. File free federal and state tax return   If you pay points to get a loan (including a mortgage, second mortgage, or line-of-credit), do not add the points to the basis of the related property. File free federal and state tax return You may be able to deduct the points currently or over the term of the loan. File free federal and state tax return For more information about deducting points, see Points in chapter 4 of Publication 535. File free federal and state tax return Assumption of a mortgage. File free federal and state tax return   If you buy property and assume (or buy the property subject to) an existing mortgage, your basis includes the amount you pay for the property plus the amount you owe on the mortgage. File free federal and state tax return Example. File free federal and state tax return If you buy a farm for $100,000 cash and assume a mortgage of $400,000, your basis is $500,000. File free federal and state tax return Constructing assets. File free federal and state tax return   If you build property or have assets built for you, your expenses for this construction are part of your basis. File free federal and state tax return Some of these expenses include the following costs: Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. File free federal and state tax return   In addition, if you use your own employees, farm materials, and equipment to build an asset, do not deduct the following expenses. File free federal and state tax return You must capitalize them (include them in the asset's basis). File free federal and state tax return Employee wages paid for the construction work, reduced by any employment credits allowed. File free federal and state tax return Depreciation on equipment you own while it is used in the construction. File free federal and state tax return Operating and maintenance costs for equipment used in the construction. File free federal and state tax return The cost of business supplies and materials used in the construction. File free federal and state tax return    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. File free federal and state tax return Allocating the Basis In some instances, the rules for determining basis apply to a group of assets acquired in the same transaction or to property that consists of separate items. File free federal and state tax return To determine the basis of these assets or separate items, there must be an allocation of basis. File free federal and state tax return Group of assets acquired. File free federal and state tax return   If you buy multiple assets for a lump sum, allocate the amount you pay among the assets. File free federal and state tax return Use this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. File free federal and state tax return You and the seller may agree in the sales contract to a specific allocation of the purchase price among the assets. File free federal and state tax return If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. File free federal and state tax return Farming business acquired. File free federal and state tax return   If you buy a group of assets that makes up a farming business, there are special rules you must use to allocate the purchase price among the assets. File free federal and state tax return Generally, reduce the purchase price by any cash received. File free federal and state tax return Allocate the remaining purchase price to the other business assets received in proportion to (but not more than) their FMV and in a certain order. File free federal and state tax return See Trade or Business Acquired under Allocating the Basis in Publication 551 for more information. File free federal and state tax return Transplanted embryo. File free federal and state tax return   If you buy a cow that is pregnant with a transplanted embryo, allocate to the basis of the cow the part of the purchase price equal to the FMV of the cow without the implant. File free federal and state tax return Allocate the rest of the purchase price to the basis of the calf. File free federal and state tax return Neither the cost allocated to the cow nor the cost allocated to the calf is deductible as a current business expense. File free federal and state tax return Uniform Capitalization Rules Under the uniform capitalization rules, you must include certain direct and indirect costs in the basis of property you produce or in your inventory costs, rather than claim them as a current deduction. File free federal and state tax return You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. File free federal and state tax return Generally, you are subject to the uniform capitalization rules if you do any of the following: Produce real or tangible personal property, or Acquire property for resale. File free federal and state tax return However, this rule does not apply to personal property if your average annual gross receipts for the 3-tax-year period ending with the year preceding the current tax year are $10 million or less. File free federal and state tax return You produce property if you construct, build, install, manufacture, develop, improve, or create the property. File free federal and state tax return You are not subject to the uniform capitalization rules if the property is produced for personal use. File free federal and state tax return In a farming business, you produce property if you raise or grow any agricultural or horticultural commodity, including plants and animals. File free federal and state tax return Plants. File free federal and state tax return   A plant produced in a farming business includes the following items: A fruit, nut, or other crop-bearing tree; An ornamental tree; A vine; A bush; Sod; and The crop or yield of a plant that will have more than one crop or yield. File free federal and state tax return Animals. File free federal and state tax return   An animal produced in a farming business includes any stock, poultry or other bird, and fish or other sea life. File free federal and state tax return The direct and indirect costs of producing plants or animals include preparatory costs and preproductive period costs. File free federal and state tax return Preparatory costs include the acquisition costs of the seed, seedling, plant, or