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Free e file irs Publication 559 - Main Content Table of Contents Personal RepresentativeDuties Fees Received by Personal Representatives Final Income Tax Return for Decedent—Form 1040Name, Address, and Signature When and Where To File Filing Requirements Income To Include Exemptions and Deductions Credits, Other Taxes, and Payments Tax Forgiveness for Armed Forces Members, Victims of Terrorism, and Astronauts Filing Reminders Other Tax InformationTax Benefits for Survivors Income in Respect of a Decedent Deductions in Respect of a Decedent Estate Tax Deduction Gifts, Insurance, and Inheritances Other Items of Income Income Tax Return of an Estate— Form 1041Filing Requirements Income To Include Exemption and Deductions Credits, Tax, and Payments Name, Address, and Signature When and Where To File Distributions to BeneficiariesIncome That Must Be Distributed Currently Other Amounts Distributed Discharge of a Legal Obligation Character of Distributions How and When To Report Bequest Termination of Estate Estate and Gift TaxesApplicable Credit Amount Gift Tax Estate Tax Generation-Skipping Transfer Tax Comprehensive ExampleFinal Return for Decedent—Form 1040 Income Tax Return of an Estate—Form 1041 How To Get Tax HelpLow Income Taxpayer Clinics Personal Representative A personal representative of an estate is an executor, administrator, or anyone who is in charge of the decedent's property. Free e file irs Generally, an executor (or executrix) is named in a decedent's will to administer the estate and distribute properties as the decedent has directed. Free e file irs An administrator (or administratrix) is usually appointed by the court if no will exists, if no executor was named in the will, or if the named executor cannot or will not serve. Free e file irs In general, an executor and an administrator perform the same duties and have the same responsibilities. Free e file irs For estate tax purposes, if there is no executor or administrator appointed, qualified, and acting within the United States, the term “executor” includes anyone in actual or constructive possession of any property of the decedent. Free e file irs It includes, among others, the decedent's agents and representatives; safe-deposit companies, warehouse companies, and other custodians of property in this country; brokers holding securities of the decedent as collateral; and the debtors of the decedent who are in this country. Free e file irs Duties The primary duties of a personal representative are to collect all the decedent's assets, pay his or her creditors, and distribute the remaining assets to the heirs or other beneficiaries. Free e file irs The personal representative also must perform the following duties. Free e file irs Apply for an employer identification number (EIN) for the estate. Free e file irs File all tax returns, including income, estate and gift tax returns, when due. Free e file irs Pay the tax determined up to the date of discharge from duties. Free e file irs Other duties of the personal representative in federal tax matters are discussed in other sections of this publication. Free e file irs If any beneficiary is a nonresident alien, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for information on the personal representative's duties as a withholding agent. Free e file irs Penalty. Free e file irs   There is a penalty for failure to file a tax return when due unless the failure is due to reasonable cause. Free e file irs Reliance on an agent (attorney, accountant, etc. Free e file irs ) is not reasonable cause for late filing. Free e file irs It is the personal representative's duty to file the returns for the decedent and the estate when due. Free e file irs Identification number. Free e file irs   The first action you should take if you are the personal representative for the decedent is to apply for an EIN for the estate. Free e file irs You should apply for this number as soon as possible because you need to enter it on returns, statements, and other documents you file concerning the estate. Free e file irs You also must give the number to payers of interest and dividends and other payers who must file a return concerning the estate. Free e file irs   You can get an EIN by applying online at www. Free e file irs irs. Free e file irs gov (click on "Apply for an EIN Online" under the Tools heading). Free e file irs Generally, if you apply online, you will receive your EIN immediately upon completing the application. Free e file irs You can also apply using Form SS-4, Application for Employer Identification Number. Free e file irs Generally, if you apply by mail, it takes about 4 weeks to get your EIN. Free e file irs See the form instructions for other ways to apply. Free e file irs   Payers of interest and dividends report amounts on Forms 1099 using the identification number of the person to whom the account is payable. Free e file irs After a decedent's death, Forms 1099 must reflect the identification number of the estate or beneficiary to whom the amounts are payable. Free e file irs As the personal representative handling the estate, you must furnish this identification number to the payer. Free e file irs For example, if interest is payable to the estate, the estate's EIN must be provided to the payer and used to report the interest on Form 1099-INT, Interest Income. Free e file irs If the interest is payable to a surviving joint owner, the