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Filing taxes online free 9. Filing taxes online free   Rental Income and Expenses Table of Contents Introduction Useful Items - You may want to see: Rental Income Rental ExpensesVacant while listed for sale. Filing taxes online free Repairs and Improvements Other Expenses Property Changed to Rental Use Renting Part of Property Not Rented for Profit Personal Use of Dwelling Unit (Including Vacation Home)Example. Filing taxes online free Dividing Expenses Dwelling Unit Used as a Home Reporting Income and Deductions DepreciationChanging your accounting method to deduct unclaimed depreciation. Filing taxes online free Limits on Rental LossesAt-Risk Rules Passive Activity Limits How To Report Rental Income and ExpensesSchedule E (Form 1040) Introduction This chapter discusses rental income and expenses. Filing taxes online free It also covers the following topics. Filing taxes online free Personal use of dwelling unit (including vacation home). Filing taxes online free Depreciation. Filing taxes online free Limits on rental losses. Filing taxes online free How to report your rental income and expenses. Filing taxes online free If you sell or otherwise dispose of your rental property, see Publication 544, Sales and Other Dispositions of Assets. Filing taxes online free If you have a loss from damage to, or theft of, rental property, see Publication 547, Casualties, Disasters, and Thefts. Filing taxes online free If you rent a condominium or a cooperative apartment, some special rules apply to you even though you receive the same tax treatment as other owners of rental property. Filing taxes online free See Publication 527, Residential Rental Property, for more information. Filing taxes online free Useful Items - You may want to see: Publication 527 Residential Rental Property 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 925 Passive Activity and At-Risk Rules 946 How To Depreciate Property Form (and Instructions) 4562 Depreciation and Amortization 6251 Alternative Minimum Tax—Individuals 8582 Passive Activity Loss Limitations Schedule E (Form 1040) Supplemental Income and Loss Rental Income In most cases, you must include in your gross income all amounts you receive as rent. Filing taxes online free Rental income is any payment you receive for the use or occupation of property. Filing taxes online free In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income. Filing taxes online free When to report. Filing taxes online free   If you are a cash-basis taxpayer, you report rental income on your return for the year you actually or constructively receive it. Filing taxes online free You are a cash-basis taxpayer if you report income in the year you receive it, regardless of when it was earned. Filing taxes online free You constructively receive income when it is made available to you, for example, by being credited to your bank account. Filing taxes online free   For more information about when you constructively receive income, see Accounting Methods in chapter 1. Filing taxes online free Advance rent. Filing taxes online free   Advance rent is any amount you receive before the period that it covers. Filing taxes online free Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. Filing taxes online free Example. Filing taxes online free You sign a 10-year lease to rent your property. Filing taxes online free In the first year, you receive $5,000 for the first year's rent and $5,000 as rent for the last year of the lease. Filing taxes online free You must include $10,000 in your income in the first year. Filing taxes online free Canceling a lease. Filing taxes online free   If your tenant pays you to cancel a lease, the amount you receive is rent. Filing taxes online free Include the payment in your income in the year you receive it regardless of your method of accounting. Filing taxes online free Expenses paid by tenant. Filing taxes online free   If your tenant pays any of your expenses, the payments are rental income. Filing taxes online free Because you must include this amount in income, you can deduct the expenses if they are deductible rental expenses. Filing taxes online free See Rental Expenses , later, for more information. Filing taxes online free Property or services. Filing taxes online free   If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income. Filing taxes online free   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. Filing taxes online free Security deposits. Filing taxes online free   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. Filing taxes online free But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. Filing taxes online free   If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Filing taxes online free Include it in your income when you receive it. Filing taxes online free Part interest. Filing taxes online free   If you own a part interest in rental property, you must report your part of the rental income from the property. Filing taxes online free Rental of property also used as your home. Filing taxes online free   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. Filing taxes online free However, you can deduct on Schedule A (Form 1040) the interest, taxes, and casualty and theft losses that are allowed for nonrental property. Filing taxes online free See Personal Use of Dwelling Unit (Including Vacation Home) , later. Filing taxes online free Rental Expenses This part discusses expenses of renting property that you ordinarily can deduct from your rental income. Filing taxes online free It includes information on the expenses you can deduct if you rent part of your property, or if you change your property to rental use. Filing taxes online free Depreciation , which you can also deduct from your rental income, is discussed later. Filing taxes online free Personal use of rental property. Filing taxes online free   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Filing taxes online free Also, your rental expense deductions may be limited. Filing taxes online free See Personal Use of Dwelling Unit (Including Vacation Home) , later. Filing taxes online free Part interest. Filing taxes online free   If you own a part interest in rental property, you can deduct expenses that you paid according to your percentage of ownership. Filing taxes online free When to deduct. Filing taxes online free   If you are a cash-basis taxpayer, you generally deduct your rental expenses in the year you pay them. Filing taxes online free Depreciation. Filing taxes online free   You can begin to depreciate rental property when it is ready and available for rent. Filing taxes online free See Placed-in-Service under When Does Depreciation Begin and End in chapter 2 of Publication 527. Filing taxes online free Pre-rental expenses. Filing taxes online free   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Filing taxes online free Uncollected rent. Filing taxes online free   If you are a cash-basis taxpayer, do not deduct uncollected rent. Filing taxes online free Because you have not included it in your income, it is not deductible. Filing taxes online free Vacant rental property. Filing taxes online free   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. Filing taxes online free However, you cannot deduct any loss of rental income for the period the property is vacant. Filing taxes online free Vacant while listed for sale. Filing taxes online free   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. Filing taxes online free If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Filing taxes online free Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. Filing taxes online free Improvements. Filing taxes online free   You must capitalize any expense you pay to improve your rental property. Filing taxes online free An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Filing taxes online free Betterments. Filing taxes online free   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. Filing taxes online free Restoration. Filing taxes online free   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. Filing taxes online free Adaptation. Filing taxes online free   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. Filing taxes online free Separate the costs of repairs and improvements, and keep accurate records. Filing taxes online free You will need to know the cost of improvements when you sell or depreciate your property. Filing taxes online free The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Filing taxes online free Other Expenses Other expenses you can deduct from your rental income include advertising, cleaning and maintenance, utilities, fire and liability insurance, taxes, interest, commissions for the collection of rent, ordinary and necessary travel and transportation, and other expenses, discussed next. Filing taxes online free Insurance premiums paid in advance. Filing taxes online free   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. Filing taxes online free You cannot deduct the total premium in the year you pay it. Filing taxes online free Legal and other professional fees. Filing taxes online free   You can deduct, as a rental expense, legal and other professional expenses, such as tax return preparation fees you paid to prepare Schedule E (Form 1040), Part I. Filing taxes online free For example, on your 2013 Schedule E, you can deduct fees paid in 2013 to prepare your 2012 Schedule E, Part I. Filing taxes online free You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. Filing taxes online free Local benefit taxes. Filing taxes online free   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. Filing taxes online free These charges are nondepreciable capital expenditures, and must be added to the basis of your property. Filing taxes online free However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Filing taxes online free Local transportation expenses. Filing taxes online free    You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. Filing taxes online free However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. Filing taxes online free See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Filing taxes online free   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. Filing taxes online free For 2013, the standard mileage rate for business use is 56. Filing taxes online free 5 cents per mile. Filing taxes online free For more information, see chapter 26. Filing taxes online free    To deduct car expenses under either method, you must keep records that follow the rules in chapter 26. Filing taxes online free In addition, you must complete Form 4562, Part V, and attach it to your tax return. Filing taxes online free Rental of equipment. Filing taxes online free   You can deduct the rent you pay for equipment that you use for rental purposes. Filing taxes online free However, in some cases, lease contracts are actually purchase contracts. Filing taxes online free If so, you cannot deduct these payments. Filing taxes online free You can recover the cost of purchased equipment through depreciation. Filing taxes online free Rental of property. Filing taxes online free   You can deduct the rent you pay for property that you use for rental purposes. Filing taxes online free If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. Filing taxes online free Travel expenses. Filing taxes online free   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. Filing taxes online free You must properly allocate your expenses between rental and nonrental activities. Filing taxes online free You cannot deduct the cost of traveling away from home if the primary purpose of the trip was to improve your property. Filing taxes online free You recover the cost of improvements by taking depreciation. Filing taxes online free For information on travel expenses, see chapter 26. Filing taxes online free    To deduct travel expenses, you must keep records that follow the rules in chapter 26. Filing taxes online free   See Rental Expenses in Publication 527 for more information. Filing taxes online free Property Changed to Rental Use If you change your home or other property (or a part of it) to rental use at any time other than the beginning of your tax year, you must divide yearly expenses, such as taxes and insurance, between rental use and personal use. Filing taxes online free You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes. Filing taxes online free You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. Filing taxes online free However, you can include the home mortgage interest, qualified mortgage insurance premiums, and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A (Form 1040). Filing taxes online free Example. Filing taxes online free Your tax year is the calendar year. Filing taxes online free You moved from your home in May and started renting it out on June 1. Filing taxes online free You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. Filing taxes online free Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. Filing taxes online free Renting Part of Property If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property. Filing