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Filing 1040ez online free 1. Filing 1040ez online free   Overview of Depreciation Table of Contents Introduction Useful Items - You may want to see: What Property Can Be Depreciated?Property You Own Property Used in Your Business or Income-Producing Activity Property Having a Determinable Useful Life Property Lasting More Than One Year What Property Cannot Be Depreciated?Land Excepted Property When Does Depreciation Begin and End?Placed in Service Idle Property Cost or Other Basis Fully Recovered Retired From Service What Method Can You Use To Depreciate Your Property?Property You Placed in Service Before 1987 Property Owned or Used in 1986 Intangible Property Corporate or Partnership Property Acquired in a Nontaxable Transfer Election To Exclude Property From MACRS What Is the Basis of Your Depreciable Property?Cost as Basis Other Basis Adjusted Basis How Do You Treat Repairs and Improvements? Do You Have To File Form 4562? How Do You Correct Depreciation Deductions?Filing an Amended Return Changing Your Accounting Method Introduction Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. Filing 1040ez online free It is an allowance for the wear and tear, deterioration, or obsolescence of the property. Filing 1040ez online free This chapter discusses the general rules for depreciating property and answers the following questions. Filing 1040ez online free What property can be depreciated? What property cannot be depreciated? When does depreciation begin and end? What method can you use to depreciate your property? What is the basis of your depreciable property? How do you treat repairs and improvements? Do you have to file Form 4562? How do you correct depreciation deductions? Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 538 Accounting Periods and Methods 551 Basis of Assets Form (and Instructions) Sch C (Form 1040) Profit or Loss From Business Sch C-EZ (Form 1040) Net Profit From Business 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization See chapter 6 for information about getting publications and forms. Filing 1040ez online free What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. Filing 1040ez online free You also can depreciate certain intangible property, such as patents, copyrights, and computer software. Filing 1040ez online free To be depreciable, the property must meet all the following requirements. Filing 1040ez online free It must be property you own. Filing 1040ez online free It must be used in your business or income-producing activity. Filing 1040ez online free It must have a determinable useful life. Filing 1040ez online free It must be expected to last more than one year. Filing 1040ez online free The following discussions provide information about these requirements. Filing 1040ez online free Property You Own To claim depreciation, you usually must be the owner of the property. Filing 1040ez online free You are considered as owning property even if it is subject to a debt. Filing 1040ez online free Example 1. Filing 1040ez online free You made a down payment to purchase rental property and assumed the previous owner's mortgage. Filing 1040ez online free You own the property and you can depreciate it. Filing 1040ez online free Example 2. Filing 1040ez online free You bought a new van that you will use only for your courier business. Filing 1040ez online free You will be making payments on the van over the next 5 years. Filing 1040ez online free You own the van and you can depreciate it. Filing 1040ez online free Leased property. Filing 1040ez online free   You can depreciate leased property only if you retain the incidents of ownership in the property (explained below). Filing 1040ez online free This means you bear the burden of exhaustion of the capital investment in the property. Filing 1040ez online free Therefore, if you lease property from someone to use in your trade or business or for the production of income, you generally cannot depreciate its cost because you do not retain the incidents of ownership. Filing 1040ez online free You can, however, depreciate any capital improvements you make to the property. Filing 1040ez online free See How Do You Treat Repairs and Improvements later in this chapter and Additions and Improvements under Which Recovery Period Applies in chapter 4. Filing 1040ez online free   If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. Filing 1040ez online free However, if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased, you cannot depreciate the cost of the property. Filing 1040ez online free Incidents of ownership. Filing 1040ez online free   Incidents of ownership in property include the following. Filing 1040ez online free The legal title to the property. Filing 1040ez online free The legal obligation to pay for the property. Filing 1040ez online free The responsibility to pay maintenance and operating expenses. Filing 1040ez online free The duty to pay any taxes on the property. Filing 1040ez online free The risk of loss if the property is destroyed, condemned, or diminished in value through obsolescence or exhaustion. Filing 1040ez online free Life tenant. Filing 1040ez online free   Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. Filing 1040ez online free However, see Certain term interests in property under Excepted Property, later. Filing 1040ez online free Cooperative apartments. Filing 1040ez online free   If you are a tenant-stockholder in a cooperative housing corporation and use your cooperative apartment in your business or for the production of income, you can depreciate your stock in the corporation, even though the corporation owns the apartment. Filing 1040ez online free   Figure your depreciation deduction as follows. Filing 1040ez online free Figure the depreciation for all the depreciable real property owned by the corporation in which you have a proprietary lease or right of tenancy. Filing 1040ez online free If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. Filing 1040ez online free Multiply your cost per share by the total number of outstanding shares, including any shares held by the corporation. Filing 1040ez online free Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock. Filing 1040ez online free Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land. Filing 1040ez online free Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant-stockholders. Filing 1040ez online free Divide the number of your shares of stock by the total number of outstanding shares, including any shares held by the corporation. Filing 1040ez online free Multiply the result of (2) by the percentage you figured in (3). Filing 1040ez online free This is your depreciation on the stock. Filing 1040ez online free   Your depreciation deduction for the year cannot be more than the part of your adjusted basis in the stock of the corporation that is allocable to your business or income-producing property. Filing 1040ez online free You must also reduce your depreciation deduction if only a portion of the property is used in a business or for the production of income. Filing 1040ez online free Example. Filing 1040ez online free You figure your share of the cooperative housing corporation's depreciation to be $30,000. Filing 1040ez online free Your adjusted basis in the stock of the corporation is $50,000. Filing 1040ez online free You use one half of your apartment solely for business purposes. Filing 1040ez online free Your depreciation deduction for the stock for the year cannot be more than $25,000 (½ of $50,000). Filing 1040ez online free Change to business use. Filing 1040ez online free   If you change your cooperative apartment to business use, figure your allowable depreciation as explained earlier. Filing 1040ez online free The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts. Filing 1040ez online free The fair market value of the property on the date you change your apartment to business use. Filing 1040ez online free This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic. Filing 1040ez online free The corporation's adjusted basis in the property on that date. Filing 1040ez online free Do not subtract depreciation when figuring the corporation's adjusted basis. Filing 1040ez online free   If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1), above. Filing 1040ez online free The fair market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic. Filing 1040ez online free   For a discussion of fair market value and adjusted basis, see Publication 551. Filing 1040ez online free Property Used in Your Business or Income-Producing Activity To claim depreciation on property, you must use it in your business or income-producing activity. Filing 1040ez online free If you use property to produce income (investment use), the income must be taxable. Filing 1040ez online free You cannot depreciate property that you use solely for personal activities. Filing 1040ez online free Partial business or investment use. Filing 1040ez online free   If you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the business or investment use. Filing 1040ez online free For example, you cannot deduct depreciation on a car used only for commuting, personal shopping trips, family vacations, driving children to and from school, or similar activities. Filing 1040ez online free    You must keep records showing the business, investment, and personal use of your property. Filing 1040ez online free For more information on the records you must keep for listed property, such as a car, see What Records Must Be Kept in chapter 5. Filing 1040ez online free    Although you can combine business and investment use of property when figuring depreciation deductions, do not treat investment use as qualified business use when determining whether the business-use requirement for listed property is met. Filing 1040ez online free For information about qualified business use of listed property, see What Is the Business-Use Requirement in chapter 5. Filing 1040ez online free Office in the home. Filing 1040ez online free   If you use part of your home as an office, you may be able to deduct depreciation on that part based on its business use. Filing 1040ez online free For information about depreciating your home office, see Publication 587. Filing 1040ez online free Inventory. Filing 1040ez online free   You cannot depreciate inventory because it is not held for use in your business. Filing 1040ez online free Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. Filing 1040ez online free   If you are a rent-to-own dealer, you may be able to treat certain property held in your business as depreciable property rather than as inventory. Filing 1040ez online free See Rent-to-own dealer under Which Property Class Applies Under GDS in chapter 4. Filing 1040ez online free   In some cases, it is not clear whether property is held for sale (inventory) or for use in your business. Filing 1040ez online free If it is unclear, examine carefully all the facts in the operation of the particular business. Filing 1040ez online free The following example shows how a careful examination of the facts in two similar situations results in different conclusions. Filing 1040ez online free Example. Filing 1040ez online free Maple Corporation is in the business of leasing cars. Filing 1040ez online free At the end of their useful lives, when the cars are no longer profitable to lease, Maple sells them. Filing 1040ez online free Maple does not have a showroom, used car lot, or individuals to sell the cars. Filing 1040ez online free Instead, it sells them through wholesalers or by similar arrangements in which a dealer's profit is not intended or considered. Filing 1040ez online free Maple can depreciate the leased cars because the cars are not held primarily for sale to customers in the ordinary course of business, but are leased. Filing 1040ez online free If Maple buys cars at wholesale prices, leases them for a short time, and then sells them at retail prices or in sales in which a dealer's profit is intended, the cars are treated as inventory and are not depreciable property. Filing 1040ez online free In this situation, the cars are held primarily for sale to customers in the ordinary course of business. Filing 1040ez online free Containers. Filing 1040ez online free   Generally, containers for the products you sell are part of inventory and you cannot depreciate them. Filing 1040ez online free However, you can depreciate containers used to ship your products if they have a life longer than one year and meet the following requirements. Filing 1040ez online free They qualify as property used in your business. Filing 1040ez online free Title to the containers does not pass to the buyer. Filing 1040ez online free   To determine if these requirements are met, consider the following questions. Filing 1040ez online free Does your sales contract, sales invoice, or other type of order acknowledgment indicate whether you have retained title? Does your invoice treat the containers as separate items? Do any of your records state your basis in the containers? Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. Filing 1040ez online free This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Filing 1040ez online free Property Lasting More Than One Year To be depreciable, property must have a useful life that extends substantially beyond the year you place it in service. Filing 1040ez online free Example. Filing 1040ez online free You maintain a library for use in your profession. Filing 1040ez online free You can depreciate it. Filing 1040ez online free However, if you buy technical books, journals, or information services for use in your business that have a useful life of one year or less, you cannot depreciate them. Filing 1040ez online free Instead, you deduct their cost as a business expense. Filing 1040ez online free What Property Cannot Be Depreciated? Certain property cannot be depreciated. Filing 1040ez online free This includes land and certain excepted property. Filing 1040ez online free Land You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up. Filing 1040ez online free The cost of land generally includes the cost of clearing, grading, planting, and landscaping. Filing 1040ez online free Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. Filing 1040ez online free These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property. Filing 1040ez online free Example. Filing 1040ez online free You constructed a new building for use in your business and paid for grading, clearing, seeding, and planting bushes and trees. Filing 1040ez online free Some of the bushes and trees were planted right next to the building, while others were planted around the outer border of the lot. Filing 1040ez online free If you replace the building, you would have to destroy the bushes and trees right next to it. Filing 1040ez online free These bushes and trees are closely associated with the building, so they have a determinable useful life. Filing 1040ez online free Therefore, you can depreciate them. Filing 1040ez online free Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. Filing 1040ez online free Excepted Property Even if the requirements explained in the preceding discussions are met, you cannot depreciate the following property. Filing 1040ez online free Property placed in service and disposed of in the same year. Filing 1040ez online free Determining when property is placed in service is explained later. Filing 1040ez online free Equipment used to build capital improvements. Filing 1040ez online free You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Filing 1040ez online free See Uniform Capitalization Rules in Publication 551. Filing 1040ez online free Section 197 intangibles. Filing 1040ez online free You must amortize these costs. Filing 1040ez online free Section 197 intangibles are discussed in detail in Chapter 8 of Publication 535. Filing 1040ez online free Intangible property, such as certain computer software, that is not section 197 intangible property, can be depreciated if it meets certain requirements. Filing 1040ez online free See Intangible Property , later. Filing 1040ez online free Certain term interests. Filing 1040ez online free Certain term interests in property. Filing 1040ez online free   You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is held, directly or indirectly, by a person related to you. Filing 1040ez online free A term interest in property means a life interest in property, an interest in property for a term of years, or an income interest in a trust. Filing 1040ez online free Related persons. Filing 1040ez online free   For a description of related persons, see Related Persons, later. Filing 1040ez online free For this purpose, however, treat as related persons only the relationships listed in items (1) through (10) of that discussion and substitute “50%” for “10%” each place it appears. Filing 1040ez online free Basis adjustments. Filing 1040ez online free   If you would be allowed a depreciation deduction for a term interest in property except that the holder of the remainder interest is related to you, you generally must reduce your basis in the term interest by any depreciation or amortization not allowed. Filing 1040ez online free   If you hold the remainder interest, you generally must increase your basis in that interest by the depreciation not allowed to the term interest holder. Filing 1040ez online free However, do not increase your basis for depreciation not allowed for periods during which either of the following situations applies. Filing 1040ez online free The term interest is held by an organization exempt from tax. Filing 1040ez online free The term interest is held by a nonresident alien individual or foreign corporation, and the income from the term interest is not effectively connected with the conduct of a trade or business in the United States. Filing 1040ez online free Exceptions. Filing 1040ez online free   The above rules do not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. Filing 1040ez online free They also do not apply to the holder of dividend rights that were separated from any stripped preferred stock if the rights were purchased after April 30, 1993, or to a person whose basis in the stock is determined by reference to the basis in the hands of the purchaser. Filing 1040ez online free When Does Depreciation Begin and End? You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. Filing 1040ez online free You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first. Filing 1040ez online free Placed in Service You place property in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. Filing 1040ez online free Even if you are not using the property, it is in service when it is ready and available for its specific use. Filing 1040ez online free Example 1. Filing 1040ez online free Donald Steep bought a machine for his business. Filing 1040ez online free The machine was delivered last year. Filing 1040ez online free However, it was not installed and operational until this year. Filing 1040ez online free It is considered placed in service this year. Filing 1040ez online free If the machine had been ready and available for use when it was delivered, it would be considered placed in service last year even if it was not actually used until this year. Filing 1040ez online free Example 2. Filing 1040ez online free On April 6, Sue Thorn bought a house to use as residential rental property. Filing 1040ez online free She made several repairs and had it ready for rent on July 5. Filing 1040ez online free At that time, she began to advertise it for rent in the local newspaper. Filing 1040ez online free The house is considered placed in service in July when it was ready and available for rent. Filing 1040ez online free She can begin to depreciate it in July. Filing 1040ez online free Example 3. Filing 1040ez online free James Elm is a building contractor who specializes in constructing office buildings. Filing 1040ez online free He bought a truck last year that had to be modified to lift materials to second-story levels. Filing 1040ez online free The installation of the lifting equipment was completed and James accepted delivery of the modified truck on January 10 of this year. Filing 1040ez online free The truck was placed in service on January 10, the date it was ready and available to perform the function for which it was bought. Filing 1040ez online free Conversion to business use. Filing 1040ez online free   If you place property in service in a personal activity, you cannot claim depreciation. Filing 1040ez online free However, if you change the property's use to use in a business or income-producing activity, then you can begin to depreciate it at the time of the change. Filing 1040ez online free You place the property in service in the business or income-producing activity on the date of the change. Filing 1040ez online free Example. Filing 1040ez online free You bought a home and used it as your personal home several years before you converted it to rental property. Filing 1040ez online free Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. Filing 1040ez online free You can begin to claim depreciation in the year you converted it to rental property because its use changed to an income-producing use at that time. Filing 1040ez online free Idle Property Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle (not in use). Filing 1040ez online free For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine. Filing 1040ez online free Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. Filing 1040ez online free You recover your basis when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. Filing 1040ez online free See What Is the Basis of Your Depreciable Property , later. Filing 1040ez online free Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. Filing 1040ez online free You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. Filing 1040ez online free You sell or exchange the property. Filing 1040ez online free You convert the property to personal use. Filing 1040ez online free You abandon the property. Filing 1040ez online free You transfer the property to a supplies or scrap account. Filing 1040ez online free The property is destroyed. Filing 1040ez online free If you included the property in a general asset account, see How Do You Use General Asset Accounts in chapter 4 for the rules that apply when you dispose of that property. Filing 1040ez online free What Method Can You Use To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most property. Filing 1040ez online free MACRS is discussed in chapter 4. Filing 1040ez online free You cannot use MACRS to depreciate the following property. Filing 1040ez online free Property you placed in service before 1987. Filing 1040ez online free Certain property owned or used in 1986. Filing 1040ez online free Intangible property. Filing 1040ez online free Films, video tapes, and recordings. Filing 1040ez online free Certain corporate or partnership property acquired in a nontaxable transfer. Filing 1040ez online free Property you elected to exclude from MACRS. Filing 1040ez online free The following discussions describe the property listed above and explain what depreciation method should be used. Filing 1040ez online free Property You Placed in Service Before 1987 You cannot use MACRS for property you placed in service before 1987 (except property you placed in service after July 31, 1986, if MACRS was elected). Filing 1040ez online free Property placed in service before 1987 must be depreciated under the methods discussed in Publication 534. Filing 1040ez online free For a discussion of when property is placed in service, see When Does Depreciation Begin