survivor's identification number, such as an SSN or ITIN, must be provided to the payer and used to report the interest. Free e file irs   If the estate or a survivor may receive interest or dividends after you inform the payer of the decedent's death, the payer should give you (or the survivor) a Form W-9, Request for Taxpayer Identification Number and Certification (or a similar substitute form). Free e file irs Complete this form to inform the payer of the estate's (or if completed by the survivor, the survivor's) identification number and return it to the payer. Free e file irs    Do not use the deceased individual's identifying number to file an individual income tax return after the decedent's final tax return. Free e file irs Also do not use it to make estimated tax payments for a tax year after the year of death. Free e file irs Penalty. Free e file irs   If you do not include the EIN or the taxpayer identification number of another person where it is required on a return, statement, or other document, you are liable for a penalty for each failure, unless you can show reasonable cause. Free e file irs You also are liable for a penalty if you do not give the taxpayer identification number of another person when required on a return, statement, or other document. Free e file irs Notice of fiduciary relationship. Free e file irs   The term fiduciary means any person acting for another person. Free e file irs It applies to persons who have positions of trust on behalf of others. Free e file irs A personal representative for a decedent's estate is a fiduciary. Free e file irs Form 56. Free e file irs   If you are appointed to act in a fiduciary capacity for another, you must file a written notice with the IRS stating this. Free e file irs Form 56, Notice Concerning Fiduciary Relationship, is used for this purpose. Free e file irs See the Instructions for Form 56 for filing requirements and other information. Free e file irs   File Form 56 as soon as all the necessary information (including the EIN) is available. Free e file irs It notifies the IRS that you, as the fiduciary, are assuming the powers, rights, duties, and privileges of the decedent. Free e file irs The notice remains in effect until you notify the IRS (by filing another Form 56) that your fiduciary relationship with the estate has terminated. Free e file irs Termination of fiduciary relationship. Free e file irs   Form 56 should also be filed to notify the IRS if your fiduciary relationship is terminated or when a successor fiduciary is appointed if the estate has not been terminated. Free e file irs See Form 56 and its instructions for more information. Free e file irs   At the time of termination of the fiduciary relationship, you may want to file Form 4810, Request for Prompt Assessment Under Internal Revenue Code Section 6501(d), and Form 5495, Request for Discharge From Personal Liability Under Internal Revenue Code Section 2204 or 6905, to wind up your duties as fiduciary. Free e file irs See below for a discussion of these forms. Free e file irs Request for prompt assessment (charge) of tax. Free e file irs   The IRS ordinarily has 3 years from the date an income tax return is filed, or its due date, whichever is later, to charge any additional tax due. Free e file irs However, as a personal representative, you may request a prompt assessment of tax after the return has been filed. Free e file irs This reduces the time for making the assessment to 18 months from the date the written request for prompt assessment was received. Free e file irs This request can be made for any tax return (except the estate tax return) of the decedent or the decedent's estate. Free e file irs This may permit a quicker settlement of the tax liability of the estate and an earlier final distribution of the assets to the beneficiaries. Free e file irs Form 4810. Free e file irs   Form 4810 can be used for making this request. Free e file irs It must be filed separately from any other document. Free e file irs   As the personal representative for the decedent's estate, you are responsible for any additional taxes that may be due. Free e file irs You can request prompt assessment of any of the decedent's taxes (other than federal estate taxes) for any years for which the statutory period for assessment is open. Free e file irs This applies even though the returns were filed before the decedent's death. Free e file irs Failure to report income. Free e file irs   If you or the decedent failed to report substantial amounts of gross income (more than 25% of the gross income reported on the return) or filed a false or fraudulent return, your request for prompt assessment will not shorten the period during which the IRS may assess the additional tax. Free e file irs However, such a request may relieve you of personal liability for the tax if you did not have knowledge of the unpaid tax. Free e file irs Request for discharge from personal liability for tax. Free e file irs   An executor can make a request for discharge from personal liability for a decedent's income, gift, and estate taxes. Free e file irs The request must be made after the returns for those taxes are filed. Free e file irs To make the request, file Form 5495. Free e file irs For this purpose, an executor is an executor or administrator that is appointed, qualified, and acting within the United States. Free e file irs   Within 9 months after receipt of the request, the IRS will notify