taxes online free You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest, qualified mortgage insurance premiums, and real estate taxes, as rental expenses on Schedule E (Form 1040). Filing taxes online free You can also deduct as rental expenses a portion of other expenses that normally are nondeductible personal expenses, such as expenses for electricity or painting the outside of your house. Filing taxes online free There is no change in the types of expenses deductible for the personal-use part of your property. Filing taxes online free Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). Filing taxes online free You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. Filing taxes online free You do not have to divide the expenses that belong only to the rental part of your property. Filing taxes online free For example, if you paint a room that you rent, or if you pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense. Filing taxes online free If you install a second phone line strictly for your tenants' use, all of the cost of the second line is deductible as a rental expense. Filing taxes online free You can deduct depreciation, discussed later, on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes. Filing taxes online free How to divide expenses. Filing taxes online free   If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between the rental use and the personal use. Filing taxes online free You can use any reasonable method for dividing the expense. Filing taxes online free It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. Filing taxes online free The two most common methods for dividing an expense are based on (1) the number of rooms in your home, and (2) the square footage of your home. Filing taxes online free Not Rented for Profit If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. Filing taxes online free You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. Filing taxes online free For more information about the rules for an activity not engaged in for profit, see Not-for-Profit Activities in chapter 1 of Publication 535. Filing taxes online free Where to report. Filing taxes online free   Report your not-for-profit rental income on Form 1040, line 21. Filing taxes online free For example, you can include your mortgage interest and any qualified mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses on the appropriate lines of Schedule A (Form 1040) if you itemize your deductions. Filing taxes online free   If you itemize your deductions, claim your other rental expenses, subject to the rules explained in chapter 1 of Publication 535, as miscellaneous itemized deductions on Form 1040, Schedule A, line 23. Filing taxes online free You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. Filing taxes online free Personal Use of Dwelling Unit (Including Vacation Home) If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. Filing taxes online free In general, your rental expenses will be no more than your total expenses multiplied by a fraction; the denominator of which is the total number of days the dwelling unit is used and the numerator of which is the total number of days actually rented at a fair rental price. Filing taxes online free Only your rental expenses may be deducted on Schedule E (Form 1040). Filing taxes online free Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040). Filing taxes online free You must also determine if the dwelling unit is considered a home. Filing taxes online free The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. Filing taxes online free Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. Filing taxes online free There is a special rule if you used the dwelling unit as a home and you rented it for less than 15 days during the year. Filing taxes online free Dwelling unit. Filing taxes online free   A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. Filing taxes online free It also includes all structures or other property belonging to the dwelling unit. Filing taxes online free A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. Filing taxes online free   A dwelling unit does not include property used solely as a hotel, motel, inn, or similar establishment. Filing taxes online free Property is used solely as a hotel, motel, inn, or similar establishment if it is regularly available for occupancy by paying customers and is not used by an owner as a home during the year. Filing taxes online free Example. Filing taxes online free   You rent a room in your home that is always available for short-term occupancy by paying customers. Filing taxes online free You do not use the room yourself, and you allow only paying customers to use the room. Filing taxes online free The room is used solely as a hotel, motel, inn, or similar establishment and is not a dwelling unit. Filing taxes online free Dividing Expenses If you use a dwelling unit for both rental and personal purposes, divide your expenses between the rental use and the personal use based on the number of days used for each purpose. Filing taxes online free When dividing your expenses, follow these rules. Filing taxes online free Any day that the unit is rented at a fair rental price is a day of rental use even if you used the unit for personal purposes that day. Filing taxes online free This rule does not apply when determining whether you used the unit as a home. Filing taxes online free Any day that the unit is available for rent but not actually rented is not a day of rental use. Filing taxes online free Example. Filing taxes online free Your beach cottage was available for rent from June 1 through August 31 (92 days). Filing taxes online free During that time, except for the first week in August (7 days) when you were unable to find a renter, you rented the cottage at a fair rental price. Filing taxes online free The person who rented the cottage for July allowed you to use it over the weekend (2 days) without any reduction in or refund of rent. Filing taxes online free Your family also used the cottage during the last 2 weeks of May (14 days). Filing taxes online free The cottage was not used at all before May 17 or after August 31. Filing taxes online free You figure the part of the cottage expenses to treat as rental expenses as follows. Filing taxes online free The cottage was used for rental a total of 85 days (92 − 7). Filing taxes online free The days it was available for rent but not rented (7 days) are not days of rental use. Filing taxes online free The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend. Filing taxes online free You used the cottage for personal purposes for 14 days (the last 2 weeks in May). Filing taxes online free The total use of the cottage was 99 days (14 days personal use + 85 days rental use). Filing taxes online free Your rental expenses are 85/99 (86%) of the cottage expenses. Filing taxes online free Note. Filing taxes online free When determining whether you used the cottage as a home, the July weekend (2 days) you used it is considered personal use even though you received a fair rental price for the weekend. Filing taxes online free Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. Filing taxes online free Because you used the cottage for personal purposes more than 14 days and more than 10% of the days of rental use (8 days), you used it as a home. Filing taxes online free If you have a net loss, you may not be able to deduct all of the rental expenses. Filing taxes online free See Dwelling Unit Used as a Home, next. Filing taxes online free Dwelling Unit Used as a Home If you use a dwelling unit for both rental and personal purposes, the tax treatment of the rental expenses you figured earlier under Dividing Expenses and rental income depends on whether you are considered to be using the dwelling unit as a home. Filing taxes online free You use a dwelling unit as a home during the tax year if you use it for personal purposes more than the greater of: 14 days, or 10% of the total days it is rented to others at a fair rental price. Filing taxes online free See What is a day of personal use , later. Filing taxes online free Fair rental price. Filing taxes online free   A fair rental price for your property generally is the amount of rent that a person who is not related to you would be willing to pay. Filing taxes online free The rent you charge is not a fair rental price if it is substantially less than the rents charged for other properties that are similar to your property in your area. Filing taxes online free   If a dwelling unit is used for personal purposes on a day it is rented at a fair rental price, do not count that day as a day of rental use in applying (2) above. Filing taxes online free Instead, count it as a day of personal use in applying both (1) and (2) above. Filing taxes online free What is a day of personal use?   A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons. Filing taxes online free You or any other person who has an interest in the unit, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined later). Filing taxes online free However, see Days used as a main home before or after renting , later. Filing taxes online free A member of your family or a member of the family of any other person who owns an interest in the unit, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. Filing taxes online free Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc. Filing taxes online free ), and lineal descendants (children, grandchildren, etc. Filing taxes online free ). Filing taxes online free Anyone under an arrangement that lets you use some other dwelling unit. Filing taxes online free Anyone at less than a fair rental price. Filing taxes online free Main home. Filing taxes online free   If the other person or member of the family in (1) or (2) above has more than one home, his or her main home is ordinarily the one he or she lived in most of the time. Filing taxes online free Shared equity financing agreement. Filing taxes online free   This is an agreement under which two or more persons acquire undivided interests for more than 50 years in an entire dwelling unit, including the land, and one or more of the co-owners is entitled to occupy the unit as his or her main home upon payment of rent to the other co-owner or owners. Filing taxes online free Donation of use of property. Filing taxes online free   You use a dwelling unit for personal purposes if: You donate the use of the unit to a charitable organization, The organization sells the use of the unit at a fund-raising event, and The “purchaser” uses the unit. Filing taxes online free Examples. Filing taxes online free   The following examples show how to determine days of personal use. Filing taxes online free Example 1. Filing taxes online free You and your neighbor are co-owners of a condominium at the beach. Filing taxes online free Last year, you rented the unit to vacationers whenever possible. Filing taxes online free The unit was not used as a main home by anyone. Filing taxes online free Your neighbor used the unit for 2 weeks last year; you did not use it at all. Filing taxes online free Because your neighbor has an interest in the unit, both of you are considered to have used the unit for personal purposes during those 2 weeks. Filing taxes online free Example 2. Filing taxes online free You and your neighbors are co-owners of a house under a shared equity financing agreement. Filing taxes online free Your neighbors live in the house and pay you a fair rental price. Filing taxes online free Even though your neighbors have an interest in the house, the days your neighbors live there are not counted as days of personal use by you. Filing taxes online free This is because your neighbors rent the house as their main home under a shared equity financing agreement. Filing taxes online free Example 3. Filing taxes online free You own a rental property that you rent to your son. Filing taxes online free Your son does not own any interest in this property. Filing taxes online free He uses it as his main home and pays you a fair rental price. Filing taxes online free Your son's use of the property is not personal use by you because your son is using it as his main home, he owns no interest in the property, and he is paying you a fair rental price. Filing taxes online free Example 4. Filing taxes online free You rent your beach house to Joshua. Filing taxes online free Joshua rents his cabin in the mountains to you. Filing taxes online free You each pay a fair rental price. Filing taxes online free You are using your house for personal purposes on the days that Joshua uses it because your house is used by Joshua under an arrangement that allows you to use his house. Filing taxes online free Days used for repairs and maintenance. Filing taxes online free   Any day that you spend working substantially full time repairing and maintaining (not improving) your property is not counted as a day of personal use. Filing taxes online free Do not count such a day as a day of personal use even if family members use the property for recreational purposes on the same day. Filing taxes online