animal. File free federal and state tax return For plants, preproductive period costs include the costs of items such as irrigation, pruning, frost protection, spraying, and harvesting. File free federal and state tax return For animals, preproductive period costs include the costs of items such as feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding. File free federal and state tax return Exceptions. File free federal and state tax return   In a farming business, the uniform capitalization rules do not apply to: Any animal, Any plant with a preproductive period of 2 years or less, or Any costs of replanting certain plants lost or damaged due to casualty. File free federal and state tax return   Exceptions (1) and (2) do not apply to a corporation, partnership, or tax shelter required to use an accrual method of accounting. File free federal and state tax return See Accrual Method Required under Accounting Methods in chapter 2. File free federal and state tax return   In addition, you can elect not to use the uniform capitalization rules for plants with a preproductive period of more than 2 years. File free federal and state tax return If you make this election, special rules apply. File free federal and state tax return This election cannot be made by a corporation, partnership, or tax shelter required to use an accrual method of accounting. File free federal and state tax return This election also does not apply to any costs incurred for the planting, cultivation, maintenance, or development of any citrus or almond grove (or any part thereof) within the first 4 years the trees were planted. File free federal and state tax return    If you elect not to use the uniform capitalization rules, you must use the alternative depreciation system for all property used in any of your farming businesses and placed in service in any tax year during which the election is in effect. File free federal and state tax return See chapter 7, for additional information on depreciation. File free federal and state tax return Example. File free federal and state tax return You grow trees that have a preproductive period of more than 2 years. File free federal and state tax return The trees produce an annual crop. File free federal and state tax return You are an individual and the uniform capitalization rules apply to your farming business. File free federal and state tax return You must capitalize the direct costs and an allocable part of indirect costs incurred due to the production of the trees. File free federal and state tax return You are not required to capitalize the costs of producing the annual crop because its preproductive period is 2 years or less. File free federal and state tax return Preproductive period of more than 2 years. File free federal and state tax return   The preproductive period of plants grown in commercial quantities in the United States is based on their nationwide weighted average preproductive period. File free federal and state tax return Plants producing the crops or yields shown in Table 6-1 have a nationwide weighted average preproductive period of more than 2 years. File free federal and state tax return Other plants (not shown in Table 6-1) may also have a nationwide weighted average preproductive period of more than 2 years. File free federal and state tax return More information. File free federal and state tax return   For more information on the uniform capitalization rules that apply to property produced in a farming business, see Regulations section 1. File free federal and state tax return 263A-4. File free federal and state tax return Table 6-1. File free federal and state tax return Plants With a Preproductive Period of More Than 2 Years Plants producing the following crops or yields have a nationwide weighted average preproductive period of more than 2 years. File free federal and state tax return Almonds Apples Apricots Avocados Blueberries Cherries Chestnuts Coffee beans Currants Dates Figs Grapefruit Grapes Guavas Kiwifruit Kumquats Lemons Limes Macadamia nuts Mangoes Nectarines Olives Oranges Peaches Pears Pecans Persimmons Pistachio nuts Plums Pomegranates Prunes Tangelos Tangerines Tangors Walnuts Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the cost basis or basis other than cost (discussed later) of the property. File free federal and state tax return The adjustments to the original basis are increases or decreases to the cost basis or other basis which result in the adjusted basis of the property. File free federal and state tax return Increases to Basis Increase the basis of any property by all items properly added to a capital account. File free federal and state tax return These include the cost of any improvements having a useful life of more than 1 year. File free federal and state tax return The following costs increase the basis of property. File free federal and state tax return The cost of extending utility service lines to property. File free federal and state tax return Legal fees, such as the cost of defending and perfecting title. File free federal and state tax return Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements. File free federal and state tax return Assessments for items such as paving roads and building ditches that increase the value of the property assessed. File free federal and state tax return Do not deduct these expenses as taxes. File free federal and state tax return However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest charges related to the improvements. File free federal and state tax return If you make additions or improvements to business property, depreciate the basis of each addition or improvement as separate depreciable property using the rules that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. File free federal and state tax return See chapter 7. File free federal and state tax return Deducting vs. File free federal and state tax return capitalizing costs. File free federal and state tax return   Do not add to your basis costs you can deduct as current expenses. File free federal and state tax return For example, amounts paid for incidental repairs or maintenance are deductible as business expenses and are not added to basis. File free federal