the executor of the amount of taxes due. Free e file irs If this amount is paid, the executor will be discharged from personal liability for any future deficiencies. Free e file irs If the IRS has not notified the executor, he or she will be discharged from personal liability at the end of the 9-month period. Free e file irs    Even if the executor is discharged from personal liability, the IRS will still be able to assess tax deficiencies against the executor to the extent he or she still has any of the decedent's property. Free e file irs Insolvent estate. Free e file irs   Generally, if a decedent's estate is insufficient to pay all the decedent's debts, the debts due to the United States must be paid first. Free e file irs Both the decedent's federal income tax liabilities at the time of death and the estate's income tax liability are debts due to the United States. Free e file irs The personal representative of an insolvent estate is personally responsible for any tax liability of the decedent or of the estate if he or she had notice of such tax obligations or failed to exercise due care in determining if such obligations existed before distribution of the estate's assets and before being discharged from duties. Free e file irs The extent of such personal responsibility is the amount of any other payments made before paying the debts due to the United States, except where such other debt paid has priority over the debts due to the United States. Free e file irs Income tax liabilities need not be formally assessed for the personal representative to be liable if he or she was aware or should have been aware of their existence. Free e file irs Fees Received by Personal Representatives All personal representatives must include fees paid to them from an estate in their gross income. Free e file irs If you are not in the trade or business of being an executor (for instance, you are the executor of a friend's or relative's estate), report these fees on your Form 1040, line 21. Free e file irs If you are in the trade or business of being an executor, report fees received from the estate as self-employment income on Schedule C or Schedule C-EZ of your Form 1040. Free e file irs If the estate operates a trade or business and you, as executor, actively participate in the trade or business while fulfilling your duties, any fees you receive related to the operation of the trade or business must be reported as self-employment income on Schedule C (or Schedule C-EZ) of your Form 1040. Free e file irs Final Income Tax Return for Decedent—Form 1040 The personal representative (defined earlier) must file the final income tax return (Form 1040) of the decedent for the year of death and any returns not filed for preceding years. Free e file irs A surviving spouse, under certain circumstances, may have to file the returns for the decedent. Free e file irs See Joint Return, later. Free e file irs Return for preceding year. Free e file irs   If an individual died after the close of the tax year, but before the return for that year was filed, the return for the year just closed will not be the final return. Free e file irs The return for that year will be a regular return and the personal representative must file it. Free e file irs Example. Free e file irs Samantha Smith died on March 21, 2013, before filing her 2012 tax return. Free e file irs Her personal representative must file her 2012 return by April 15, 2013. Free e file irs Her final tax return covering the period from January 1, 2013, to March 20, 2013, is due April 15, 2014. Free e file irs Name, Address, and Signature Write the word “DECEASED,” the decedent's name, and the date of death across the top of the tax return. Free e file irs If filing a joint return, write the name and address of the decedent and the surviving spouse in the name and address fields. Free e file irs If a joint return is not being filed, write the decedent's name in the name field and the personal representative's name and address in the address field. Free e file irs Third party designee. Free e file irs   You can check the “Yes” box in the Third Party Designee area on page 2 of the return to authorize the IRS to discuss the return with a friend, family member, or any other person you choose. Free e file irs This allows the IRS to call the person you identified as the designee to answer any questions that may arise during the processing of the return. Free e file irs It also allows the designee to perform certain actions. Free e file irs See the Instructions for Form 1040 for details. Free e file irs Signature. Free e file irs   If a personal representative has been appointed, that person must sign the return. Free e file irs If it is a joint return, the surviving spouse must also sign it. Free e file irs If no personal representative has been appointed, the surviving spouse (on a joint return) signs the return and writes in the signature area “Filing as surviving spouse. Free e file irs ” If no personal representative has been appointed and if there is no surviving spouse, the person in charge of the decedent's property must file and sign the return as “personal representative. Free e file irs ” Paid preparer. Free e file irs   If you pay someone to prepare, assist in preparing, or review the tax return, that person must sign the return and fill in the other blanks in the Paid Preparer Use Only area of the return. Free e file irs See the Form 1040 instructions for details. Free