free Days used as a main home before or after renting. Filing taxes online free   For purposes of determining whether a dwelling unit was used as a home, you may not have to count days you used the property as your main home before or after renting it or offering it for rent as days of personal use. Filing taxes online free Do not count them as days of personal use if: You rented or tried to rent the property for 12 or more consecutive months. Filing taxes online free You rented or tried to rent the property for a period of less than 12 consecutive months and the period ended because you sold or exchanged the property. Filing taxes online free However, this special rule does not apply when dividing expenses between rental and personal use. Filing taxes online free Examples. Filing taxes online free   The following examples show how to determine whether you used your rental property as a home. Filing taxes online free Example 1. Filing taxes online free You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. Filing taxes online free You rented the basement apartment at a fair rental price to college students during the regular school year. Filing taxes online free You rented to them on a 9-month lease (273 days). Filing taxes online free You figured 10% of the total days rented to others at a fair rental price is 27 days. Filing taxes online free During June (30 days), your brothers stayed with you and lived in the basement apartment rent free. Filing taxes online free Your basement apartment was used as a home because you used it for personal purposes for 30 days. Filing taxes online free Rent-free use by your brothers is considered personal use. Filing taxes online free Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days). Filing taxes online free Example 2. Filing taxes online free You rented the guest bedroom in your home at a fair rental price during the local college's homecoming, commencement, and football weekends (a total of 27 days). Filing taxes online free Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. Filing taxes online free You figured 10% of the total days rented to others at a fair rental price is 3 days. Filing taxes online free The room was used as a home because you used it for personal purposes for 21 days. Filing taxes online free That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days). Filing taxes online free Example 3. Filing taxes online free You own a condominium apartment in a resort area. Filing taxes online free You rented it at a fair rental price for a total of 170 days during the year. Filing taxes online free For 12 of those days, the tenant was not able to use the apartment and allowed you to use it even though you did not refund any of the rent. Filing taxes online free Your family actually used the apartment for 10 of those days. Filing taxes online free Therefore, the apartment is treated as having been rented for 160 (170 − 10) days. Filing taxes online free You figured 10% of the total days rented to others at a fair rental price is 16 days. Filing taxes online free Your family also used the apartment for 7 other days during the year. Filing taxes online free You used the apartment as a home because you used it for personal purposes for 17 days. Filing taxes online free That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days). Filing taxes online free Minimal rental use. Filing taxes online free   If you use the dwelling unit as a home and you rent it less than 15 days during the year, that period is not treated as rental activity. Filing taxes online free See Used as a home but rented less than 15 days , later, for more information. Filing taxes online free Limit on deductions. Filing taxes online free   Renting a dwelling unit that is considered a home is not a passive activity. Filing taxes online free Instead, if your rental expenses are more than your rental income, some or all of the excess expenses cannot be used to offset income from other sources. Filing taxes online free The excess expenses that cannot be used to offset income from other sources are carried forward to the next year and treated as rental expenses for the same property. Filing taxes online free Any expenses carried forward to the next year will be subject to any limits that apply for that year. Filing taxes online free This limitation will apply to expenses carried forward to another year even if you do not use the property as your home for that subsequent year. Filing taxes online free   To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 9-1. Filing taxes online free Reporting Income and Deductions Property not used for personal purposes. Filing taxes online free   If you do not use a dwelling unit for personal purposes, see How To Report Rental Income and Expenses , later, for how to report your rental income and expenses. Filing taxes online free Property used for personal purposes. Filing taxes online free   If you do use a dwelling unit for personal purposes, then how you report your rental income and expenses depends on whether you used the dwelling unit as a home. Filing taxes online free Not used as a home. Filing taxes online free   If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. Filing taxes online free Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in Dividing Expenses . Filing taxes online free The expenses for personal use are not deductible as rental expenses. Filing taxes online free   Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses , later. Filing taxes online free Used as a home but rented less than 15 days. Filing taxes online free   If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). Filing taxes online free You are not required to report the rental income and rental expenses from this activity. Filing taxes online free The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). Filing taxes online free See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses. Filing taxes online free Used as a home and rented 15 days or more. Filing taxes online free   If you use a dwelling unit as a home and rent it 15 days or more during the year, include all your rental income in your income. Filing taxes online free Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in Dividing Expenses . Filing taxes online free The expenses for personal use are not deductible as rental expenses. Filing taxes online free   If you had a net profit from renting the dwelling unit for the year (that is, if your rental income is more than the total of your rental expenses, including depreciation), deduct all of your rental expenses. Filing taxes online free You do not need to use Worksheet 9-1. Filing taxes online free   However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. Filing taxes online free To figure your deductible rental expenses and any carryover to next year, use Worksheet 9-1. Filing taxes online free Depreciation You recover the cost of income-producing property through yearly tax deductions. Filing taxes online free You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. Filing taxes online free Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. Filing taxes online free You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures, and equipment, as an expense. Filing taxes online free You can deduct depreciation only on the part of your property used for rental purposes. Filing taxes online free Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. Filing taxes online free You may have to use Form 4562 to figure and report your depreciation. Filing taxes online free See How To Report Rental Income and Expenses , later. Filing taxes online free Alternative minimum tax (AMT). Filing taxes online free    If you use accelerated depreciation, you may be subject to the AMT. Filing taxes online free Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). Filing taxes online free Claiming the correct amount of depreciation. Filing taxes online free   You should claim the correct amount of depreciation each tax year. Filing taxes online free If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. Filing taxes online free   If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U. Filing taxes online free S Individual Income Tax Return. Filing taxes online free If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. Filing taxes online free See Claiming the correct amount of depreciation in chapter 2 of Publication 527 for more information. Filing taxes online free Changing your accounting method to deduct unclaimed depreciation. Filing taxes online free   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. Filing taxes online free In some instances, that consent is automatic. Filing taxes online free For more information, see chapter 1 of Publication 946. Filing taxes online free Land. Filing taxes online free   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. Filing taxes online free The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. Filing taxes online free More information. Filing taxes online free   See Publication 527 for more information about depreciating rental property and see Publication 946 for more information about depreciation. Filing taxes online free Limits on Rental Losses If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can deduct. Filing taxes online free You must consider these rules in the order shown below. Filing taxes online free At-risk rules. Filing taxes online free These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. Filing taxes online free This applies only if the real property was placed in service after 1986. Filing taxes online free Passive activity limits. Filing taxes online free Generally, rental real estate activities are considered passive activities and losses are not deductible unless you have income from other passive activities to offset them. Filing taxes online free However, there are exceptions. Filing taxes online free At-Risk Rules You may be subject to the at-risk rules if you have: A loss from an activity carried on as a trade or business or for the production of income, and Amounts invested in the activity for which you are not fully at risk. Filing taxes online free Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. Filing taxes online free In most cases, any loss from an activity subject to the at-risk rules is allowed only to the extent of the total amount you have at risk in the activity at the end of the tax year. Filing taxes online free You are considered at risk in an activity to the extent of cash and the adjusted basis of other property you contributed to the activity and certain amounts borrowed for use in the activity. Filing taxes online free See Publication 925 for more information. Filing taxes online free Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. Filing taxes online free For this purpose, a rental activity is an activity from which you receive income mainly for the use of tangible property, rather than for services. Filing taxes online free Limits on passive activity deductions and credits. Filing taxes online free    Deductions or losses from passive activities are limited. Filing taxes online free You generally cannot offset income, other than passive income, with losses from passive activities. Filing taxes online free Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. Filing taxes online free Any excess loss or credit is carried forward to the next tax year. Filing taxes online free   For a detailed discussion of these rules, see Publication 925. Filing taxes online free    You may have to complete Form 8582 to figure the amount of any passive activity loss for the current tax year for all activities and the amount of the passive activity loss allowed on your tax return. Filing taxes online free Real estate professionals. Filing taxes online free   Rental activities in which you materially participated during the year are not passive activities if, for that year, you were a real estate professional. Filing taxes online free For a detailed discussion of the requirements, see Publication 527. Filing taxes online free For a detailed discussion of material participation, see Publication 925. Filing taxes online free Exception for Personal Use of Dwelling Unit If you used the rental property as a home during the year, any income, deductions, gain, or loss allocable to such use shall not be taken into account for purposes of the passive activity loss limitation. Filing taxes online free Instead, follow the rules explained in Personal Use of Dwelling Unit (Including Vacation Home), earlier. Filing taxes online free Exception for Rental Real Estate Activities With Active Participation If you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. Filing taxes online free This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Filing taxes online free Similarly, you may be able to offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. Filing taxes online free Active participation. Filing taxes online free   You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. Filing taxes online free Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. Filing taxes online free Maximum special allowance. Filing taxes