and state tax return However, you can elect either to deduct or to capitalize certain other costs. File free federal and state tax return See chapter 7 in Publication 535. File free federal and state tax return Decreases to Basis The following are some items that reduce the basis of property. File free federal and state tax return Section 179 deduction. File free federal and state tax return Deductions previously allowed or allowable for amortization, depreciation, and depletion. File free federal and state tax return Alternative motor vehicle credit. File free federal and state tax return See Form 8910. File free federal and state tax return Alternative fuel vehicle refueling property credit. File free federal and state tax return See Form 8911. File free federal and state tax return Residential energy efficient property credits. File free federal and state tax return See Form 5695. File free federal and state tax return Investment credit (part or all) taken. File free federal and state tax return Casualty and theft losses and insurance reimbursements. File free federal and state tax return Payments you receive for granting an easement. File free federal and state tax return Exclusion from income of subsidies for energy conservation measures. File free federal and state tax return Certain canceled debt excluded from income. File free federal and state tax return Rebates from a manufacturer or seller. File free federal and state tax return Patronage dividends received from a cooperative association as a result of a purchase of property. File free federal and state tax return See Patronage Dividends in chapter 3. File free federal and state tax return Gas-guzzler tax. File free federal and state tax return See Form 6197. File free federal and state tax return Some of these items are discussed next. File free federal and state tax return For a more detailed list of items that decrease basis, see section 1016 of the Internal Revenue Code and Publication 551. File free federal and state tax return Depreciation and section 179 deduction. File free federal and state tax return   The adjustments you must make to the basis of the property if you take the section 179 deduction or depreciate the property are explained next. File free federal and state tax return For more information on these deductions, see chapter 7. File free federal and state tax return Section 179 deduction. File free federal and state tax return   If you take the section 179 expense deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. File free federal and state tax return Depreciation. File free federal and state tax return   Decrease the basis of property by the depreciation you deducted or could have deducted on your tax returns under the method of depreciation you chose. File free federal and state tax return If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. File free federal and state tax return If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. File free federal and state tax return   If you deducted more depreciation than you should have, decrease your basis by the amount you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for any year. File free federal and state tax return   See chapter 7 for information on figuring the depreciation you should have claimed. File free federal and state tax return   In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation you must capitalize under the uniform capitalization rules. File free federal and state tax return Casualty and theft losses. File free federal and state tax return   If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement. File free federal and state tax return Also, decrease it by any deductible loss not covered by insurance. File free federal and state tax return See chapter 11 for information about figuring your casualty or theft loss. File free federal and state tax return   You must increase your basis in the property by the amount you spend on clean-up costs (such as debris removal) and repairs that restore the property to its pre-casualty condition. File free federal and state tax return To make this determination, compare the repaired property to the property before the casualty. File free federal and state tax return Easements. File free federal and state tax return   The amount you receive for granting an easement is usually considered to be proceeds from the sale of an interest in the real property. File free federal and state tax return It reduces the basis of the affected part of the property. File free federal and state tax return If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. File free federal and state tax return See Easements and rights-of-way in chapter 3. File free federal and state tax return Exclusion from income of subsidies for energy conservation measures. File free federal and state tax return   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. File free federal and state tax return Reduce the basis of the property by the excluded amount. File free federal and state tax return Canceled debt excluded from income. File free federal and state tax return   If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. File free federal and state tax return A debt includes any indebtedness for which you are liable or which attaches to property you hold. File free federal and state tax return   You can exclude your canceled debt from income if the debt is any of the following. File free federal and state tax return Debt canceled in a bankruptcy case or when you are insolvent. File free federal and state tax return Qualified farm debt. File free federal and state tax return Qualified real property business debt (provided you are not a C corporation). File free federal and state tax return Qualified principal residence indebtedness. File free federal and state tax return Discharge of certain indebtedness of a qualified individual because of Midwestern disasters. File free federal and state tax return If you exclude canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. File free federal and state tax return If you exclude canceled debt described in (3), you must only reduce the basis of your depreciable property by the excluded amount. File free federal and state tax return   For more