and End , earlier. Filing 1040ez online free Use of real property changed. Filing 1040ez online free   You generally must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing use after 1986. Filing 1040ez online free Improvements made after 1986. Filing 1040ez online free   You must treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. Filing 1040ez online free Therefore, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. Filing 1040ez online free For more information about improvements, see How Do You Treat Repairs and Improvements , later and Additions and Improvements under Which Recovery Period Applies in chapter 4. Filing 1040ez online free Property Owned or Used in 1986 You may not be able to use MACRS for property you acquired and placed in service after 1986 if any of the situations described below apply. Filing 1040ez online free If you cannot use MACRS, the property must be depreciated under the methods discussed in Publication 534. Filing 1040ez online free For the following discussions, do not treat property as owned before you placed it in service. Filing 1040ez online free If you owned property in 1986 but did not place it in service until 1987, you do not treat it as owned in 1986. Filing 1040ez online free Personal property. Filing 1040ez online free   You cannot use MACRS for personal property (section 1245 property) in any of the following situations. Filing 1040ez online free You or someone related to you owned or used the property in 1986. Filing 1040ez online free You acquired the property from a person who owned it in 1986 and as part of the transaction the user of the property did not change. Filing 1040ez online free You lease the property to a person (or someone related to this person) who owned or used the property in 1986. Filing 1040ez online free You acquired the property in a transaction in which: The user of the property did not change, and The property was not MACRS property in the hands of the person from whom you acquired it because of (2) or (3) above. Filing 1040ez online free Real property. Filing 1040ez online free   You generally cannot use MACRS for real property (section 1250 property) in any of the following situations. Filing 1040ez online free You or someone related to you owned the property in 1986. Filing 1040ez online free You lease the property to a person who owned the property in 1986 (or someone related to that person). Filing 1040ez online free You acquired the property in a like-kind exchange, involuntary conversion, or repossession of property you or someone related to you owned in 1986. Filing 1040ez online free MACRS applies only to that part of your basis in the acquired property that represents cash paid or unlike property given up. Filing 1040ez online free It does not apply to the carried-over part of the basis. Filing 1040ez online free Exceptions. Filing 1040ez online free   The rules above do not apply to the following. Filing 1040ez online free Residential rental property or nonresidential real property. Filing 1040ez online free Any property if, in the first tax year it is placed in service, the deduction under the Accelerated Cost Recovery System (ACRS) is more than the deduction under MACRS using the half-year convention. Filing 1040ez online free For information on how to figure depreciation under ACRS, see Publication 534. Filing 1040ez online free Property that was MACRS property in the hands of the person from whom you acquired it because of (2) above. Filing 1040ez online free Related persons. Filing 1040ez online free   For this purpose, the following are related persons. Filing 1040ez online free An individual and a member of his or her family, including only a spouse, child, parent, brother, sister, half-brother, half-sister, ancestor, and lineal descendant. Filing 1040ez online free A corporation and an individual who directly or indirectly owns more than 10% of the value of the outstanding stock of that corporation. Filing 1040ez online free Two corporations that are members of the same controlled group. Filing 1040ez online free A trust fiduciary and a corporation if more than 10% of the value of the outstanding stock is directly or indirectly owned by or for the trust or grantor of the trust. Filing 1040ez online free The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Filing 1040ez online free The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts. Filing 1040ez online free A tax-exempt educational or charitable organization and any person (or, if that person is an individual, a member of that person's family) who directly or indirectly controls the organization. Filing 1040ez online free Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 10% of the value of the outstanding stock of each corporation. Filing 1040ez online free A corporation and a partnership if the same persons own both of the following. Filing 1040ez online free More than 10% of the value of the outstanding stock of the corporation. Filing 1040ez online free More than 10% of the capital or profits interest in the partnership. Filing 1040ez online free The executor and beneficiary of any estate. Filing 1040ez online free A partnership and a person who directly or indirectly owns more than 10% of the capital or profits interest in the partnership. Filing 1040ez online free Two partnerships, if the same persons directly or indirectly own more than 10% of the capital or profits interest in each. Filing 1040ez online free The related person and a person who is engaged in trades or businesses under common control. Filing 1040ez online free See section 52(a) and 52(b) of the Internal Revenue Code. Filing 1040ez online free When to determine relationship. Filing 1040ez online free   You must determine whether you are related to another person at the time you acquire the property. Filing 1040ez online free   A partnership acquiring property from a terminating partnership must determine whether it is related to the terminating partnership immediately before the event causing the termination. Filing 1040ez online free For this rule, a terminating partnership is one that sells or exchanges, within 12 months, 50% or more of its total interest in partnership capital or profits. Filing 1040ez online free Constructive ownership of stock or partnership interest. Filing 1040ez online free   To determine whether a person directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership, apply the following rules. Filing 1040ez online free Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Filing 1040ez online free However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more of the value of the stock of the corporation. Filing 1040ez online free An individual is considered to own the stock or partnership interest directly or indirectly owned by or for the individual's family. Filing 1040ez online free An individual who owns, except by applying rule (2), any stock in a corporation is considered to own the stock directly or indirectly owned by or for the individual's partner. Filing 1040ez online free For purposes of rules (1), (2), or (3), stock or a partnership interest considered to be owned by a person under rule (1) is treated as actually owned by that person. Filing 1040ez online free However, stock or a partnership interest considered to be owned by an individual under rule (2) or (3) is not treated as owned by that individual for reapplying either rule (2) or (3) to make another person considered to be the owner of the same stock or partnership interest. Filing 1040ez online free Intangible Property Generally, if you can depreciate intangible property, you usually use the straight line method of depreciation. Filing 1040ez online free However, you can choose to depreciate certain intangible property under the income forecast method (discussed later). Filing 1040ez online free You cannot depreciate intangible property that is a section 197 intangible or that otherwise does not meet all the requirements discussed earlier under What Property Can Be Depreciated. Filing 1040ez online free Straight Line Method This method lets you deduct the same amount of depreciation each year over the useful life of the property. Filing 1040ez online free To figure your deduction, first determine the adjusted basis, salvage value, and estimated useful life of your property. Filing 1040ez online free Subtract the salvage value, if any, from the adjusted basis. Filing 1040ez online free The balance is the total depreciation you can take over the useful life of the property. Filing 1040ez online free Divide the balance by the number of years in the useful life. Filing 1040ez online free This gives you your yearly depreciation deduction. Filing 1040ez online free Unless there is a big change in adjusted basis or useful life, this amount will stay the same throughout the time you depreciate the property. Filing 1040ez online free If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. Filing 1040ez online free Example. Filing 1040ez online free In April, Frank bought a patent for $5,100 that is not a section 197 intangible. Filing 1040ez online free He depreciates the patent under the straight line method, using a 17-year useful life and no salvage value. Filing 1040ez online free He divides the $5,100 basis by 17 years to get his $300 yearly depreciation deduction. Filing 1040ez online free He only used the patent for 9 months during the first year, so he multiplies $300 by 9/12 to get his deduction of $225 for the first year. Filing 1040ez online free Next year, Frank can deduct $300 for the full year. Filing 1040ez online free Patents and copyrights. Filing 1040ez online free   If you can depreciate the cost of a patent or copyright, use the straight line method over the useful life. Filing 1040ez online free The useful life of a patent or copyright is the lesser of the life granted to it by the government or the remaining life when you acquire it. Filing 1040ez online free However, if the patent or copyright becomes valueless before the end of its useful life, you can deduct in that year any of its remaining cost or other basis. Filing 1040ez online free Computer software. Filing 1040ez online free   Computer software is generally a section 197 intangible and cannot be depreciated if you acquired it in connection with the acquisition of assets constituting a business or a substantial part of a business. Filing 1040ez online free   However, computer software is not a section 197 intangible and can be depreciated, even if acquired in connection with the acquisition of a business, if it meets all of the following tests. Filing 1040ez online free It is readily available for purchase by the general public. Filing 1040ez online free It is subject to a nonexclusive license. Filing 1040ez online free It has not been substantially modified. Filing 1040ez online free   If the software meets the tests above, it may also qualify for the section 179 deduction and the special depreciation allowance, discussed later. Filing 1040ez online free If you can depreciate the cost of computer software, use the straight line method over a useful life of 36 months. Filing 1040ez online free    Tax-exempt use property subject to a lease. Filing 1040ez online free   The useful life of computer software leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership), cannot be less than 125% of the lease term. Filing 1040ez online free Certain created intangibles. Filing 1040ez online free   You can amortize certain intangibles created on or after December 31, 2003, over a 15-year period using the straight line method and no salvage value, even though they have a useful life that cannot be estimated with reasonable accuracy. Filing 1040ez online free For example, amounts paid to acquire memberships or privileges of indefinite duration, such as a trade association membership, are eligible costs. Filing 1040ez online free   The