online free   The maximum special allowance is: $25,000 for single individuals and married individuals filing a joint return for the tax year, $12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year, and $25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified. Filing taxes online free   If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. Filing taxes online free If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI. Filing taxes online free   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. Filing taxes online free More information. Filing taxes online free   See Publication 925 for more information on the passive loss limits, including information on the treatment of unused disallowed passive losses and credits and the treatment of gains and losses realized on the disposition of a passive activity. Filing taxes online free How To Report Rental Income and Expenses The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). Filing taxes online free However, do not use that schedule to report a not-for-profit activity. Filing taxes online free See Not Rented for Profit, earlier. Filing taxes online free Providing substantial services. Filing taxes online free   If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business (Sole Proprietorship). Filing taxes online free Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. Filing taxes online free For information, see Publication 334, Tax Guide for Small Business. Filing taxes online free You also may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. Filing taxes online free   Use Form 1065, U. Filing taxes online free S. Filing taxes online free Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). Filing taxes online free Qualified joint venture. Filing taxes online free   If you and your spouse each materially participate as the only members of a jointly owned and operated real estate business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. Filing taxes online free This election, in most cases, will not increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage if your rental income is subject to self-employment tax. Filing taxes online free For more information, see Publication 527. Filing taxes online free Form 1098, Mortgage Interest Statement. Filing taxes online free    If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098, or similar statement showing the interest you paid for the year. Filing taxes online free If you and at least one other person (other than your spouse if you file a joint return) were liable for, and paid interest on the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. Filing taxes online free Attach a statement to your return showing the name and address of the other person. Filing taxes online free In the left margin of Schedule E, next to line 13, enter “See attached. Filing taxes online free ” Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. Filing taxes online free , you normally report your rental income and expenses on Schedule E, Part I. Filing taxes online free List your total income, expenses, and depreciation for each rental property. Filing taxes online free Be sure to enter the number of fair rental and personal use days on line 2. Filing taxes online free If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. Filing taxes online free Complete lines 1 and 2 for each property. Filing taxes online free However, fill in lines 23a through 26 on only one Schedule E. Filing taxes online free On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. Filing taxes online free To find out if you need to attach Form 4562, see Form 4562, in chapter 3 of Publication 527. Filing taxes online free If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. Filing taxes online free Form 6198, At-Risk Limitations. Filing taxes online free See At-Risk Rules , earlier. Filing taxes online free Also see Publication 925. Filing taxes online free Form 8582, Passive Activity Loss Limitations. Filing taxes online free See Passive Activity Limits , earlier. Filing taxes online free Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. Filing taxes online free If you need to use page 2 of Schedule E, be sure to use page 2 of the same Schedule E you used to enter your rental activity on page 1. Filing taxes online free Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). Filing taxes online free Worksheet 9-1. Filing taxes online free Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Use this worksheet only if you answer “yes” to all of the following questions. Filing taxes online free Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home . Filing taxes online free ) Did you rent the dwelling unit at a fair rental price 15 days or more this year? Is the total of your rental expenses and depreciation more than your rental income? PART I. Filing taxes online free Rental Use Percentage A. Filing taxes online free Total days available for rent at fair rental price A. Filing taxes online free       B. Filing taxes online free Total days available for rent (line A) but not rented B. Filing taxes online free       C. Filing taxes online free Total days of rental use. Filing taxes online free Subtract line B from line A C. Filing taxes online free       D. Filing taxes online free Total days of personal use (including days rented at less than fair rental price) D. Filing taxes online free       E. Filing taxes online free Total days of rental and personal use. Filing taxes online free Add lines C and D E. Filing taxes online free       F. Filing taxes online free Percentage of expenses allowed for rental. Filing taxes online free Divide line C by line E     F. Filing taxes online free   PART II. Filing taxes online free Allowable Rental Expenses 1. Filing taxes online free Enter rents received 1. Filing taxes online free   2a. Filing taxes online free Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) 2a. Filing taxes online free       b. Filing taxes online free Enter the rental portion of real estate taxes b. Filing taxes online free       c. Filing taxes online free Enter the rental portion of deductible casualty and theft losses (see instructions) c. Filing taxes online free       d. Filing taxes online free Enter direct rental expenses (see instructions) d. Filing taxes online free       e. Filing taxes online free Fully deductible rental expenses. Filing taxes online free Add lines 2a–2d. Filing taxes online free Enter here and  on the appropriate lines on Schedule E (see instructions) 2e. Filing taxes online free   3. Filing taxes online free Subtract line 2e from line 1. Filing taxes online free If zero or less, enter -0- 3. Filing taxes online free   4a. Filing taxes online free Enter the rental portion of expenses directly related to operating or maintaining  the dwelling unit (such as repairs, insurance, and utilities) 4a. Filing taxes online free       b. Filing taxes online free Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) b. Filing taxes online free       c. Filing taxes online free Carryover of operating expenses from 2012 worksheet c. Filing taxes online free       d. Filing taxes online free Add lines 4a–4c d. Filing taxes online free       e. Filing taxes online free Allowable expenses. Filing taxes online free Enter the smaller of line 3 or line 4d (see instructions) 4e. Filing taxes online free   5. Filing taxes online free Subtract line 4e from line 3. Filing taxes online free If zero or less, enter -0- 5. Filing taxes online free   6a. Filing taxes online free Enter the rental portion of excess casualty and theft losses (see instructions) 6a. Filing taxes online free       b. Filing taxes online free Enter the rental portion of depreciation of the dwelling unit b. Filing taxes online free       c. Filing taxes online free Carryover of excess casualty losses and depreciation from 2012 worksheet c. Filing taxes online free       d. Filing taxes online free Add lines 6a–6c d. Filing taxes online free       e. Filing taxes online free Allowable excess casualty and theft losses and depreciation. Filing taxes online free Enter the smaller of  line 5 or line 6d (see instructions) 6e. Filing taxes online free   PART III. Filing taxes online free Carryover of Unallowed Expenses to Next Year 7a. Filing taxes online free Operating expenses to be carried over to next year. Filing taxes online free Subtract line 4e from line 4d 7a. Filing taxes online free   b. Filing taxes online free Excess casualty and theft losses and depreciation to be carried over to next year. Filing taxes online free  Subtract line 6e from line 6d b. Filing taxes online free   Worksheet 9-1 Instructions. Filing taxes online free Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Caution. Filing taxes online free Use the percentage determined in Part I, line F, to figure the rental portions to enter on lines 2a–2c, 4a–4b, and 6a–6b of  Part II. Filing taxes online free Line 2a. Filing taxes online free Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. Filing taxes online free Do not include interest on a loan that did not benefit the dwelling unit. Filing taxes online free For example, do not include interest on a home equity loan used to pay off credit cards or other personal loans, buy a car, or pay college tuition. Filing taxes online free Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. Filing taxes online free Include the rental portion of this interest in the total you enter on line 2a of the worksheet. Filing taxes online free   Figure the qualified mortgage insurance premiums on the dwelling unit that you could deduct on line 13 of Schedule A as if you had not rented the unit. Filing taxes online free See the Schedule A instructions. Filing taxes online free However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. Filing taxes online free See Line 4b to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. Filing taxes online free Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. Filing taxes online free   Note. Filing taxes online free Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. Filing taxes online free Instead, figure the personal portion on a separate Schedule A. Filing taxes online free If you have deducted mortgage interest or qualified mortgage insurance premiums on the dwelling unit on other forms, such as Schedule C or F, remember to reduce your Schedule A deduction by that amount. Filing taxes online free           Line 2c. Filing taxes online free Figure the casualty and theft losses related to the dwelling unit that you could deduct on Schedule A as if you had not rented the dwelling unit. Filing taxes online free To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. Filing taxes online free If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. Filing taxes online free On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. Filing taxes online free Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet. Filing taxes online free   Note. Filing taxes online free Do not file this Form 4684 or use it to figure your personal losses on Schedule A. Filing taxes online free Instead, figure the personal portion on a separate Form 4684. Filing taxes online free           Line 2d. Filing taxes online free Enter the total of your rental expenses that are directly related only to the rental activity. Filing taxes online free These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. Filing taxes online free Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. Filing taxes online free           Line 2e. Filing taxes online free You can deduct the amounts on lines 2a, 2b, 2c, and 2d as rental expenses on Schedule E even if your rental expenses are more than your rental income. Filing taxes online free Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. Filing taxes online free           Line 4b. Filing taxes online free On line 2a, you entered the rental portion of the mortgage interest and qualified mortgage insurance premiums you could deduct on Schedule A if you had not rented the dwelling unit. Filing taxes online free If you had additional mortgage interest and qualified mortgage insurance premiums that would not be deductible on Schedule A because of limits imposed on them, enter on line 4b of this worksheet the rental portion of those excess amounts. Filing taxes online free Do not include interest on a loan that did not benefit the dwelling unit (as explained in the line 2a instructions). Filing taxes online free           Line 4e. Filing taxes online free You can deduct the amounts on lines 4a, 4b, and 4c as rental expenses on Schedule E only to the extent they are not more than the amount on line 4e. Filing taxes online free *           Line 6a. Filing taxes online free To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. Filing taxes online free   A. Filing taxes online free Enter the amount from Form 4684, line 10       B. Filing taxes online free Enter the rental portion of line A       C. Filing taxes online free Enter the amount from line 2c of this worksheet       D. Filing taxes online free Subtract line C from line B. Filing taxes online free Enter the result here and on line 6a of this worksheet               Line 6e. Filing taxes online free You can deduct the amounts on lines 6a, 6b, and 6c as rental expenses on Schedule E only to the extent they are not more than the amount on line 6e. Filing taxes online free * *Allocating the limited deduction. Filing taxes online free If you cannot deduct all of the amount on line 4d or 6d this year, you can allocate the allowable deduction in any way you wish among the expenses included on line 4d or 6d. Filing taxes online free Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. Filing taxes online free Prev  Up  Next   Home   More Online Publications