information about canceled debt in a bankruptcy case, see Publication 908, Bankruptcy Tax Guide. File free federal and state tax return For more information about insolvency and canceled debt that is qualified farm debt or qualified principal residence indebtedness, see chapter 3. File free federal and state tax return For more information about qualified real property business debt, see Publication 334, Tax Guide for Small Business. File free federal and state tax return For more information about canceled debt in Midwestern disaster areas, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. File free federal and state tax return Basis Other Than Cost There are times when you cannot use cost as basis. File free federal and state tax return In these situations, the fair market value or the adjusted basis of property may be used. File free federal and state tax return Examples are discussed next. File free federal and state tax return Property changed from personal to business or rental use. File free federal and state tax return   When you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. File free federal and state tax return An example of changing property from personal to business use would be changing the use of your pickup truck that you originally purchased for your personal use to use in your farming business. File free federal and state tax return   The basis for depreciation is the lesser of: The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. File free federal and state tax return   If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or loss. File free federal and state tax return The basis for figuring a gain is your adjusted basis in the property when you sell the property. File free federal and state tax return Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. File free federal and state tax return Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . File free federal and state tax return Property received for services. File free federal and state tax return   If you receive property for services, include the property's FMV in income. File free federal and state tax return The amount you include in income becomes your basis. File free federal and state tax return If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. File free federal and state tax return Example. File free federal and state tax return George Smith is an accountant and also operates a farming business. File free federal and state tax return George agreed to do some accounting work for his neighbor in exchange for a dairy cow. File free federal and state tax return The accounting work and the cow are each worth $1,500. File free federal and state tax return George must include $1,500 in income for his accounting services. File free federal and state tax return George's basis in the cow is $1,500. File free federal and state tax return Taxable Exchanges A taxable exchange is one in which the gain is taxable, or the loss is deductible. File free federal and state tax return A taxable gain or deductible loss also is known as a recognized gain or loss. File free federal and state tax return A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. File free federal and state tax return If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. File free federal and state tax return Example. File free federal and state tax return You trade a tract of farmland with an adjusted basis of $2,000 for a tractor that has an FMV of $6,000. File free federal and state tax return You must report a taxable gain of $4,000 for the land. File free federal and state tax return The tractor has a basis of $6,000. File free federal and state tax return Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property you receive using the basis of the converted property. File free federal and state tax return Similar or related property. File free federal and state tax return   If the replacement property is similar or related in service or use to the converted property, the replacement property's basis is the same as the old property's basis on the date of the conversion. File free federal and state tax return However, make the following adjustments. File free federal and state tax return Decrease the basis by the following amounts. File free federal and state tax return Any loss you recognize on the involuntary conversion. File free federal and state tax return Any money you receive that you do not spend on similar property. File free federal and state tax return Increase the basis by the following amounts. File free federal and state tax return Any gain you recognize on the involuntary conversion. File free federal and state tax return Any cost of acquiring the replacement property. File free federal and state tax return Money or property not similar or related. File free federal and state tax return   If you receive money or property not similar or related in service or use to the converted property and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the involuntary conversion. File free federal and state tax return Allocating the basis. File free federal and state tax return   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. File free federal and state tax return Basis for depreciation. File free federal and state tax return   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. File free federal and state tax return For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. File free federal and state tax return For more information about involuntary conversions, see chapter 11. File free federal and state tax return Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. File free federal and state tax return A nontaxable gain or loss also is known as an unrecognized gain or loss. File free federal and state tax return If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. File free federal and state tax return Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. File free federal and state tax return For an exchange to qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. File free federal and state tax return There must also be an exchange of like-kind property. File free federal and state tax return For more information, see Like-Kind Exchanges in  chapter 8. File free