e file irs When and Where To File The final income tax return is due at the same time the decedent's return would have been due had death not occurred. Free e file irs A final return for a decedent who was a calendar year taxpayer is generally due on April 15 following the year of death, regardless of when during that year death occurred. Free e file irs However, when the due date falls on a Saturday, Sunday, or legal holiday, the return is filed timely if filed by the next business day. Free e file irs The tax return must be prepared for the year of death regardless of when during the year death occurred. Free e file irs Generally, you must file the final income tax return of the decedent with the Internal Revenue Service Center for the place where you live. Free e file irs A tax return for a decedent can be electronically filed. Free e file irs A personal representative may also obtain an income tax filing extension on behalf of a decedent. Free e file irs Filing Requirements The gross income, age, and filing status of a decedent generally determine whether a return must be filed. Free e file irs Gross income is all income received by an individual from any source in the form of money, goods, property, and services that is not tax-exempt. Free e file irs It includes gross receipts from self-employment, but if the business involves manufacturing, merchandising, or mining, subtract any cost of goods sold. Free e file irs In general, filing status depends on whether the decedent was considered single or married at the time of death. Free e file irs See the income tax return instructions or Publication 501, Exemptions, Standard Deduction, and Filing Information. Free e file irs Refund A return must be filed to obtain a refund if tax was withheld from salaries, wages, pensions, or annuities, or if estimated tax was paid, even if a return is not otherwise required to be filed. Free e file irs Also, the decedent may be entitled to other credits that result in a refund. Free e file irs These advance payments of tax and credits are discussed later under Credits, Other Taxes, and Payments. Free e file irs Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer. Free e file irs   Form 1310 does not have to be filed if you are claiming a refund and you are: A surviving spouse filing an original or amended joint return with the decedent, or A court-appointed or certified personal representative filing the decedent’s original return and a copy of the court certificate showing your appointment is attached to the return. Free e file irs   If the personal representative is filing a claim for refund on Form 1040X, Amended U. Free e file irs S. Free e file irs Individual Income Tax Return, or Form 843, Claim for Refund and Request for Abatement, and the court certificate has already been filed with the IRS, attach Form 1310 and write “Certificate Previously Filed” at the bottom of the form. Free e file irs Example. Free e file irs Edward Green died before filing his tax return. Free e file irs You were appointed the personal representative for Edward's estate, and you file his Form 1040 showing a refund due. Free e file irs You do not need Form 1310 to claim the refund if you attach a copy of the court certificate showing you were appointed the personal representative. Free e file irs    If you are a surviving spouse and you receive a tax refund check in both your name and your deceased spouse's name, you can have the check reissued in your name alone. Free e file irs Return the joint-name check marked “VOID” to your local IRS office or the service center where you mailed your return, along with a written request for reissuance of the refund check. Free e file irs A new check will be issued in your name and mailed to you. Free e file irs Death certificate. Free e file irs   When filing the decedent's final income tax return, do not attach the death certificate or other proof of death to the final return. Free e file irs Instead, keep it for your records and provide it if requested. Free e file irs Nonresident Alien If the decedent was a nonresident alien who would have had to file Form 1040NR, U. Free e file irs S. Free e file irs Nonresident Alien Income Tax Return, you must file that form for the decedent's final tax year. Free e file irs See the Instructions for Form 1040NR for the filing requirements, due date, and where to file. Free e file irs Joint Return Generally, the personal representative and the surviving spouse can file a joint return for the decedent and the surviving spouse. Free e file irs However, the surviving spouse alone can file the joint return if no personal representative has been appointed before the due date for filing the final joint return for the year of death. Free e file irs This also applies to the return for the preceding year if the decedent died after the close of the preceding tax year and before filing the return for that year. Free e file irs The income of the decedent that was includible on his or her return for the year up to the date of death (see Income To Include, later) and the income of the surviving spouse for the entire year must be included in the final joint return. Free e file irs A final joint return with the decedent cannot be filed if the surviving spouse remarried before the end of the year of the decedent's death. Free e file irs The filing status of the decedent in this instance is married filing a separate return. Free e file irs For information