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The Filing Taxes Online Free

Filing taxes online free 7. Filing taxes online free   Coverdell Education Savings Account (ESA) Table of Contents Introduction What Is a Coverdell ESAQualified Education Expenses ContributionsContribution Limits Additional Tax on Excess Contributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Transfer Because of Divorce DistributionsTax-Free Distributions Taxable Distributions When Assets Must Be Distributed Introduction If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. Filing taxes online free For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. Filing taxes online free There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. Filing taxes online free However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. Filing taxes online free See Contributions , later. Filing taxes online free This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. Filing taxes online free What is the tax benefit of the Coverdell ESA. Filing taxes online free   Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. Filing taxes online free   If, for a year, distributions from an account are not more than a designated beneficiary's qualified education expenses at an eligible educational institution, the beneficiary will not owe tax on the distributions. Filing taxes online free See Tax-Free Distributions , later. Filing taxes online free    Table 7-1 summarizes the main features of the Coverdell ESA. Filing taxes online free Table 7-1. Filing taxes online free Coverdell ESA at a Glance Do not rely on this table alone. Filing taxes online free It provides only general highlights. Filing taxes online free See the text for definitions of terms in bold type and for more complete explanations. Filing taxes online free Question Answer What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary. Filing taxes online free Where can it be established? It can be opened in the United States at any bank or other IRS-approved entity that offers Coverdell ESAs. Filing taxes online free Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary. Filing taxes online free Who can contribute to a Coverdell ESA? Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return). Filing taxes online free Are distributions tax free? Yes, if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year. Filing taxes online free What Is a Coverdell ESA A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the Designated beneficiary (defined later) of the account. Filing taxes online free When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary. Filing taxes online free To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. Filing taxes online free The document creating and governing the account must be in writing and must satisfy the following requirements. Filing taxes online free The trustee or custodian must be a bank or an entity approved by the IRS. Filing taxes online free The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions. Filing taxes online free The contribution is in cash. Filing taxes online free The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Filing taxes online free The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000. Filing taxes online free Money in the account cannot be invested in life insurance contracts. Filing taxes online free Money in the account cannot be combined with other property except in a common trust fund or common investment fund. Filing taxes online free The balance in the account generally must be distributed within 30 days after the earlier of the following events. Filing taxes online free The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. Filing taxes online free The beneficiary's death. Filing taxes online free Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. Filing taxes online free For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. Filing taxes online free Designated beneficiary. Filing taxes online free   This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account. Filing taxes online free Contributions to a qualified tuition program (QTP). Filing taxes online free   A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. Filing taxes online free In the case of a change in beneficiary, this is a qualified expense only if the new beneficiary is a family member of that designated beneficiary. Filing taxes online free See chapter 8, Qualified Tuition Program . Filing taxes online free Eligible Educational Institution For purposes of Coverdell ESAs, an eligible educational institution can be either an eligible postsecondary school or an eligible elementary or secondary school. Filing taxes online free Eligible postsecondary school. Filing taxes online free   This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Filing taxes online free S. Filing taxes online free Department of Education. Filing taxes online free It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Filing taxes online free The educational institution should be able to tell you if it is an eligible educational institution. Filing taxes online free   Certain educational institutions located outside the United States also participate in the U. Filing taxes online free S. Filing taxes online free Department of Education's Federal Student Aid (FSA) programs. Filing taxes online free Eligible elementary or secondary school. Filing taxes online free   This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. Filing taxes online free Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. Filing taxes online free As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time. Filing taxes online free The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. Filing taxes online free Tuition and fees. Filing taxes online free Books, supplies, and equipment. Filing taxes online free Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school. Filing taxes online free Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). Filing taxes online free The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Filing taxes online free The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Filing taxes online free The actual amount charged if the student is residing in housing owned or operated by the school. Filing taxes online free Half-time student. Filing taxes online free   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. Filing taxes online free Qualified Elementary and Secondary Education Expenses These are expenses related to enrollment or attendance at an eligible elementary or secondary school. Filing taxes online free As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. Filing taxes online free There are special rules for computer-related expenses. Filing taxes online free The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. Filing taxes online free Tuition and fees. Filing taxes online free Books, supplies, and equipment. Filing taxes online free Academic tutoring. Filing taxes online free Special needs services for a special needs beneficiary. Filing taxes online free The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school. Filing taxes online free Room and board. Filing taxes online free Uniforms. Filing taxes online free Transportation. Filing taxes online free Supplementary items and services (including extended day programs). Filing taxes online free The purchase of computer technology, equipment, or Internet access and related services is a qualified elementary and secondary education expense if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in elementary or secondary school. Filing taxes online free (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. Filing taxes online free ) Contributions Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI (defined later under Contribution Limits ) for the year is less than $110,000. Filing taxes online free For individuals filing joint returns, that amount is $220,000. Filing taxes online free Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. Filing taxes online free There is no requirement that an organization's income be below a certain level. Filing taxes online free Contributions must meet all of the following requirements. Filing taxes online free They must be in cash. Filing taxes online free They cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Filing taxes online free They must be made by the due date of the contributor's tax return (not including extensions). Filing taxes online free Contributions can be made to one or several Coverdell ESAs for the same designated beneficiary provided that the total contributions are not more than the contribution limits (defined later) for a year. Filing taxes online free Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary. Filing taxes online free Table 7-2 summarizes many of the features of contributing to a Coverdell ESA. Filing taxes online free When contributions considered made. Filing taxes online free   Contributions made to a Coverdell ESA for the preceding tax year are considered to have been made on the last day of the preceding year. Filing taxes online free They must be made by the due date (not including extensions) for filing your return for the preceding year. Filing taxes online free   For example, if you make a contribution to a Coverdell ESA in February 2014, and you designate it as a contribution for 2013, you are considered to have made that contribution on December 31, 2013. Filing taxes online free Contribution Limits There are two yearly limits: One on the total amount that can be contributed for each designated beneficiary in any year, and One on the amount that any individual can contribute for any one designated beneficiary for a year. Filing taxes online free Limit for each designated beneficiary. Filing taxes online free   For 2013, the total of all contributions to all Coverdell ESAs set up for the benefit of any one designated beneficiary cannot be more than $2,000. Filing taxes online free This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. Filing taxes online free Rollovers are discussed under Rollovers and Other Transfers , later. Filing taxes online free Example. Filing taxes online free When Maria Luna was born in 2012, three separate Coverdell ESAs were set up for her, one by her parents, one by her grandfather, and one by her aunt. Filing taxes online free In 2013, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. Filing taxes online free For example, if her grandfather contributed $2,000 to one of her Coverdell ESAs, no one else could contribute to any of her three accounts. Filing taxes online free Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. Filing taxes online free These contributions could be put into any of Maria's Coverdell ESA accounts. Filing taxes online free Limit for each contributor. Filing taxes online free   Generally, you can contribute up to $2,000 for each designated beneficiary for 2013. Filing taxes online free This is the most you can contribute for the benefit of any one beneficiary for the year, regardless of the number of Coverdell ESAs set up for the beneficiary. Filing taxes online free Example. Filing taxes online free The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. Filing taxes online free If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2013, he could also contribute $2,000 to Edgar's Coverdell ESA. Filing taxes online free Reduced limit. Filing taxes online free   Your contribution limit may be reduced. Filing taxes online free If your MAGI (defined on this page) is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced (see Figuring the limit , later). Filing taxes online free If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you cannot contribute to anyone's Coverdell ESA. Filing taxes online free Table 7-2. Filing taxes online free Coverdell ESA Contributions at a Glance Do not rely on this table alone. Filing taxes online free It provides only general highlights. Filing taxes online free See the text for more complete explanations. Filing taxes online free Question Answer Are contributions deductible? No. Filing taxes online free What is the annual contribution limit per designated beneficiary? $2,000 for each designated beneficiary. Filing taxes online free What if more than one Coverdell ESA has been opened for the same designated beneficiary? The annual contribution limit is $2,000 for each beneficiary, no matter how many Coverdell ESAs are set up for that beneficiary. Filing taxes online free What if more than one individual makes contributions for the same designated beneficiary? The annual