following are not eligible. Filing 1040ez online free Any intangible asset acquired from another person. Filing 1040ez online free Created financial interests. Filing 1040ez online free Any intangible asset that has a useful life that can be estimated with reasonable accuracy. Filing 1040ez online free Any intangible asset that has an amortization period or limited useful life that is specifically prescribed or prohibited by the Code, regulations, or other published IRS guidance. Filing 1040ez online free Any amount paid to facilitate an acquisition of a trade or business, a change in the capital structure of a business entity, and certain other transactions. Filing 1040ez online free   You must also increase the 15-year safe harbor amortization period to a 25-year period for certain intangibles related to benefits arising from the provision, production, or improvement of real property. Filing 1040ez online free For this purpose, real property includes property that will remain attached to the real property for an indefinite period of time, such as roads, bridges, tunnels, pavements, and pollution control facilities. Filing 1040ez online free Income Forecast Method You can choose to use the income forecast method instead of the straight line method to depreciate the following depreciable intangibles. Filing 1040ez online free Motion picture films or video tapes. Filing 1040ez online free Sound recordings. Filing 1040ez online free Copyrights. Filing 1040ez online free Books. Filing 1040ez online free Patents. Filing 1040ez online free Under the income forecast method, each year's depreciation deduction is equal to the cost of the property, multiplied by a fraction. Filing 1040ez online free The numerator of the fraction is the current year's net income from the property, and the denominator is the total income anticipated from the property through the end of the 10th taxable year following the taxable year the property is placed in service. Filing 1040ez online free For more information, see section 167(g) of the Internal Revenue Code. Filing 1040ez online free Films, video tapes, and recordings. Filing 1040ez online free   You cannot use MACRS for motion picture films, video tapes, and sound recordings. Filing 1040ez online free For this purpose, sound recordings are discs, tapes, or other phonorecordings resulting from the fixation of a series of sounds. Filing 1040ez online free You can depreciate this property using either the straight line method or the income forecast method. Filing 1040ez online free Participations and residuals. Filing 1040ez online free   You can include participations and residuals in the adjusted basis of the property for purposes of computing your depreciation deduction under the income forecast method. Filing 1040ez online free The participations and residuals must relate to income to be derived from the property before the end of the 10th taxable year after the property is placed in service. Filing 1040ez online free For this purpose, participations and residuals are defined as costs which by contract vary with the amount of income earned in connection with the property. Filing 1040ez online free   Instead of including these amounts in the adjusted basis of the property, you can deduct the costs in the taxable year that they are paid. Filing 1040ez online free Videocassettes. Filing 1040ez online free   If you are in the business of renting videocassettes, you can depreciate only those videocassettes bought for rental. Filing 1040ez online free If the videocassette has a useful life of one year or less, you can currently deduct the cost as a business expense. Filing 1040ez online free Corporate or Partnership Property Acquired in a Nontaxable Transfer MACRS does not apply to property used before 1987 and transferred after 1986 to a corporation or partnership (except property the transferor placed in service after July 31, 1986, if MACRS was elected) to the extent its basis is carried over from the property's adjusted basis in the transferor's hands. Filing 1040ez online free You must continue to use the same depreciation method as the transferor and figure depreciation as if the transfer had not occurred. Filing 1040ez online free However, if MACRS would otherwise apply, you can use it to depreciate the part of the property's basis that exceeds the carried-over basis. Filing 1040ez online free The nontaxable transfers covered by this rule include the following. Filing 1040ez online free A distribution in complete liquidation of a subsidiary. Filing 1040ez online free A transfer to a corporation controlled by the transferor. Filing 1040ez online free An exchange of property solely for corporate stock or securities in a reorganization. Filing 1040ez online free A contribution of property to a partnership in exchange for a partnership interest. Filing 1040ez online free A partnership distribution of property to a partner. Filing 1040ez online free Election To Exclude Property From MACRS If you can properly depreciate any property under a method not based on a term of years, such as the unit-of-production method, you can elect to exclude that property from MACRS. Filing 1040ez online free You make the election by reporting your depreciation for the property on line 15 in Part II of Form 4562 and attaching a statement as described in the instructions for Form 4562. Filing 1040ez online free You must make this election by the return due date (including extensions) for the tax year you place your property in service. Filing 1040ez online free However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within six months of the due date of the return (excluding extensions). Filing 1040ez online free Attach the election to the amended return and write “Filed pursuant to section 301. Filing 1040ez online free 9100-2” on the election statement. Filing 1040ez online free File the amended return at the same address you filed the original return. Filing 1040ez online free Use of standard mileage rate. Filing 1040ez online free   If you use the standard mileage rate to figure your tax deduction for your business automobile, you are treated as having made an election to exclude the automobile from MACRS. Filing 1040ez online free See Publication 463 for a discussion of the standard mileage rate. Filing 1040ez online free What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. Filing 1040ez online free To determine basis, you need to know the cost or other basis of your property. Filing 1040ez online free Cost as Basis The basis of property you buy is its cost plus amounts you paid for items such as sales tax (see Exception , below), freight charges, and installation and testing fees. Filing 1040ez online free The cost includes the amount you pay in cash, debt obligations, other property, or services. Filing 1040ez online free Exception. Filing 1040ez online free   You can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). Filing 1040ez online free If you make that choice, you cannot include those sales taxes as part of your cost basis. Filing 1040ez online free Assumed debt. Filing 1040ez online free   If you buy property and assume (or buy subject to) an existing mortgage or other debt on the property, your basis includes the amount you pay for the property plus the amount of the assumed debt. Filing 1040ez online free Example. Filing 1040ez online free You make a $20,000 down payment on property and assume the seller's mortgage of $120,000. Filing 1040ez online free Your total cost is $140,000, the cash you paid plus the mortgage you assumed. Filing 1040ez online free Settlement costs. Filing 1040ez online free   The basis of real property also includes certain fees and charges you pay in addition to the purchase price. Filing 1040ez online free These generally are shown on your settlement statement and include the following. Filing 1040ez online free Legal and recording fees. Filing 1040ez online free Abstract fees. Filing 1040ez online free Survey charges. Filing 1040ez online free Owner's title insurance. Filing 1040ez online free Amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Filing 1040ez online free   For fees and charges you cannot include in the basis of property, see Real Property in Publication 551. Filing 1040ez online free Property you construct or build. Filing 1040ez online free   If you construct, build, or otherwise produce property for use in your business, you may have to use the uniform capitalization rules to determine the basis of your property. Filing 1040ez online free For information about the uniform capitalization rules, see Publication 551 and the regulations under section 263A of the Internal Revenue Code. Filing 1040ez online free Other Basis Other basis usually refers to basis that is determined by the way you received the property. Filing 1040ez online free For example, your basis is other than cost if you acquired the property in exchange for other property, as payment for services you performed, as a gift, or as an inheritance. Filing 1040ez online free If you acquired property in this or some other way, see Publication 551 to determine your basis. Filing 1040ez online free Property changed from personal use. Filing 1040ez online free   If you held property for personal use and later use it in your business or income-producing activity, your depreciable basis is the lesser of the following. Filing 1040ez online free The fair market value (FMV) of the property on the date of the change in use. Filing 1040ez online free Your original cost or other basis adjusted as follows. Filing 1040ez online free Increased by the cost of any permanent improvements or additions and other costs that must be added to basis. Filing 1040ez online free Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis. Filing 1040ez online free Example. Filing 1040ez online free Several years ago, Nia paid $160,000 to have her home built on a lot that cost her $25,000. Filing 1040ez online free Before changing the property to rental use last year, she paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house. Filing 1040ez online free Land is not depreciable, so she includes only the cost of the house when figuring the basis for depreciation. Filing 1040ez online free Nia's adjusted basis in the house when she changed its use was $178,000 ($160,000 + $20,000 − $2,000). Filing 1040ez online free On the same date, her property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. Filing 1040ez online free The basis for depreciation on the house is the FMV on the date of change ($165,000), because it is less than her adjusted basis ($178,000). Filing 1040ez online free Property acquired in a nontaxable transaction. Filing 1040ez online free   Generally, if you receive property in a nontaxable exchange, the basis of the property you receive is the same as the adjusted basis of the property you gave up. Filing 1040ez online free Special rules apply in determining the basis and figuring the MACRS depreciation deduction and special depreciation allowance for property acquired in a like-kind exchange or involuntary conversion. Filing 1040ez online free See Like-kind exchanges and involuntary conversions. Filing 1040ez online free under How Much Can You Deduct? in chapter 3 and Figuring the Deduction for Property Acquired in a Nontaxable Exchange in chapter 4. Filing 1040ez online free   There are also special rules for determining the basis of MACRS property involved in a like-kind exchange or involuntary conversion when the property is contained in a general asset account. Filing 1040ez online free See How Do You Use General Asset Accounts in chapter 4. Filing 1040ez online free Adjusted Basis To find your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service. Filing 1040ez online free These events could include the following. Filing 1040ez online free Installing utility lines. Filing 1040ez online free