about tax benefits to which a surviving spouse may be entitled, see Tax Benefits for Survivors, later, under Other Tax Information. Free e file irs Personal representative may revoke joint return election. Free e file irs   A court-appointed personal representative may revoke an election to file a joint return previously made by the surviving spouse alone. Free e file irs This is done by filing a separate return for the decedent within one year from the due date of the return (including any extensions). Free e file irs The joint return made by the surviving spouse will then be regarded as the separate return of that spouse by excluding the decedent's items and refiguring the tax liability. Free e file irs Relief from joint liability. Free e file irs   In some cases, one spouse may be relieved of joint liability for tax, interest, and penalties on a joint return for items of the other spouse that were incorrectly reported on the joint return. Free e file irs If the decedent qualified for this relief while alive, the personal representative can pursue an existing request, or file a request, for relief from joint liability. Free e file irs For information on requesting this relief, see Publication 971, Innocent Spouse Relief. Free e file irs Income To Include The decedent's income includible on the final return is generally determined as if the person were still alive except that the taxable period is usually shorter because it ends on the date of death. Free e file irs The method of accounting regularly used by the decedent before death also determines the income includible on the final return. Free e file irs This section explains how some types of income are reported on the final return. Free e file irs For more information about accounting methods, see Publication 538, Accounting Periods and Methods. Free e file irs Cash Method If the decedent accounted for income under the cash method, only those items actually or constructively received before death are included on the final return. Free e file irs Constructive receipt of income. Free e file irs   Interest from coupons on the decedent's bonds is constructively received by the decedent if the coupons matured in the decedent's final tax year, but had not been cashed. Free e file irs Include the interest income on the final return. Free e file irs   Generally, a dividend is considered constructively received if it was available for use by the decedent without restriction. Free e file irs If the corporation customarily mailed its dividend checks, the dividend was includible when received. Free e file irs If the individual died between the time the dividend was declared and the time it was received in the mail, the decedent did not constructively receive it before death. Free e file irs Do not include the dividend in the final return. Free e file irs Accrual Method Generally, under an accrual method of accounting, income is reported when earned. Free e file irs If the decedent used an accrual method, only the income items normally accrued before death are included on the final return. Free e file irs Interest and Dividend Income (Forms 1099) Form(s) 1099 reporting interest and dividends earned by the decedent before death should be received and the amounts included on the decedent's final return. Free e file irs A separate Form 1099 should show the interest and dividends earned after the date of the decedent's death and paid to the estate or other recipient that must include those amounts on its return. Free e file irs You can request corrected Forms 1099 if these forms do not properly reflect the right recipient or amounts. Free e file irs For example, a Form 1099-INT, reporting interest payable to the decedent, may include income that should be reported on the final income tax return of the decedent, as well as income that the estate or other recipient should report, either as income earned after death or as income in respect of the decedent (discussed later). Free e file irs For income earned after death, you should ask the payer for a Form 1099 that properly identifies the recipient (by name and identification number) and the proper amount. Free e file irs If that is not possible, or if the form includes an amount that represents income in respect of the decedent, report the interest as shown next under How to report. Free e file irs See U. Free e file irs S. Free e file irs savings bonds acquired from decedent under Income in Respect of a Decedent, later, for information on savings bond interest that may have to be reported on the final return. Free e file irs How to report. Free e file irs   If you are preparing the decedent's final return and you have received a Form 1099-INT for the decedent that includes amounts belonging to the decedent and to another recipient (the decedent's estate or another beneficiary), report the total interest shown on Form 1099-INT on Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. Free e file irs Next, enter a subtotal of the interest shown on Forms 1099, and the interest reportable from other sources for which you did not receive Forms 1099. Free e file irs Then, show any interest (including any interest you receive as a nominee) belonging to another recipient separately and subtract it from the subtotal. Free e file irs Identify the amount of this adjustment as “Nominee Distribution” or other appropriate designation. Free e file irs   Report dividend income for which you received a Form 1099-DIV, Dividends