contribution limit is $2,000 per beneficiary, no matter how many individuals contribute. Filing taxes online free Can contributions other than cash be made to a Coverdell ESA? No. Filing taxes online free When must contributions stop? No contributions can be made to a beneficiary's Coverdell ESA after he or she reaches age 18, unless the beneficiary is a special needs beneficiary. Filing taxes online free Modified adjusted gross income (MAGI). Filing taxes online free   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Filing taxes online free MAGI when using Form 1040A. Filing taxes online free   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Filing taxes online free MAGI when using Form 1040. Filing taxes 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 taxes online free MAGI when using Form 1040NR. Filing taxes online free   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form. Filing taxes online free MAGI when using Form 1040NR-EZ. Filing taxes online free   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form. Filing taxes online free   If you have any of these adjustments, you can use Worksheet 7-1. Filing taxes online free MAGI for a Coverdell ESA , later, to figure your MAGI for Form 1040. Filing taxes online free Worksheet 7-1. Filing taxes online free MAGI for a Coverdell ESA 1. Filing taxes online free Enter your adjusted gross income  (Form 1040, line 38)   1. Filing taxes online free   2. Filing taxes online free Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Filing taxes online free       3. Filing taxes online free Enter your foreign housing deduction (Form 2555, line 50)   3. Filing taxes online free         4. Filing taxes online free Enter the amount of income from Puerto Rico you are excluding   4. Filing taxes online free       5. Filing taxes online free Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Filing taxes online free       6. Filing taxes online free Add lines 2, 3, 4, and 5   6. Filing taxes online free   7. Filing taxes online free Add lines 1 and 6. Filing taxes online free This is your  modified adjusted gross income   7. Filing taxes online free   Figuring the limit. Filing taxes online free    To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. Filing taxes online free The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). Filing taxes online free The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). Filing taxes online free Subtract the result from $2,000. Filing taxes online free This is the amount you can contribute for each beneficiary. Filing taxes online free You can use Worksheet 7-2. Filing taxes online free Coverdell ESA Contribution Limit to figure the limit on contributions. Filing taxes online free    Worksheet 7-2. Filing taxes online free Coverdell ESA Contribution Limit 1. Filing taxes online free Maximum contribution   1. Filing taxes online free $2,000 2. Filing taxes online free Enter your modified adjusted gross income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. Filing taxes online free   3. Filing taxes online free Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Filing taxes online free   4. Filing taxes online free Subtract line 3 from line 2. Filing taxes online free If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Filing taxes online free   5. Filing taxes online free Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Filing taxes online free     Note. Filing taxes online free If the amount on line 4 is greater than or equal to the amount on line 5, stop here. Filing taxes online free You are not allowed to contribute to a Coverdell ESA for 2013. Filing taxes online free       6. Filing taxes online free Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Filing taxes online free . Filing taxes online free 7. Filing taxes online free Multiply line 1 by line 6   7. Filing taxes online free   8. Filing taxes online free Subtract line 7 from line 1   8. Filing taxes online free   Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Filing taxes online free Example. Filing taxes online free Paul, who is single, had a MAGI of $96,500 for 2013. Filing taxes online free Paul can contribute up to $1,800 in 2013 for each beneficiary, as shown in the illustrated Worksheet 7-2, Coverdell ESA Contribution Limit–Illustrated. Filing taxes online free Worksheet 7-2. Filing taxes online free Coverdell ESA Contribution Limit—Illustrated 1. Filing taxes online free Maximum contribution   1. Filing taxes online free $2,000 2. Filing taxes online free Enter your modified adjusted gross  income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. Filing taxes online free 96,500 3. Filing taxes online free Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Filing taxes online free 95,000 4. Filing taxes online free Subtract line 3 from line 2. Filing taxes online free If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Filing taxes online free 1,500 5. Filing taxes online free Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Filing taxes online free 15,000   Note. Filing taxes online free If the amount on line 4 is greater than or equal to the amount on line 5,  stop here. Filing taxes online free You are not allowed to  contribute to a Coverdell ESA for 2013. Filing taxes online free       6. Filing taxes online free Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Filing taxes online free . Filing taxes online free 100 7. Filing taxes online free Multiply line 1 by line 6   7. Filing taxes online free 200 8. Filing taxes online free Subtract line 7 from line 1   8. Filing taxes online free 1,800 Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Filing taxes online free Additional Tax on Excess Contributions The beneficiary must pay a 6% excise tax each year on excess contributions that are in a Coverdell ESA at the end of the year. Filing taxes online free Excess contributions are the total of the following two amounts. Filing taxes online free Contributions to any designated beneficiary's Coverdell ESA for the year that are more than $2,000 (or, if less, the total of each contributor's limit for the year, as discussed earlier). Filing taxes online free Excess contributions for the preceding year, reduced by the total of the following two amounts: Distributions (other than those rolled over as discussed later) during the year, and The contribution limit for the current year minus the amount contributed for the current year. Filing taxes online free Exceptions. Filing taxes online free   The excise tax does not apply if excess contributions made during 2013 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2014, for a calendar year taxpayer). Filing taxes online free   However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. Filing taxes online free You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. Filing taxes online free Box 2 of that form will show the amount of earnings on your excess contributions. Filing taxes online free Code “2” or “3” entered in the blank box below boxes 5 and 6 indicate the year in which the earnings are taxable. Filing taxes online free See Instructions for Recipient on the back of copy B of your Form 1099-Q. Filing taxes online free Enter the amount of earnings on line 21 of Form 1040 (or Form 1040NR) for the applicable tax year. Filing taxes online free For more information, see Taxable Distributions , later. Filing taxes online free   The excise tax does not apply to any rollover contribution. Filing taxes online free Note. Filing taxes online free Contributions made in one year for the preceding tax year are considered to have been made on the last day of the preceding year. Filing taxes online free Example. Filing taxes online free In 2012, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. Filing taxes online free Because Greta did not withdraw the excess before June 1, 2013, she had to pay an additional tax of $18 (6% × $300) when she filed her 2012 tax return. Filing taxes online free In 2013, excess contributions of $500 were made to Greta's account, however, she withdrew $250 from that account to use for qualified education expenses. Filing taxes online free Using the steps shown earlier under Additional Tax on Excess Contributions , Greta figures the excess contribution in her account at the end of 2013 as follows. Filing taxes online free (1)   $500 excess contributions made in 2013     + (2)   $300 excess contributions in ESA at end of 2012     − (2a)   $250 distribution during 2013         $550 excess at end of 2013   × 6%=$33           If Greta limits 2014 contributions to $1,450 ($2,000 maximum allowed − $550 excess contributions from 2013), she will not owe any additional tax in 2014 for excess contributions. Filing taxes online free Figuring and reporting the additional tax. Filing taxes online free   You figure this excise tax in Part V of Form 5329. Filing taxes online free Report the additional tax on Form 1040, line 58 (or Form 1040NR, line 56). Filing taxes online free Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary can be changed. Filing taxes online free The beneficiary's interest can be transferred to a spouse or former spouse because of divorce. Filing taxes online free Rollovers Any amount distributed from a Coverdell ESA is not taxable if it is rolled over to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary's family (including the beneficiary's spouse) who is under age 30. Filing taxes online free This age limitation does not apply if the new beneficiary is a special needs beneficiary. Filing taxes online free An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution. Filing taxes online free Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. Filing taxes online free These are not taxable distributions. Filing taxes online free Members of the beneficiary's family. Filing taxes online free   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. Filing taxes online free Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. Filing taxes online free Brother, sister, stepbrother, or stepsister. Filing taxes online free Father or mother or ancestor of either. Filing taxes online free Stepfather or stepmother. Filing taxes online free Son or daughter of a brother or sister. Filing taxes online free Brother or sister of father or mother. Filing taxes online free Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Filing taxes online free The spouse of any individual listed above. Filing taxes online free First cousin. Filing taxes online free Example. Filing taxes online free When Aaron graduated from college last year he had $5,000 left in his Coverdell ESA. Filing taxes online free He wanted to give this money to his younger sister, who was still in high school. Filing taxes online free In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his sister's Coverdell ESA within 60 days of the distribution. Filing taxes online free Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or distribution. Filing taxes online free This rule does not apply to the rollover of a military death gratuity or payment from Servicemembers' Group Life Insurance (SGLI). Filing taxes online free Military death gratuity. Filing taxes online free   If you received a military death gratuity or a payment from Servicemembers' Group Life Insurance (SGLI), you may roll over all or part of the amount received to one or more Coverdell ESAs for the benefit of members of the beneficiary's family (see Members of the beneficiary's family , earlier). Filing taxes online free Such payments are made to an eligible survivor upon the death of a member of the armed forces. Filing taxes online free The contribution to a Coverdell ESA from survivor benefits received cannot be made later than 1 year after the date on which you receive the gratuity or SGLI payment. Filing taxes online free   This rollover contribution is not subject to (but is in addition to) the contribution limits discussed earlier under Contribution Limits . Filing taxes online free The amount you roll over cannot exceed the total survivor benefits you received, reduced by contributions from these benefits to a Roth IRA or other Coverdell ESAs. Filing taxes online free   The amount contributed from the survivor benefits is treated as part of your basis (cost) in the Coverdell ESA, and will not be taxed when distributed. Filing taxes online free See Distributions , later. Filing taxes online free The limit of one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment. Filing taxes online free Changing the Designated Beneficiary The designated beneficiary can be changed. Filing taxes online free See Members of the beneficiary's family , earlier. Filing taxes online free There are no tax consequences if, at the time of the change, the new beneficiary is under age 30 or is a special needs beneficiary. Filing taxes online free Example. Filing taxes online free Assume the same situation for Aaron as in the last example (see Rollovers , earlier). Filing taxes online free Instead of closing his Coverdell ESA and paying the distribution into his sister's Coverdell ESA, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his sister. Filing taxes online free Transfer