Paying legal fees for perfecting the title. Filing 1040ez online free Settling zoning issues. Filing 1040ez online free Receiving rebates. Filing 1040ez online free Incurring a casualty or theft loss. Filing 1040ez online free For a discussion of adjustments to the basis of your property, see Adjusted Basis in Publication 551. Filing 1040ez online free If you depreciate your property under MACRS, you also may have to reduce your basis by certain deductions and credits with respect to the property. Filing 1040ez online free For more information, see What Is the Basis for Depreciation in chapter 4. Filing 1040ez online free . Filing 1040ez online free Basis adjustment for depreciation allowed or allowable. Filing 1040ez online free   You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater. Filing 1040ez online free Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Filing 1040ez online free Depreciation allowable is depreciation you are entitled to deduct. Filing 1040ez online free   If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable. Filing 1040ez online free   If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed). Filing 1040ez online free How Do You Treat Repairs and Improvements? If you improve depreciable property, you must treat the improvement as separate depreciable property. Filing 1040ez online free Improvement means an addition to or partial replacement of property that adds to its value, appreciably lengthens the time you can use it, or adapts it to a different use. Filing 1040ez online free You generally deduct the cost of repairing business property in the same way as any other business expense. Filing 1040ez online free However, if a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it. Filing 1040ez online free Example. Filing 1040ez online free You repair a small section on one corner of the roof of a rental house. Filing 1040ez online free You deduct the cost of the repair as a rental expense. Filing 1040ez online free However, if you completely replace the roof, the new roof is an improvement because it increases the value and lengthens the life of the property. Filing 1040ez online free You depreciate the cost of the new roof. Filing 1040ez online free Improvements to rented property. Filing 1040ez online free   You can depreciate permanent improvements you make to business property you rent from someone else. Filing 1040ez online free Do You Have To File Form 4562? Use Form 4562 to figure your deduction for depreciation and amortization. Filing 1040ez online free Attach Form 4562 to your tax return for the current tax year if you are claiming any of the following items. Filing 1040ez online free A section 179 deduction for the current year or a section 179 carryover from a prior year. Filing 1040ez online free See chapter 2 for information on the section 179 deduction. Filing 1040ez online free Depreciation for property placed in service during the current year. Filing 1040ez online free Depreciation on any vehicle or other listed property, regardless of when it was placed in service. Filing 1040ez online free See chapter 5 for information on listed property. Filing 1040ez online free A deduction for any vehicle if the deduction is reported on a form other than Schedule C (Form 1040) or Schedule C-EZ (Form 1040). Filing 1040ez online free Amortization of costs if the current year is the first year of the amortization period. Filing 1040ez online free Depreciation or amortization on any asset on a corporate income tax return (other than Form 1120S, U. Filing 1040ez online free S. Filing 1040ez online free Income Tax Return for an S Corporation) regardless of when it was placed in service. Filing 1040ez online free You must submit a separate Form 4562 for each business or activity on your return for which a Form 4562 is required. Filing 1040ez online free Table 1-1 presents an overview of the purpose of the various parts of Form 4562. Filing 1040ez online free Employee. Filing 1040ez online free   Do not use Form 4562 if you are an employee and you deduct job-related vehicle expenses using either actual expenses (including depreciation) or the standard mileage rate. Filing 1040ez online free Instead, use either Form 2106 or Form 2106-EZ. Filing 1040ez online free Use Form 2106-EZ if you are claiming the standard mileage rate and you are not reimbursed by your employer for any expenses. Filing 1040ez online free How Do You Correct Depreciation Deductions? If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. Filing 1040ez online free See Filing an Amended Return , next. Filing 1040ez online free If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. Filing 1040ez online free See Changing Your Accounting Method , later. Filing 1040ez online free Filing an Amended Return You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Filing 1040ez online free You claimed the incorrect amount because of a mathematical error made in any year. Filing 1040ez online free You claimed the incorrect amount because of a posting error made in any year. Filing 1040ez online free You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. Filing 1040ez online free You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Filing 1040ez online free Adoption of accounting method defined. Filing 1040ez online free   Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return, or by using the same impermissible method of determining depreciation in two or more consecutively filed tax returns. Filing 1040ez online free   For an exception to this 2-year rule, see Revenue Procedure 2011-14 on page 330 of the Internal Revenue Bulletin 2011-4, available at www. Filing 1040ez online free irs. Filing 1040ez online free gov/pub/irs-irbs/irb11-04. Filing 1040ez online free pdf. Filing 1040ez online free (Note. Filing 1040ez online free Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. Filing 1040ez online free For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. Filing 1040ez online free irs. Filing 1040ez online free gov/pub/irs-irbs/irb12-14. Filing 1040ez online free pdf. Filing 1040ez online free )   For a safe harbor method of accounting to treat rotable spare parts as depreciable assets and procedures to obtain automatic consent to change to the safe harbor method of accounting, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www. Filing 1040ez online free irs. Filing 1040ez online free gov/pub/irs-irbs/irb07-29. Filing 1040ez online free pdf. Filing 1040ez online free When to file. Filing 1040ez online free   If an amended return is allowed, you must file it by the later of the following. Filing 1040ez online free 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Filing 1040ez online free A return filed before an unextended due date is considered filed on that due date. Filing 1040ez online free 2 years from the time you paid your tax for that year. Filing 1040ez online free Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. Filing 1040ez online free You generally must file Form 3115, Application for Change in Accounting Method, to request a change in your method of accounting for depreciation. Filing 1040ez online free The following are examples of a change in method of accounting for depreciation. Filing 1040ez online free A change from an impermissible method of determining depreciation for depreciable property, if the impermissible method was used in two or more consecutively filed tax returns. Filing 1040ez online free A change in the treatment of an asset from nondepreciable to depreciable or vice versa. Filing 1040ez online free A change in the depreciation method, period of recovery, or convention of a depreciable asset. Filing 1040ez online free A change from not claiming to claiming the special depreciation allowance if you did not make the election to not claim any special allowance. Filing 1040ez online free A change from claiming a 50% special depreciation allowance to claiming a 30% special depreciation allowance for qualified property (including property that is included in a class of property for which you elected a 30% special allowance instead of a 50% special allowance). Filing 1040ez online free Changes in depreciation that are not a change in method of accounting (and may only be made on an amended return) include the following. Filing 1040ez online free An adjustment in the useful life of a depreciable asset for which depreciation is determined under section 167. Filing 1040ez online free A change in use of an asset in the hands of the same taxpayer. Filing 1040ez online free Making a late depreciation election or revoking a timely valid depreciation election (including the election not to deduct the special depreciation allowance). Filing 1040ez online free If you elected not to claim any special allowance, a change from not claiming to claiming the special allowance is a revocation of the election and is not an accounting method change. Filing 1040ez online free Generally, you must get IRS approval to make a late depreciation election or revoke a depreciation election. Filing 1040ez online free You must submit a request for a letter ruling to make a late election or revoke an election. Filing 1040ez online free Any change in the placed in service date of a depreciable asset. Filing 1040ez online free See section 1. Filing 1040ez online free 446-1(e)(2)(ii)(d) of the regulations for more information and examples. Filing 1040ez online free IRS approval. Filing 1040ez online free   In some instances, you may be able to get approval from the IRS to change your method of accounting for depreciation under the automatic change request procedures generally covered in Revenue Procedure 2011-14. Filing 1040ez online free If you do not qualify to use the automatic procedures to get approval, you must use the advance consent request procedures generally covered in Revenue Procedure 97-27, 1997-1 C. Filing 1040ez online free B. Filing 1040ez online free 680. Filing 1040ez online free Also see the Instructions for Form 3115 for more information on getting approval, including lists of scope limitations and automatic accounting method changes. Filing 1040ez online free Additional guidance. Filing 1040ez online free    For additional guidance and special procedures for changing your accounting method, automatic change procedures, amending your return, and filing Form 3115, see Revenue Procedure 2011-14 on page 330 of the Internal Revenue Bulletin 2011-4, available at www. Filing 1040ez online free irs. Filing 1040ez online free gov/pub/irs-irbs/irb11-04. Filing 1040ez online free pdf. Filing 1040ez online free (Note. Filing 1040ez online free Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. Filing 1040ez online free For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. Filing 1040ez online free irs. Filing 1040ez online free gov/pub/irs-irbs/irb12-14. Filing 1040ez online free pdf. Filing 1040ez online free )   For a safe harbor method of accounting to treat rotable spare parts as depreciable assets, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www. Filing 1040ez online free irs. Filing 1040ez online free gov/pub/irs-irbs/irb07-29. Filing 1040ez online free pdf. Filing 1040ez online free Table 1-1. Filing 1040ez online free Purpose of Form 4562 This table describes the purpose of the various parts of Form 4562. Filing 1040ez online free For more information, see Form 4562 and its instructions. Filing 1040ez online free Part Purpose I • Electing the section 179 deduction • Figuring the maximum section 179 deduction for the current year • Figuring any section 179 deduction carryover to the next year II • Reporting the special depreciation allowance for property (other than listed property) placed in service during the tax year • Reporting depreciation deductions on property being depreciated under any method other than Modified Accelerated Cost Recovery System (MACRS) III • Reporting MACRS