and Distributions, on the appropriate schedule using the same procedure. Free e file irs    Note. Free e file irs If the decedent received amounts as a nominee, you must give the actual owner a Form 1099, unless the owner is the decedent's spouse. Free e file irs See General Instructions for Certain Information Returns (Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G) for more information on filing Forms 1099. Free e file irs Partnership Income The death of a partner closes the partnership's tax year for that partner. Free e file irs Generally, it does not close the partnership's tax year for the remaining partners. Free e file irs The decedent's distributive share of partnership items must be figured as if the partnership's tax year ended on the date the partner died. Free e file irs To avoid an interim closing of the partnership books, the partners can agree to estimate the decedent's distributive share by prorating the amounts the partner would have included for the entire partnership tax year. Free e file irs On the decedent's final return, include the decedent's distributive share of partnership items for the following periods. Free e file irs The partnership's tax year that ended within or with the decedent's final tax year (the year ending on the date of death). Free e file irs The period, if any, from the end of the partnership's tax year in (1) to the decedent's date of death. Free e file irs Example. Free e file irs Mary Smith was a partner in XYZ partnership and reported her income on a tax year ending December 31. Free e file irs The partnership uses a tax year ending June 30. Free e file irs Mary died August 31, 2013, and her estate established its tax year through August 31. Free e file irs The distributive share of partnership items based on the decedent's partnership interest is reported as follows. Free e file irs Final Return for the Decedent—January 1 through August 31, 2013, includes XYZ partnership items from (a) the partnership tax year ending June 30, 2013, and (b) the partnership tax year beginning July 1, 2013, and ending August 31, 2013 (the date of death). Free e file irs Income Tax Return of the Estate—September 1, 2013, through August 31, 2014, includes XYZ partnership items for the period September 1, 2013, through June 30, 2014. Free e file irs S Corporation Income If the decedent was a shareholder in an S corporation, include on the final return the decedent's share of the S corporation's items of income, loss, deduction, and credit for the following periods. Free e file irs The corporation's tax year that ended within or with the decedent's final tax year (the year ending on the date of death). Free e file irs The period, if any, from the end of the corporation's tax year in (1) to the decedent's date of death. Free e file irs Self-Employment Income Include self-employment income actually or constructively received or accrued, depending on the decedent's accounting method. Free e file irs For self-employment tax purposes only, the decedent's self-employment income will include the decedent's distributive share of a partnership's income or loss through the end of the month in which death occurred. Free e file irs For this purpose, the partnership's income or loss is considered to be earned ratably over the partnership's tax year. Free e file irs Community Income If the decedent was married and domiciled in a community property state, half of the income received and half of the expenses paid during the decedent's tax year by either the decedent or spouse may be considered to be the income and expenses of the other. Free e file irs For more information, see Publication 555, Community Property. Free e file irs HSA, Archer MSA, or Medicare Advantage MSA The treatment of an HSA (health savings account), an Archer MSA (medical savings account), or a Medicare Advantage MSA at the death of the account holder, depends on who acquires the interest in the account. Free e file irs If the decedent's estate acquires the interest, the fair market value (FMV) of the assets in the account on the date of death is included in income on the decedent's final return. Free e file irs The estate tax deduction, discussed later, does not apply to this amount. Free e file irs If a beneficiary acquires the interest, see the discussion under Income in Respect of a Decedent, later. Free e file irs For other information on HSAs, Archer MSAs, or Medicare Advantage MSAs, see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. Free e file irs Coverdell Education Savings Account (ESA) Generally, the balance in a Coverdell ESA must be distributed within 30 days after the individual for whom the account was established reaches age 30, or dies, whichever is earlier. Free e file irs The treatment of the Coverdell ESA at the death of an individual under age 30 depends on who acquires the interest in the account. Free e file irs If the decedent's estate acquires the interest, the earnings on the account must be included on the final income tax return of the decedent. Free e file irs The estate tax deduction, discussed later, does not apply to this amount. Free e file irs If a beneficiary acquires the interest, see the discussion under Income in Respect of a Decedent, later. Free e file irs The age 30 limitation does not apply if the individual for whom the account was established or the beneficiary that acquires the account is an individual with special needs. Free e file irs This includes an