Because of Divorce If a spouse or former spouse receives a Coverdell ESA under a divorce or separation instrument, it is not a taxable transfer. Filing taxes online free After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own. Filing taxes online free Example. Filing taxes online free In their divorce settlement, Peg received her ex-husband's Coverdell ESA. Filing taxes online free In this process, the account was transferred into her name. Filing taxes online free Peg now treats the funds in this Coverdell ESA as if she were the original owner. Filing taxes online free Distributions The designated beneficiary of a Coverdell ESA can take a distribution at any time. Filing taxes online free Whether the distributions are tax free depends, in part, on whether the distributions are equal to or less than the amount of Adjusted qualified education expenses (defined later) that the beneficiary has in the same tax year. Filing taxes online free See Table 7-3, Coverdell ESA Distributions at a Glance, for highlights. Filing taxes online free Table 7-3. Filing taxes online free Coverdell ESA Distributions at a Glance Do not rely on this table alone. Filing taxes online free It provides only general highlights. Filing taxes online free See the text for definitions of terms in bold type and for more complete explanations. Filing taxes online free Question Answer Is a distribution from a Coverdell ESA to pay for a designated beneficiary's qualified education expenses tax free? Generally, yes, to the extent the amount of the distribution is not more than the designated beneficiary's adjusted qualified education expenses. Filing taxes online free After the designated beneficiary completes his or her education at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed? Yes. Filing taxes online free Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. Filing taxes online free Also, certain transfers to members of the beneficiary's family are permitted. Filing taxes online free Does the designated beneficiary need to be enrolled for a minimum number of courses to take a tax-free distribution? No. Filing taxes online free Adjusted qualified education expenses. Filing taxes online free   To determine if total distributions for the year are more than the amount of qualified education expenses, reduce total qualified education expenses by any tax-free educational assistance. Filing taxes 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), Veterans' educational assistance (see Veterans' Benefits 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 ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Filing taxes online free The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses. Filing taxes online free Tax-Free Distributions Generally, distributions are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year. Filing taxes online free Do not report tax-free distributions (including qualifying rollovers) on your tax return. Filing taxes online free Taxable Distributions A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the beneficiary's adjusted qualified education expenses for the year. Filing taxes online free Excess distribution. Filing taxes online free   This is the part of the total distribution that is more than the beneficiary's adjusted qualified education expenses for the year. Filing taxes online free Earnings and basis. Filing taxes online free   You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2013. Filing taxes online free The amount of your gross distribution will be shown in box 1. Filing taxes online free For 2013, instead of dividing the gross distribution between your earnings (box 2) and your basis (already-taxed amount) (box 3), the payer or trustee may report the fair market value (account balance) of the Coverdell ESA as of December 31, 2013. Filing taxes online free This will be shown in the blank box below boxes 5 and 6. Filing taxes online free   The amount contributed from survivor benefits (see Military death gratuity , earlier) is treated as part of your basis and will not be taxed when distributed. Filing taxes online free Figuring the Taxable Portion of a Distribution The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. Filing taxes online free Figure the taxable portion for 2013 as shown in the following steps. Filing taxes online free Multiply the total amount distributed by a fraction. Filing taxes online free The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the value (balance) of the account at the end of 2013 plus the amount distributed during 2013. Filing taxes online free Subtract the amount figured in (1) from the total amount distributed during 2013. Filing taxes online free The result is the amount of earnings included in the distribution(s). Filing taxes online free Multiply the amount of earnings figured in (2) by a fraction. Filing taxes online free The numerator is the adjusted qualified education expenses paid during 2013 and the denominator is the total amount distributed during 2013. Filing taxes online free Subtract the amount figured in (3) from the amount figured in (2). Filing taxes online free The result is the amount the beneficiary must include in income. Filing taxes online free The taxable amount must be reported on Form 1040 or Form 1040NR, line 21. Filing taxes online free Example. Filing taxes online free You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2013. Filing taxes online free There were no contributions in 2013. Filing taxes online free This is your first distribution from the account, so your basis in the account on December 31, 2012, was $1,500. Filing taxes online free The value (balance) of your account on December 31, 2013, was $950. Filing taxes online free You had $700 of adjusted qualified education expenses (AQEE) for the year. Filing taxes online free Using the steps in Figuring the Taxable Portion of a Distribution , earlier, figure the taxable portion of your distribution as follows. Filing taxes online free   1. Filing taxes online free $850 (distribution) × $1,500 basis + $0 contributions  $950 value + $850 distribution       =$708 (basis portion of distribution)     2. Filing taxes online free $850 (distribution)−$708 (basis portion of distribution)     =$142 (earnings included in distribution)   3. Filing taxes online free $142 (earnings) × $700 AQEE  $850 distribution           =$117 (tax-free earnings)     4. Filing taxes online free $142 (earnings)−$117 (tax-free earnings)=$25 (taxable earnings)                 You must include $25 in income as distributed earnings not used for qualified education expenses. Filing taxes online free Report this amount on Form 1040, line 21, listing the type and amount of income on the dotted line. Filing taxes online free Worksheet 7-3, Coverdell ESA–Taxable Distributions and Basis , at the end of this chapter, can help you figure your adjusted qualified education expenses, how much of your distribution must be included in income, and the remaining basis in your Coverdell ESA(s). Filing taxes online free Coordination With American Opportunity and Lifetime Learning Credits The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. Filing taxes online free This means the beneficiary must reduce qualified higher education expenses by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit. Filing taxes online free Example. Filing taxes online free Derek Green had $5,800 of qualified higher education expenses for 2013, his first year in college. Filing taxes online free He paid his college expenses from the following sources. Filing taxes online free     Partial tuition scholarship (tax free) $1,500     Coverdell ESA distribution 1,000     Gift from parents 2,100     Earnings from part-time job 1,200           Of his $5,800 of qualified higher education expenses, $4,000 was tuition and related expenses that also qualified for an American opportunity credit. Filing taxes online free Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. Filing taxes online free Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses. Filing taxes online free     Total qualified higher education expenses $5,800     Minus: Tax-free educational assistance −1,500     Minus: Expenses taken into account in  figuring American opportunity credit − 4,000     Equals: Adjusted qualified higher education  expenses (AQHEE) $ 300           Since the adjusted qualified higher education expenses ($300) are less than the Coverdell ESA distribution ($1,000), part of the distribution will be taxable. Filing taxes online free The balance in Derek's account was $1,800 on December 31, 2013. Filing taxes online free Prior to 2013, $2,100 had been contributed to this account. Filing taxes online free Contributions for 2013 totaled $400. Filing taxes online free Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below. Filing taxes online free   1. Filing taxes online free $1,000 (distribution) × $2,100 basis + $400 contributions  $1,800 value + $1,000 distribution           =$893 (basis portion of distribution)     2. Filing taxes online free $1,000 (distribution)−$893 (basis portion of distribution)     = $107 (earnings included in distribution)   3. Filing taxes online free $107 (earnings) × $300 AQHEE  $1,000 distribution       =$32 (tax-free earnings)     4. Filing taxes online free $107 (earnings)−$32 (tax-free earnings)=$75 (taxable earnings)                 Derek must include $75 in income (Form 1040, line 21). Filing taxes online free This is the amount of distributed earnings not used for adjusted qualified higher education expenses. Filing taxes online free Coordination With Qualified Tuition Program (QTP) Distributions If a designated beneficiary receives distributions from both a Coverdell ESA and a QTP in the same year, and the total distribution is more than the beneficiary's adjusted qualified higher education expenses, those expenses must be allocated between the distribution from the Coverdell ESA and the distribution from the QTP before figuring how much of each distribution is taxable. Filing taxes online free The following two examples illustrate possible allocations. Filing taxes online free Example 1. Filing taxes online free In 2013, Beatrice graduated from high school and began her first semester of college. Filing taxes online free That year, she had $1,000 of qualified elementary and secondary education expenses (QESEE) for high school and $3,000 of qualified higher education expenses (QHEE) for college. Filing taxes online free To pay these expenses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. Filing taxes online free No one claimed Beatrice as a dependent, nor was she eligible for an education credit. Filing taxes online free She did not receive any tax-free educational assistance in 2013. Filing taxes online free Beatrice must allocate her total qualified education expenses between the two distributions. Filing taxes online free Beatrice knows that tax-free treatment will be available if she applies her $800 Coverdell ESA distribution toward her $1,000 of qualified education expenses for high school. Filing taxes online free The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free. Filing taxes online free Next, Beatrice matches her $4,200 QTP distribution to her $3,000 of QHEE, and finds she has an excess QTP distribution of $1,200 ($4,200 QTP − $3,000 QHEE). Filing taxes online free She cannot use the extra $200 of high school expenses (from (1) above) against the QTP distribution because those expenses do not qualify a QTP for tax-free treatment. Filing taxes online free Finally, Beatrice figures the taxable and tax-free portions of her QTP distribution based on her $3,000 of QHEE. Filing taxes online free (See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program for more information. Filing taxes online free ) Example 2. Filing taxes online free Assume the same facts as in Example 1 , except that Beatrice withdrew $1,800 from her Coverdell ESA and $3,200 from her QTP. Filing taxes online free In this case, she allocates her qualified education expenses as follows. Filing taxes online free Using the same reasoning as in Example 1, Beatrice matches $1,000 of her Coverdell ESA distribution to her $1,000 of QESEE—she has $800 of her distribution remaining. Filing taxes online free Because higher education expenses can also qualify a Coverdell ESA distribution for tax-free treatment, Beatrice allocates her $3,000 of QHEE between the remaining $800 Coverdell ESA and the $3,200 QTP distributions ($4,000 total). Filing taxes online free   $3,000 QHEE × $800 ESA distribution  $4,000 total distribution = $600 QHEE (ESA)     $3,000 QHEE × $3,200 QTP distribution  $4,000 total distribution = $2,400 QHEE (QTP)   Beatrice then figures the taxable part of her: Coverdell ESA distribution based on qualified education expenses of $1,600 ($1,000 QESEE + $600 QHEE). Filing taxes online free See Figuring the Taxable Portion of a Distribution , earlier, in this chapter. Filing taxes online free   QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program). Filing taxes online free The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. Filing taxes online free However, you