depreciation deductions for property placed in service before this year • Reporting MACRS depreciation deductions for property (other than listed property) placed in service during the current year IV • Summarizing other parts V • Reporting the special depreciation allowance for automobiles and other listed property • Reporting MACRS depreciation on automobiles and other listed property • Reporting the section 179 cost elected for automobiles and other listed property • Reporting information on the use of automobiles and other transportation vehicles VI • Reporting amortization deductions Section 481(a) adjustment. Filing 1040ez online free   If you file Form 3115 and change from an impermissible method to a permissible method of accounting for depreciation, you can make a section 481(a) adjustment for any unclaimed or excess amount of allowable depreciation. Filing 1040ez online free The adjustment is the difference between the total depreciation actually deducted for the property and the total amount allowable prior to the year of change. Filing 1040ez online free If no depreciation was deducted, the adjustment is the total depreciation allowable prior to the year of change. Filing 1040ez online free A negative section 481(a) adjustment results in a decrease in taxable income. Filing 1040ez online free It is taken into account in the year of change and is reported on your business tax returns as “other expenses. Filing 1040ez online free ” A positive section 481(a) adjustment results in an increase in taxable income. Filing 1040ez online free It is generally taken into account over 4 tax years and is reported on your business tax returns as “other income. Filing 1040ez online free ” However, you can elect to use a one-year adjustment period and report the adjustment in the year of change if the total adjustment is less than $25,000. Filing 1040ez online free Make the election by completing the appropriate line on Form 3115. Filing 1040ez online free   If you file a Form 3115 and change from one permissible method to another permissible method, the section 481(a) adjustment is zero. Filing 1040ez online free Prev  Up  Next   Home   More Online Publications
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Page Last Reviewed or Updated: 10-Feb-2014

The Filing 1040ez Online Free

Filing 1040ez online free 3. Filing 1040ez online free   Lifetime Learning Credit Table of Contents Introduction Can You Claim the CreditWho Can Claim the Credit Who Cannot Claim the Credit What Expenses QualifyQualified Education Expenses No Double Benefit Allowed Expenses That Do Not Qualify Who Is an Eligible Student Who Can Claim a Dependent's Expenses Figuring the CreditEffect of the Amount of Your Income on the Amount of Your Credit Claiming the Credit Introduction For 2013, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. Filing 1040ez online free They are the American opportunity credit and the lifetime learning credit. Filing 1040ez online free This chapter discusses the lifetime learning credit. Filing 1040ez online free The American opportunity credit is discussed in chapter 2, The American Opportunity Credit . Filing 1040ez online free This chapter explains: Who can claim the lifetime learning credit, What expenses qualify for the credit, Who is an eligible student, Who can claim a dependent's expenses, How to figure the credit, How to claim the credit, and When the credit must be repaid. Filing 1040ez online free What is the tax benefit of the lifetime learning credit. Filing 1040ez online free   For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all eligible students. Filing 1040ez online free There is no limit on the number of years the lifetime learning credit can be claimed for each student. Filing 1040ez online free   A tax credit reduces the amount of income tax you may have to pay. Filing 1040ez online free Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. Filing 1040ez online free The lifetime learning credit is a nonrefundable credit. Filing 1040ez online free This means that it can reduce your tax to zero, but if the credit is more than your tax the excess will not be refunded to you. Filing 1040ez online free   Your allowable lifetime learning credit may be limited by the amount of your income and the amount of your tax. Filing 1040ez online free Can you claim more than one education credit this year. Filing 1040ez online free   For each student, you can elect for any year only one of the credits. Filing 1040ez online free For example, if you elect to take the lifetime learning credit for a child on your 2013 tax return, you cannot, for that same child, also claim the American opportunity credit for 2013. Filing 1040ez online free   If you are eligible to claim the lifetime learning credit and you are also eligible to claim the American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both. Filing 1040ez online free   If you pay qualified education expenses for more than one student in the same year, you can choose to take certain credits on a per-student, per-year basis. Filing 1040ez online free This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year. Filing 1040ez online free Differences between the American opportunity and lifetime learning credits. Filing 1040ez online free   There are several differences between these two credits. Filing 1040ez online free For example, you can claim the American opportunity credit for the same student for no more than 4 tax years, but any year in which the Hope Scholarship Credit was claimed counts toward the 4 years. Filing 1040ez online free However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses. Filing 1040ez online free The differences between these credits are shown in Appendix B, Highlights of Education Tax Benefits for Tax Year 2013 near the end of this publication. Filing 1040ez online free Overview of the lifetime learning credit. Filing 1040ez online free   See Table 3-1, Overview of the Lifetime Learning Credit for the basics of the lifetime learning credit. Filing 1040ez online free The details are discussed in this chapter. Filing 1040ez online free Can You Claim the Credit The following rules will help you determine if you are eligible to claim the lifetime learning credit on your tax return. Filing 1040ez online free Who Can Claim the Credit Generally, you can claim the lifetime learning credit if all three of the following requirements are met. Filing 1040ez online free You pay qualified education expenses of higher education. Filing 1040ez online free You pay the education expenses for an eligible student. Filing 1040ez online free The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Filing 1040ez online free Table 3-1. Filing 1040ez online free Overview of the Lifetime Learning Credit Maximum credit Up to $2,000 credit per return Limit on modified adjusted gross income (MAGI) $127,000 if married filling jointly;  $63,000 if single, head of household, or qualifying widow(er) Refundable or nonrefundable Nonrefundable—credit limited to the amount of tax you must pay on your taxable income Number of years of postsecondary education Available for all years of postsecondary education and for courses to acquire or improve job skills Number of tax years credit available Available for an unlimited number of years Type of program required Student does not need to be pursuing a program leading to a degree or other recognized education credential Number of courses Available for one or more courses Felony drug conviction Felony drug convictions do not make the student ineligible Qualified expenses Tuition and fees required for enrollment or attendance (including amounts required to be paid to the institution for course-related books, supplies, and equipment) Payments for academic periods Payments made in 2013 for academic periods beginning in 2013 or beginning in the first 3 months of 2014 Note. Filing 1040ez online free Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you. Filing 1040ez online free “Qualified education expenses” are defined later under Qualified Education Expenses . Filing 1040ez online free “Eligible students” are defined later under Who Is an Eligible Student . Filing 1040ez online free A dependent for whom you claim an exemption is defined later under Who Can Claim a Dependent's Expenses . Filing 1040ez online free You may find Figure 3-1, Can You Claim the Lifetime Learning Credit for 2013 , later, helpful in determining if you can claim a lifetime learning credit on your tax return. Filing 1040ez online free Who Cannot Claim the Credit You cannot claim the lifetime learning credit for 2013 if any of the following apply. Filing 1040ez online free Your filing status is married filing separately. Filing 1040ez online free You are listed as a dependent on another person's tax return (such as your parents'). Filing 1040ez online free See Who Can Claim a Dependent's Expenses , later. Filing 1040ez online free Your modified adjusted gross income (MAGI) is $63,000 or more ($127,000 or more in the case of a joint return). Filing 1040ez online free MAGI is explained later under Effect of the Amount of Your Income on the Amount of Your Credit . Filing 1040ez online free You (or your spouse) were a nonresident alien for any part of 2013 and the nonresident alien did not elect to be treated as a resident alien for tax purposes. Filing 1040ez online free More information on nonresident aliens can be found in Publication 519. Filing 1040ez online free You claim the American Opportunity Credit (see chapter 2) or a Tuition and Fees Deduction (see chapter 6) for the same student in 2013. Filing 1040ez online free What Expenses Qualify The lifetime learning credit is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Filing 1040ez online free Generally, the credit is allowed for qualified education expenses paid in 2013 for an academic period beginning in 2013 or in the first 3 months of 2014. Filing 1040ez online free For example, if you paid $1,500 in December 2013 for qualified tuition for the spring 2014 semester beginning in January 2014, you may be able to use that $1,500 in figuring your 2013 credit. Filing 1040ez online free Academic period. Filing 1040ez online free   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. Filing 1040ez online free In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. Filing 1040ez online free Paid with borrowed funds. Filing 1040ez online free   You can claim a lifetime learning credit for qualified education expenses paid with the proceeds of a loan. Filing 1040ez online free You use the expenses to figure the lifetime learning credit for the year in which the expenses are paid, not the year in which the loan is repaid. Filing 1040ez online free Treat loan disbursements sent directly to the educational institution as paid on the date the institution credits the student's account. Filing 1040ez online free Student withdraws from class(es). Filing 1040ez online free   You can claim a lifetime learning credit for qualified education expenses not refunded when a student withdraws. Filing 1040ez online free Qualified Education Expenses For purposes of the lifetime learning credit, qualified education expenses are tuition and certain related expenses required for enrollment in a course at an eligible educational institution. Filing 1040ez online free The course must be either part of a postsecondary degree program or taken by the student to acquire or improve job skills. Filing 1040ez online free Eligible educational institution. Filing 1040ez online free   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Filing 1040ez online free S. Filing 1040ez online free Department of Education. Filing 1040ez online free It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Filing 1040ez online free The educational institution should be able to tell you if it is an eligible educational institution. Filing 1040ez online