federal and state tax return The basis of the property you receive generally is the same as the adjusted basis of the property you gave up. File free federal and state tax return Example 1. File free federal and state tax return You traded a truck you used in your farming business for a new smaller truck to use in farming. File free federal and state tax return The adjusted basis of the old truck was $10,000. File free federal and state tax return The FMV of the new truck is $30,000. File free federal and state tax return Because this is a nontaxable exchange, you do not recognize any gain, and your basis in the new truck is $10,000, the same as the adjusted basis of the truck you traded. File free federal and state tax return Example 2. File free federal and state tax return You trade a field cultivator (adjusted basis of $8,000) for a planter (FMV of $9,000). File free federal and state tax return You use both the field cultivator and the planter in your farming business. File free federal and state tax return The basis of the planter you receive is $8,000, the same as the field cultivator traded Exchange expenses. File free federal and state tax return   Exchange expenses generally are the closing costs that you pay. File free federal and state tax return They include such items as brokerage commissions, attorney fees, and deed preparation fees. File free federal and state tax return Add them to the basis of the like-kind property you receive. File free federal and state tax return Property plus cash. File free federal and state tax return   If you trade property in a like-kind exchange and also pay money, the basis of the property you receive is the adjusted basis of the property you gave up plus the money you paid. File free federal and state tax return Example. File free federal and state tax return You trade in a truck (adjusted basis of $3,000) for another truck (FMV of $7,500) and pay $4,000. File free federal and state tax return Your basis in the new truck is $7,000 (the $3,000 adjusted basis of the old truck plus the $4,000 cash). File free federal and state tax return Special rules for related persons. File free federal and state tax return   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. File free federal and state tax return Each person must report any gain or loss not recognized on the original exchange unless the loss is not deductible under the related party rules. File free federal and state tax return Each person reports it on the tax return filed for the year in which the later disposition occurred. File free federal and state tax return If this rule applies, the basis of the property received in the original exchange will be its FMV. File free federal and state tax return For more information, see chapter 8. File free federal and state tax return Exchange of business property. File free federal and state tax return   Exchanging the property of one business for the property of another business generally is a multiple property exchange. File free federal and state tax return For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. File free federal and state tax return Basis for depreciation. File free federal and state tax return   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction. File free federal and state tax return For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. File free federal and state tax return Partially Nontaxable Exchanges A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. File free federal and state tax return The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments. File free federal and state tax return Decrease the basis by the following amounts. File free federal and state tax return Any money you receive. File free federal and state tax return Any loss you recognize on the exchange. File free federal and state tax return Increase the basis by the following amounts. File free federal and state tax return Any additional costs you incur. File free federal and state tax return Any gain you recognize on the exchange. File free federal and state tax return If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. File free federal and state tax return Example 1. File free federal and state tax return You trade farmland (basis of $100,000) for another tract of farmland (FMV of $110,000) and $30,000 cash. File free federal and state tax return You realize a gain of $40,000. File free federal and state tax return This is the FMV of the land received plus the cash minus the basis of the land you traded ($110,000 + $30,000 − $100,000). File free federal and state tax return Include your gain in income (recognize gain) only to the extent of the cash received. File free federal and state tax return Your basis in the land you received is figured as follows. File free federal and state tax return Basis of land traded $100,000 Minus: Cash received (adjustment 1(a)) − 30,000   $70,000 Plus: Gain recognized (adjustment 2(b)) + 30,000 Basis of land received $100,000 Example 2. File free federal and state tax return You trade a truck (adjusted basis of $22,750) for another truck (FMV of $20,000) and $10,000 cash. File free federal and state tax return You realize a gain of $7,250. File free federal and state tax return This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($20,000 + $10,000 − $22,750). File free federal and state tax return You include all the gain in your income (recognize gain) because the gain is less than the cash you received. File free federal and state tax return Your basis in the truck you received is figured as follows. File free federal and state tax return Adjusted basis of truck traded $22,750 Minus: Cash received (adjustment 1(a)) −10,000   $12,750 Plus: Gain recognized (adjustment 2(b)) + 7,250 Basis of truck received $20,000 Allocation of basis. File free federal and state tax return   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. File free federal and state tax return The rest is the basis of the like-kind property. File free federal and state tax return Example. File free federal and state tax return You traded a tractor with an adjusted basis of $15,000 for another tractor that had an FMV of $12,500. File free federal and state tax return You also received $1,000 cash