do not have to allocate your expenses in the same way. Filing taxes online free You can use any reasonable method. Filing taxes online free Losses on Coverdell ESA Investments If you have a loss on your investment in a Coverdell ESA, you may be able to deduct the loss on your income tax return. Filing taxes online free You can deduct the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Filing taxes online free Your basis is the total amount of contributions to that Coverdell ESA. Filing taxes online free You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. Filing taxes online free If you have distributions from more than one Coverdell ESA account during a year, you must combine the information (amount of distribution, basis, etc. Filing taxes online free ) from all such accounts in order to determine your taxable earnings for the year. Filing taxes online free By doing this, the loss from one ESA account reduces the distributed earnings (if any) from any other ESA account. Filing taxes online free For examples of the calculation, see Losses on QTP Investments in chapter 8, Qualified Tuition Program. Filing taxes online free Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. Filing taxes online free Exceptions. Filing taxes online free   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. Filing taxes online free Made because the designated beneficiary is disabled. Filing taxes online free A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. Filing taxes online free A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. Filing taxes online free Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Filing taxes online free Made on account of the attendance of the designated beneficiary at a U. Filing taxes online free S. Filing taxes online free military academy (such as the USMA at West Point). Filing taxes online free This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. Filing taxes online free S. Filing taxes online free Code) attributable to such attendance. Filing taxes online free Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier). Filing taxes online free Made before June 1, 2014, of an excess 2013 contribution (and any earnings on it). Filing taxes online free The distributed earnings must be included in gross income for the year in which the excess contribution was made. Filing taxes online free Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. Filing taxes online free Figuring the additional tax. Filing taxes online free    Use Part II of Form 5329, to figure any additional tax. Filing taxes online free Report the amount on Form 1040, line 58, or Form 1040NR, line 56. Filing taxes online free When Assets Must Be Distributed Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs. Filing taxes online free The designated beneficiary reaches age 30. Filing taxes online free In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. Filing taxes online free However, this rule does not apply if the beneficiary is a special needs beneficiary. Filing taxes online free The designated beneficiary dies before reaching age 30. Filing taxes online free In this case, the remaining assets must generally be distributed within 30 days after the date of death. Filing taxes online free Exception for Transfer to Surviving Spouse or Family Member If a Coverdell ESA is transferred to a surviving spouse or other family member as the result of the death of the designated beneficiary, the Coverdell ESA retains its status. Filing taxes online free (“Family member” was defined earlier under Rollovers . Filing taxes online free ) This means the spouse or other family member can treat the Coverdell ESA as his or her own and does not need to withdraw the assets until he or she reaches age 30. Filing taxes online free This age limitation does not apply if the new beneficiary is a special needs beneficiary. Filing taxes online free There are no tax consequences as a result of the transfer. Filing taxes online free How To Figure the Taxable Earnings When a total distribution is made because the designated beneficiary either reached age 30 or died, the earnings that accumulated tax free in the account must be included in taxable income. Filing taxes online free You determine these earnings as shown in the following two steps. Filing taxes online free Multiply the amount distributed by a fraction. Filing taxes online free The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the balance in the account at the end of 2013 plus the amount distributed during 2013. Filing taxes online free Subtract the amount figured in (1) from the total amount distributed during 2013. Filing taxes online free The result is the amount of earnings included in the distribution. Filing taxes online free For an example, see steps (1) and (2) of the Example under Figuring the Taxable Portion of a Distribution, earlier. Filing taxes online free The beneficiary or other person receiving the distribution must report this amount on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line. Filing taxes online free Worksheet 7-3 Instructions. Filing taxes online free Coverdell ESA—Taxable Distributions and Basis Line G. Filing taxes online free Enter the total distributions received from all Coverdell ESAs during 2013. Filing taxes online free Do not include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). Filing taxes online free Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year for which the contributions were made. Filing taxes online free Line 2. Filing taxes online free Your basis (amount already taxed) in this Coverdell ESA as of December 31, 2012, is the total of:   •All contributions to this Coverdell ESA before 2013 •Minus the tax-free portion of any distributions from this Coverdell ESA before 2013. Filing taxes online free   If your last distribution from this Coverdell ESA was before 2013, you must start with the basis in your account as of the end of the last year in which you took a distribution. Filing taxes online free For years before 2002, you can find that amount on the last line of the worksheet in the Instructions for Form 8606, Nondeductible IRAs, that you completed for that year. Filing taxes online free For years after 2001, you can find that amount by using the ending basis from the worksheet in Publication 970 for that year. Filing taxes online free You can determine your basis in this Coverdell ESA as of December 31, 2012, by adding to the basis as of the end of that year any contributions made to that account after the year of the distribution and before 2013. Filing taxes online free Line 4. Filing taxes online free Enter the total distributions received from this Coverdell ESA in 2013. Filing taxes online free Do not include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). Filing taxes online free   Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year of the contributions. Filing taxes online free Line 7. Filing taxes online free Enter the total value of this Coverdell ESA as of December 31, 2013, plus any outstanding rollovers contributed to the account after 2012, but before the end of the 60-day rollover period. Filing taxes online free A statement should be sent to you by January 31, 2014, for this Coverdell ESA showing the value on December 31, 2013. Filing taxes online free   A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. Filing taxes online free An outstanding rollover is any amount withdrawn within 60 days before the end of 2013 (November 2 through December 31) that was rolled over after December 31, 2013, but within the 60-day rollover period. Filing taxes online free Worksheet 7-3. Filing taxes online free Coverdell ESA—Taxable Distributions and Basis How to complete this worksheet. Filing taxes online free • • • Complete Part I, lines A through H, on only one worksheet. Filing taxes online free  Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs. Filing taxes online free  Complete Part III, the Summary (line 16), on only one worksheet. Filing taxes online free Part I. Filing taxes online free Qualified Education Expenses (Complete for total expenses)       A. Filing taxes online free Enter your total qualified education expenses for 2013   A. Filing taxes online free   B. Filing taxes online free Enter those qualified education expenses paid for with tax-free educational assistance (for example, tax-free scholarships, veterans' educational benefits, Pell grants, employer-provided educational assistance)   B. Filing taxes online free         C. Filing taxes online free Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040). Filing taxes online free Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040 or 1040NR)   C. Filing taxes online free         D. Filing taxes online free Enter those qualified higher education expenses on which  an American opportunity or lifetime learning credit was based   D. Filing taxes online free         E. Filing taxes online free Add lines B, C, and D   D. Filing taxes online free   F. Filing taxes online free Subtract line E from line A. Filing taxes online free This is your adjusted qualified education expense for 2013   E. Filing taxes online free   G. Filing taxes online free Enter your total distributions from all Coverdell ESAs during 2013. Filing taxes online free Do not include rollovers  or the return of excess contributions (see instructions)   F. Filing taxes online free   H. Filing taxes online free Divide line F by line G. Filing taxes online free Enter the result as a decimal (rounded to at least 3 places). Filing taxes online free If the  result is 1. Filing taxes online free 000 or more, enter 1. Filing taxes online free 000   G. Filing taxes online free . Filing taxes online free Part II. Filing taxes online free Taxable Distributions and Basis (Complete separately for each account) 1. Filing taxes online free Enter the amount contributed to this Coverdell ESA for 2013, including contributions made for 2013 from January 1, 2014, through April 15, 2014. Filing taxes online free Do not include rollovers or the return of excess contributions   1. Filing taxes online free   2. Filing taxes online free Enter your basis in this Coverdell ESA as of December 31, 2012 (see instructions)   2. Filing taxes online free   3. Filing taxes online free Add lines 1 and 2   3. Filing taxes online free   4. Filing taxes online free Enter the total distributions from this Coverdell ESA during 2013. Filing taxes online free Do not include rollovers  or the return of excess contributions (see instructions)   4. Filing taxes online free   5. Filing taxes online free Multiply line 4 by line H. Filing taxes online free This is the amount of adjusted qualified  education expense attributable to this Coverdell ESA   5. Filing taxes online free         6. Filing taxes online free Subtract line 5 from line 4   6. Filing taxes online free         7. Filing taxes online free Enter the total value of this Coverdell ESA as of December 31, 2013,  plus any outstanding rollovers (see instructions)   7. Filing taxes online free         8. Filing taxes online free Add lines 4 and 7   8. Filing taxes online free         9. Filing taxes online free Divide line 3 by line 8. Filing taxes online free Enter the result as a decimal (rounded to  at least 3 places). Filing taxes online free If the result is 1. Filing taxes online free 000 or more, enter 1. Filing taxes online free 000   9. Filing taxes online free . Filing taxes online free       10. Filing taxes online free Multiply line 4 by line 9. Filing taxes online free This is the amount of basis allocated to your  distributions, and is tax free   10. Filing taxes online free     Note. Filing taxes online free If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15. Filing taxes online free       11. Filing taxes online free Subtract line 10 from line 4   11. Filing taxes online free   12. Filing taxes online free Divide line 5 by line 4. Filing taxes online free Enter the result as a decimal (rounded to  at least 3 places). Filing taxes online free If the result is 1. Filing taxes online free 000 or more, enter 1. Filing taxes online free 000   12. Filing taxes online free . Filing taxes online free       13. Filing taxes online free Multiply line 11 by line 12. Filing taxes online free This is the amount of qualified education  expenses allocated to your distributions, and is tax free   13. Filing taxes online free   14. Filing taxes online free Subtract line 13 from line 11. Filing taxes online free This is the portion of the distributions from this  Coverdell ESA in 2013 that you must include in income   14. Filing taxes online free   15. Filing taxes online free Subtract line 10 from line 3. Filing taxes online free This is your basis in this Coverdell ESA as of December 31, 2013   15. Filing taxes online free   Part III. Filing taxes online free Summary (Complete only once)       16. Filing taxes online free Taxable amount. Filing taxes online free Add together all amounts on line 14 for all your Coverdell ESAs. Filing taxes online free Enter here  and include on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line   16. 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