free   Certain educational institutions located outside the United States also participate in the U. Filing 1040ez online free S. Filing 1040ez online free Department of Education's Federal Student Aid (FSA) programs. Filing 1040ez online free Related expenses. Filing 1040ez online free   Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution for enrollment or attendance. Filing 1040ez online free Prepaid expenses. Filing 1040ez online free   Qualified education expenses paid in 2013 for an academic period that begins in the first three months of 2014 can be used in figuring an education credit for 2013 only. Filing 1040ez online free See Academic period , earlier. Filing 1040ez online free For example, you pay $2,000 in December 2013 for qualified tuition for the 2014 winter quarter that begins in January 2014, you can use that $2,000 in figuring an education credit for 2013 only (if you meet all the other requirements). Filing 1040ez online free You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 education credit(s). Filing 1040ez online free In the following examples, assume that each student is an eligible student at an eligible educational institution. Filing 1040ez online free Example 1. Filing 1040ez online free   Jackson is a sophomore in University V's degree program in dentistry. Filing 1040ez online free This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. Filing 1040ez online free Because the equipment rental fee must be paid to University V for enrollment and attendance, Jackson's equipment rental fee is a qualified expense. Filing 1040ez online free Example 2. Filing 1040ez online free   Donna and Charles, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. Filing 1040ez online free The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. Filing 1040ez online free Charles bought his books from a friend, so what he paid for them is not a qualified education expense. Filing 1040ez online free Donna bought hers at College W's bookstore. Filing 1040ez online free Although Donna paid College W directly for her first-year books and materials, her payment is not a qualified expense because the books and materials are not required to be purchased from College W for enrollment or attendance at the institution. Filing 1040ez online free Example 3. Filing 1040ez online free   When Marci enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. Filing 1040ez online free This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and student government. Filing 1040ez online free No portion of the fee covers personal expenses. Filing 1040ez online free Although labeled as a student activity fee, the fee is required for Marci's enrollment and attendance at College X. Filing 1040ez online free Therefore, it is a qualified expense. Filing 1040ez online free No Double Benefit Allowed You cannot do any of the following: Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim a lifetime learning credit based on those same expenses. Filing 1040ez online free Claim a lifetime learning credit in the same year that you are claiming a tuition and fees deduction for the same student. Filing 1040ez online free Claim a lifetime learning credit and an American opportunity credit based on the same qualified education expenses. Filing 1040ez online free Claim a lifetime learning credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP). Filing 1040ez online free See Coordination With American Opportunity and Lifetime Learning Credits in chapter 7, Coverdell Education Savings Account, and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8, Qualified Tuition Program. Filing 1040ez online free Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. Filing 1040ez online free See Adjustments to Qualified Education Expenses, next. Filing 1040ez online free This image is too large to be displayed in the current screen. Filing 1040ez online free Please click the link to view the image. Filing 1040ez online free Figure 3-1 Adjustments to Qualified Education Expenses For each student, reduce the qualified education expenses paid by or on behalf of that student under the following rules. Filing 1040ez online free The result is the amount of adjusted qualified education expenses for each student. Filing 1040ez online free Tax-free educational assistance. Filing 1040ez online free   For tax-free educational assistance received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. Filing 1040ez online free See Academic period , earlier. Filing 1040ez online free   Some tax-free educational assistance received after 2013 may be treated as a refund of qualified education expenses paid in 2013. Filing 1040ez online free This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2013 for qualified education expenses paid on behalf of a student in 2013 (or attributable to enrollment at an eligible educational institution during 2013). Filing 1040ez online free   If this tax-free educational assistance is received after 2013 but before you file your 2013 income tax return, see Refunds received after 2013 but before your income tax return is filed , later. Filing 1040ez online free If this tax-free educational assistance is received after 2013 and after you file your 2013 income tax return, see Refunds received after 2013 and after your income tax return is filed , later. Filing 1040ez online free   Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Filing 1040ez online free Generally, any scholarship or fellowship is treated as tax free. Filing 1040ez online free However, a scholarship or fellowship is not treated as tax free to the extent the student includes it in gross income (if the student is required to file a tax return for the year the scholarship or fellowship is received) and either of the following is true. Filing 1040ez online free The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Filing 1040ez online free The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Filing 1040ez online free You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received. Filing 1040ez online free For examples, see Coordination with Pell grants and other scholarships, later. Filing 1040ez online free Refunds. Filing 1040ez online free   A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. Filing 1040ez online free Some tax-free educational assistance received after 2013 may be treated as a refund. Filing 1040ez online free See Tax-free educational assistance , earlier. Filing 1040ez online free Refunds received in 2013. Filing 1040ez online free   For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses for 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013. Filing 1040ez online free Refunds received after 2013 but before your income tax return is filed. Filing 1040ez online free   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid before you file an income tax return for 2013, the amount of qualified education expenses for 2013 is reduced by the amount of the refund. Filing 1040ez online free Refunds received after 2013 and after your income tax return is filed. Filing 1040ez online free   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid after you file an income tax return for 2013, you may need to repay some or all of the credit. Filing 1040ez online free See Credit recapture, next. Filing 1040ez online free Credit recapture. Filing 1040ez online free    If any tax-free educational assistance for the qualified education expenses paid in 2013 or any refund of your qualified education expenses paid in 2013 is received after you file your 2013 income tax return, you must recapture (repay) any excess credit. Filing 1040ez online free You do this by refiguring the amount of your adjusted qualified education expenses for 2013 by reducing the expenses by the amount of the refund or tax-free educational assistance. Filing 1040ez online free You then refigure your education credit(s) for 2013 and figure the amount by which your 2013 tax liability would have increased if you had claimed the refigured credit(s). Filing 1040ez online free Include that amount as an additional tax for the year the refund or tax-free assistance was received. Filing 1040ez online free Example. Filing 1040ez online free   You pay $9,300 in tuition and fees in December 2013, and your child began college in January 2014. Filing 1040ez online free You filed your 2013 tax return on February 14, 2014, and claimed a lifetime learning credit of $1,860. Filing 1040ez online free You claimed no other tax credits. Filing 1040ez online free After you filed your return, your child withdrew from two courses and you received a refund of $2,900. Filing 1040ez online free You must refigure your 2013 lifetime learning credit using $6,400 of qualified education expenses instead of $9,300. Filing 1040ez online free The refigured credit is $1,280 and your tax liability increased by $580. Filing 1040ez online free See instructions for your 2014 income tax return to determine where to include this tax. Filing 1040ez online free If you pay qualified education expenses in 2014 for an academic period that begins in the first 3 months of 2014 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2014 instead of reducing your expenses for 2013. Filing 1040ez online free Amounts that do not reduce qualified education expenses. Filing 1040ez online free   Do not reduce qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. Filing 1040ez online free   Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations. Filing 1040ez online free The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses, as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Filing 1040ez online free The use of the money is not restricted. Filing 1040ez online free For examples, see Adjustments to Qualified Education Expenses in chapter 2, American Opportunity Credit. Filing 1040ez online free Coordination with Pell grants and other scholarships. Filing 1040ez online free   In some cases, you may be able to reduce your tax liability by including scholarships in income. Filing 1040ez online free If you are claiming an education credit for a claimed dependent who received a scholarship, you may be able to reduce your tax liability if the student includes the scholarship in income. Filing 1040ez online free The scholarship must be one that may (by its terms) be applied to expenses (such as room and board) other than qualified education expenses. Filing 1040ez online free Example 1—No scholarship. Filing 1040ez online free Judy Green, who is unmarried, is taking courses at a public community college to be recertified to teach in public schools. Filing 1040ez online free Her AGI and her MAGI, for purposes of the credit, are $27,000. Filing 1040ez online free Judy takes the standard deduction of $5,950 and personal exemption of $3,800, reducing her AGI to taxable income of $17,250 and her tax before credits is $2,156. Filing 1040ez online free She claims no credits other than the lifetime learning credit. Filing 1040ez online free In July 2013 she paid $700 for the summer 2013 semester; in August 2013 she paid $1,900 for the fall 2013 semester; and in December 2013 she paid another $1,900 for the spring semester beginning in January 2014. Filing 1040ez online free Judy and the college meet all requirements for the lifetime learning tax credit. Filing 1040ez online free She can use all of the $4,500 tuition she paid in 2013 when figuring her 2013 lifetime learning credit. Filing 1040ez online free She claims a $900 lifetime learning credit and her tax after credits is $1,256. Filing 1040ez online free Example 2—Scholarship excluded from income. Filing 1040ez online free The facts are the same as in Example 1—No scholarship, except that Judy was awarded a $1,500 scholarship. Filing 1040ez online free Under the terms of her scholarship, it may be used to pay any educational expenses, including room and board. Filing 1040ez online