and a truck that had an FMV of $3,000. File free federal and state tax return The truck is unlike property. File free federal and state tax return You realized a gain of $1,500. File free federal and state tax return This is the FMV of the tractor received plus the FMV of the truck received plus the cash minus the adjusted basis of the tractor you traded ($12,500 + $3,000 + $1,000 − $15,000). File free federal and state tax return You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. File free federal and state tax return Your basis in the properties you received is figured as follows. File free federal and state tax return Adjusted basis of old tractor $15,000 Minus: Cash received (adjustment 1(a)) − 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) + 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property—the truck ($3,000). File free federal and state tax return This is the truck's FMV. File free federal and state tax return The rest ($12,500) is the basis of the tractor. File free federal and state tax return Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. File free federal and state tax return Example. File free federal and state tax return You used a tractor on your farm for 3 years. File free federal and state tax return Its adjusted basis is $22,000 and its FMV is $40,000. File free federal and state tax return You are interested in a new tractor, which sells for $60,000. File free federal and state tax return Ordinarily, you would trade your old tractor for the new one and pay the dealer $20,000. File free federal and state tax return Your basis for depreciating the new tractor would then be $42,000 ($20,000 + $22,000, the adjusted basis of your old tractor). File free federal and state tax return However, you want a higher basis for depreciating the new tractor, so you agree to pay the dealer $60,000 for the new tractor if he will pay you $40,000 for your old tractor. File free federal and state tax return Because the two transactions are dependent on each other, you are treated as having exchanged your old tractor for the new one and paid $20,000 ($60,000 − $40,000). File free federal and state tax return Your basis for depreciating the new tractor is $42,000, the same as if you traded the old tractor. File free federal and state tax return Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you. File free federal and state tax return You also must know its FMV at the time it was given to you and any gift tax paid on it. File free federal and state tax return FMV equal to or greater than donor's adjusted basis. File free federal and state tax return   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis when you received the gift. File free federal and state tax return Increase your basis by all or part of any gift tax paid, depending on the date of the gift. File free federal and state tax return   Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. File free federal and state tax return See Adjusted Basis , earlier. File free federal and state tax return   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. File free federal and state tax return Figure the increase by multiplying the gift tax paid by the following fraction. File free federal and state tax return Net increase in value of the gift Amount of the gift   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. File free federal and state tax return The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. File free federal and state tax return Example. File free federal and state tax return In 2013, you received a gift of property from your mother that had an FMV of $50,000. File free federal and state tax return Her adjusted basis was $20,000. File free federal and state tax return The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). File free federal and state tax return She paid a gift tax of $7,320. File free federal and state tax return Your basis, $26,076, is figured as follows. File free federal and state tax return Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000 Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . File free federal and state tax return 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. File free federal and state tax return If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. File free federal and state tax return However, your basis cannot exceed the FMV of the gift when it was given to you. File free federal and state tax return FMV less than donor's adjusted basis. File free federal and state tax return   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. File free federal and state tax return Your basis for figuring gain is the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. File free federal and state tax return Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. File free federal and state tax return (See Adjusted Basis , earlier. File free federal and state tax return )   If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither gain nor loss on the sale or other disposition of the property. File free federal and state tax return Example. File free federal and state tax return You received farmland as a gift from your parents when they retired from farming. File free federal and state tax return At the time of the gift, the land had an FMV of $80,000. File free federal and state tax return Your parents' adjusted basis was $100,000. File free federal and state tax return After you received the land, no events occurred that would increase or decrease your basis. File free federal and state tax return If you sell the land for $120,000, you will have a $20,000 gain because you must use the donor's adjusted basis at the time of the gift ($100,000) as your basis to figure a gain. File free federal and state tax return If you sell the land for $70,000, you will have a $10,000 loss because you must use the FMV at the time of the gift ($80,000) as your basis to figure a loss. File free federal and state tax return If the sales price is between $80,000 and $100,000, you have neither gain nor loss. File free federal and state tax return For instance, if the sales price was $90,000 and you tried to figure a gain using the donor's adjusted basis ($100,000), you would get a $10,000 loss. File free federal