free If Judy excludes the scholarship from income, she will be deemed (for purposes of computing her education credit) as having used the scholarship to pay for tuition, required fees, and course materials. Filing 1040ez online free Only $3,000 of the $4,500 tuition she paid in 2013 could be used when figuring her 2013 lifetime learning credit. Filing 1040ez online free Her lifetime learning credit would be reduced to $600 and her tax after credits would be $1,556. Filing 1040ez online free Example 3—Scholarship included in income. Filing 1040ez online free The facts are the same as in Example 2—Scholarship excluded from income. Filing 1040ez online free If, unlike Example 2, Judy includes the $1,500 scholarship in income, she will be deemed to have used the entire scholarship to pay for room and board. Filing 1040ez online free Judy's AGI will increase to $28,500, her taxable income would be $18,750, and her tax before credits would be $2,381. Filing 1040ez online free She would be able to use the $4,500 of adjusted qualified education expenses to figure her credit. Filing 1040ez online free Judy could claim a $900 lifetime learning credit and her tax after credits would be $1,481. Filing 1040ez online free Expenses That Do Not Qualify Qualified education expenses do not include amounts paid for: Insurance, Medical expenses (including student health fees), Room and board, Transportation, or Similar personal, living, or family expenses. Filing 1040ez online free This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. Filing 1040ez online free Sports, games, hobbies, and noncredit courses. Filing 1040ez online free   Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. Filing 1040ez online free However, if the course of instruction or other education is part of the student's degree program or is taken by the student to acquire or improve job skills, these expenses can qualify. Filing 1040ez online free Comprehensive or bundled fees. Filing 1040ez online free   Some eligible educational institutions combine all of their fees for an academic period into one amount. Filing 1040ez online free If you do not receive or do not have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed above, contact the institution. Filing 1040ez online free The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T. Filing 1040ez online free See Figuring the Credit , later, for more information about Form 1098-T. Filing 1040ez online free Who Is an Eligible Student For purposes of the lifetime learning credit, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution (as defined under Qualified Education Expenses , earlier). Filing 1040ez online free Who Can Claim a Dependent's Expenses If there are qualified education expenses for your dependent during a tax year, either you or your dependent, but not both of you, can claim a lifetime learning credit for your dependent's expenses for that year. Filing 1040ez online free For you to claim a lifetime learning credit for your dependent's expenses, you must also claim an exemption for your dependent. Filing 1040ez online free You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c. Filing 1040ez online free IF you. Filing 1040ez online free . Filing 1040ez online free . Filing 1040ez online free THEN only. Filing 1040ez online free . Filing 1040ez online free . Filing 1040ez online free claim an exemption on your tax return for a dependent who is an eligible student you can claim the lifetime learning credit based on that dependent's expenses. Filing 1040ez online free The dependent cannot claim the credit. Filing 1040ez online free do not claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption) the dependent can claim the lifetime learning credit. Filing 1040ez online free You cannot claim the credit based on this dependent's expenses. Filing 1040ez online free Expenses paid by dependent. Filing 1040ez online free   If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. Filing 1040ez online free Include these expenses when figuring the amount of your lifetime learning credit. Filing 1040ez online free    Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are treated as paid by your dependent. Filing 1040ez online free Expenses paid by you. Filing 1040ez online free   If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the lifetime learning credit. Filing 1040ez online free If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring the lifetime learning credit. Filing 1040ez online free Expenses paid by others. Filing 1040ez online free   Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. Filing 1040ez online free In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. Filing 1040ez online free If you claim an exemption on your tax return for the student, you are considered to have paid the expenses. Filing 1040ez online free Example. Filing 1040ez online free In 2013, Ms. Filing 1040ez online free Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. Filing 1040ez online free For purposes of claiming a lifetime learning credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself. Filing 1040ez online free Unless an exemption for Todd is claimed on someone else's 2013 tax return, only Todd can use the payment to claim a lifetime learning credit. Filing 1040ez online free If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2013 tax return, whoever claims the exemption may be able to use the expenses to claim a lifetime learning credit. Filing 1040ez online free If anyone else claims an exemption for Todd, Todd cannot claim a lifetime learning credit. Filing 1040ez online free Tuition reduction. Filing 1040ez online free   When an eligible educational institution provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. Filing 1040ez online free If it is taxable, the employee is treated as receiving a payment of that amount and, in turn, paying it to the educational institution on behalf of the student. Filing 1040ez online free For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Filing 1040ez online free Figuring the Credit The amount of the lifetime learning credit is 20% of the first $10,000 of qualified education expenses you paid for all eligible students. Filing 1040ez online free The maximum amount of lifetime learning credit you can claim for 2013 is $2,000 (20% × $10,000). Filing 1040ez online free However, that amount may be reduced based on your MAGI. Filing 1040ez online free See Effect of the Amount of Your Income on the Amount of Your Credit , later. Filing 1040ez online free Example. Filing 1040ez online free Bruce and Toni Harper are married and file a joint tax return. Filing 1040ez online free For 2013, their MAGI is $75,000. Filing 1040ez online free Toni is attending a local college (an eligible educational institution) to earn credits toward a degree in nursing. Filing 1040ez online free She already has a bachelor's degree in history and wants to become a nurse. Filing 1040ez online free In August 2013, Toni paid $5,000 of qualified education expenses for her fall 2013 semester. Filing 1040ez online free Bruce and Toni can claim a $1,000 (20% × $5,000) lifetime learning credit on their 2013 joint tax return. Filing 1040ez online free Form 1098-T. Filing 1040ez online free   To help you figure your lifetime learning credit, the student should receive Form 1098-T. Filing 1040ez online free Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2014. Filing 1040ez online free An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. Filing 1040ez online free However, the amounts in boxes 1 and 2 of Form 1098-T might be different from what you paid. Filing 1040ez online free When figuring the credit, use only the amounts you paid or are deemed to have paid in 2013 for qualified education expenses. Filing 1040ez online free   In addition, Form 1098-T should give other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements or refunds, and whether the student was enrolled at least half-time or was a graduate student. Filing 1040ez online free    The eligible educational institution may ask for a completed Form W-9S, or similar statement to obtain the student's name, address, and taxpayer identification number. Filing 1040ez online free Effect of the Amount of Your Income on the Amount of Your Credit The amount of your lifetime learning credit is phased out (gradually reduced) if your MAGI is between $53,000 and $63,000 ($107,000 and $127,000 if you file a joint return). Filing 1040ez online free You cannot claim a lifetime learning credit if your MAGI is $63,000 or more ($127,000 or more if you file a joint return). Filing 1040ez online free Modified adjusted gross income (MAGI). Filing 1040ez online free   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Filing 1040ez online free MAGI when using Form 1040A. Filing 1040ez online free   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Filing 1040ez online free MAGI when using Form 1040. Filing 1040ez online free   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Filing 1040ez online free You can use Worksheet 3-1 to figure your MAGI. Filing 1040ez online free Worksheet 3-1. Filing 1040ez online free MAGI for the Lifetime Learning Credit 1. Filing 1040ez online free Enter your adjusted gross income  (Form 1040, line 38)   1. Filing 1040ez online free   2. Filing 1040ez online free Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Filing 1040ez online free       3. Filing 1040ez online free Enter your foreign housing deduction (Form 2555, line 50)   3. Filing 1040ez online free       4. Filing 1040ez online free Enter the amount of income from Puerto Rico you are excluding   4. Filing 1040ez online free       5. Filing 1040ez online free Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Filing 1040ez online free       6. Filing 1040ez online free Add the amounts on lines 2, 3, 4, and 5   6. Filing 1040ez online free   7. Filing 1040ez online free Add the amounts on lines 1 and 6. Filing 1040ez online free  This is your modified adjusted  gross income. Filing 1040ez online free Enter this amount  on Form 8863, line 14   7. Filing 1040ez online free   Phaseout. Filing 1040ez online free   If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 10-18 of Form 8863. Filing 1040ez online free The same method is shown in the following example. Filing 1040ez online free Example. Filing 1040ez online free You are filing a joint return with a MAGI of $112,000. Filing 1040ez online free In 2013, you paid $6,600 of qualified education expenses. Filing 1040ez online free You figure the tentative lifetime learning credit (20% of the first $10,000 of qualified education expenses you paid for all eligible students). Filing 1040ez online free The result is a $1,320 (20% x $6,600) tentative credit. Filing 1040ez online free Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($1,320) by a fraction. Filing 1040ez online free The numerator of the fraction is $127,000 (the upper limit for those filing a joint return) minus your MAGI. Filing 1040ez online free The denominator is $20,000, the range of incomes for the phaseout ($107,000 to $127,000). Filing 1040ez online free The result is the amount of your phased out (reduced) lifetime learning credit ($990). Filing 1040ez online free   $1,320 × $127,000 − $112,000  $20,000 = $990   Claiming the Credit You claim the lifetime learning credit by completing Form 8863 and submitting it with your Form 1040 or 1040A. Filing 1040ez online free Enter the credit on Form 1040, line 49, or Form 1040A, line 31. Filing 1040ez online free Note. Filing 1040ez online free In Appendix A, Illustrated Example of Education Credits at the end of this publication, there is an example illustrating the use of Form 8863 when both the American opportunity credit and the lifetime learning credit are claimed on the same tax return. Filing 1040ez online free Prev  Up  Next   Home   More Online Publications