and state tax return If you then tried to figure a loss using the FMV ($80,000), you would get a $10,000 gain. File free federal and state tax return Business property. File free federal and state tax return   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. File free federal and state tax return Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. File free federal and state tax return The same rule applies to a transfer by your former spouse if the transfer is incident to divorce. File free federal and state tax return However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed plus the liabilities to which the property is subject are more than the adjusted basis of the property transferred. File free federal and state tax return The transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. File free federal and state tax return For more information, see Property Settlements in Publication 504, Divorced or Separated Individuals. File free federal and state tax return Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. File free federal and state tax return If a federal estate return is filed, you can use its appraised value. File free federal and state tax return The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation. File free federal and state tax return For information on the alternate valuation, see the Instructions for Form 706. File free federal and state tax return The decedent's adjusted basis in land to the extent of the value that is excluded from the decedent's taxable estate as a qualified conservation easement. File free federal and state tax return If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. File free federal and state tax return Special-use valuation method. File free federal and state tax return   Under certain conditions, when a person dies, the executor or personal representative of that person's estate may elect to value qualified real property at other than its FMV. File free federal and state tax return If so, the executor or personal representative values the qualified real property based on its use as a farm or other closely held business. File free federal and state tax return If the executor or personal representative elects this method of valuation for estate tax purposes, this value is the basis of the property for the qualified heirs. File free federal and state tax return The qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. File free federal and state tax return   If you are a qualified heir who received special-use valuation property, increase your basis by any gain recognized by the estate or trust because of post-death appreciation. File free federal and state tax return Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or on the alternate valuation date. File free federal and state tax return Figure all FMVs without regard to the special-use valuation. File free federal and state tax return   You may be liable for an additional estate tax if, within 10 years after the death of the decedent, you transfer the property or the property stops being used as a farm. File free federal and state tax return This tax does not apply if you dispose of the property in a like-kind exchange or in an involuntary conversion in which all of the proceeds are reinvested in qualified replacement property. File free federal and state tax return The tax also does not apply if you transfer the property to a member of your family and certain requirements are met. File free federal and state tax return   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. File free federal and state tax return To increase your basis, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of payment of the additional estate tax. File free federal and state tax return If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. File free federal and state tax return The increase in your basis is considered to have occurred immediately before the event that resulted in the additional estate tax. File free federal and state tax return   You make the election by filing, with Form 706-A, United States Additional Estate Tax Return, a statement that: Contains your (and the estate's) name, address, and taxpayer identification number; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which you are making the election; and Provides any additional information required by the Form 706-A instructions. File free federal and state tax return   For more information, see Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706-A, and the related instructions. File free federal and state tax return Property inherited from a decedent who died in 2010. File free federal and state tax return   If you inherited property from a decedent who died in 2010, different rules may apply. File free federal and state tax return See Publication 4895, Tax Treatment of Property Acquired From a Decendent Dying in 2010, for details. File free federal and state tax return Property Distributed From a Partnership or Corporation The following rules apply to determine a partner's basis and a shareholder's basis in property distributed respectively from a partnership to the partner with respect to the partner's interest in the partnership and from a corporation to the shareholder with respect to the shareholder's ownership of stock in the corporation. File free federal and state tax return Partner's basis. File free federal and state tax return   Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed by a partnership to the partner is its adjusted basis to the partnership immediately before the distribution. File free federal and state tax return However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. File free federal and state tax return For more information, see Partner's Basis for Distributed Property in Publication 541, Partnerships. File free federal and state tax return Shareholder's basis. File free federal and state tax return   The basis of property distributed by a corporation to a shareholder is its fair market value. File free federal and state tax return For more information about corporate distributions, see Distributions to Shareholders in Publication 542, Corporations. File free federal and state tax return Prev  Up  Next   Home   More Online Publications