individual who, because of a physical, mental, or emotional condition (including a learning disability), requires additional time to complete his or her education. Free e file irs For more information on Coverdell ESAs, see Publication 970, Tax Benefits for Education. Free e file irs Accelerated Death Benefits Accelerated death benefits are amounts received under a life insurance contract before the death of the insured individual. Free e file irs These benefits also include amounts received on the sale or assignment of the contract to a viatical settlement provider. Free e file irs Generally, if the decedent received accelerated death benefits on the life of a terminally or chronically ill individual, whether on his or her own life or on the life of another person, those benefits are not included in the decedent's income. Free e file irs For more information, see the discussion under Gifts, Insurance, and Inheritances under Other Tax Information, later. Free e file irs Exemptions and Deductions Generally, the rules for exemptions and deductions allowed to an individual also apply to the decedent's final income tax return. Free e file irs Show on the final return deductible items the decedent paid (or accrued, if the decedent reported deductions on an accrual method) before death. Free e file irs This section contains a detailed discussion of medical expenses because the tax treatment of the decedent's medical expenses can be different. Free e file irs See Medical Expenses, later. Free e file irs Exemptions You can claim the decedent's personal exemption on the final income tax return. Free e file irs If the decedent was another person's dependent (for example, a parent's), you cannot claim the personal exemption on the decedent's final return. Free e file irs Standard Deduction If you do not itemize deductions on the final return, the full amount of the appropriate standard deduction is allowed regardless of the date of death. Free e file irs For information on the appropriate standard deduction, see the Form 1040 income tax return instructions or Publication 501. Free e file irs Medical Expenses Medical expenses paid before death by the decedent are deductible, subject to limits, on the final income tax return if deductions are itemized. Free e file irs This includes expenses for the decedent, as well as for the decedent's spouse and dependents. Free e file irs Beginning in 2013, medical expenses exceeding 10% of adjusted gross income (AGI) may be deducted, unless the decedent or their spouse is age 65 or older. Free e file irs In that case medical expenses exceeding 7. Free e file irs 5% of AGI may be deducted. Free e file irs Qualified medical expenses are not deductible if paid with a tax-free distribution from an HSA or an Archer MSA. Free e file irs Election for decedent's expenses. Free e file irs   Medical expenses not paid before death are liabilities of the estate and are shown on the federal estate tax return (Form 706). Free e file irs However, if medical expenses for the decedent are paid out of the estate during the 1-year period beginning with the day after death, you can elect to treat all or part of the expenses as paid by the decedent at the time they were incurred. Free e file irs   If you make the election, you can claim all or part of the expenses on the decedent's income tax return (if deductions are itemized) rather than on the federal estate tax return (Form 706). Free e file irs You can deduct expenses incurred in the year of death on the final income tax return. Free e file irs You should file an amended return (Form 1040X) for medical expenses incurred in an earlier year, unless the statutory period for filing a claim for that year has expired. Free e file irs   The amount you can deduct on the income tax return is the amount above 10% of adjusted gross income (or 7. Free e file irs 5% of adjusted gross income if the decedent or the decedent's spouse was born before January 2, 1949). Free e file irs Amounts not deductible because of this percentage cannot be claimed on the federal estate tax return. Free e file irs Making the election. Free e file irs   You make the election by attaching a statement, in duplicate, to the decedent's income tax return or amended return. Free e file irs The statement must state that you have not claimed the amount as an estate tax deduction, and that the estate waives the right to claim the amount as a deduction. Free e file irs This election applies only to expenses incurred for the decedent, not to expenses incurred to provide medical care for dependents. Free e file irs Example. Free e file irs Richard Brown used the cash method of accounting and filed his income tax return on a calendar year basis. Free e file irs Richard died on June 1, 2013, at the age of 78, after incurring $800 in medical expenses. Free e file irs Of that amount, $500 was incurred in 2012 and $300 was incurred in 2013. Free e file irs Richard itemized his deductions when he filed his 2012 income tax return. Free e file irs The personal representative of the estate paid the entire $800 liability in August 2013. Free e file irs The personal representative may file an amended return (Form 1040X) for 2012 claiming the $500 medical expense as a deduction, subject to the 7. Free e file irs 5% limit. Free e file irs The $300 of expenses incurred in 2013 can be deducted on the final income tax return if deductions are itemized, subject to the 7. Free e file irs 5% limit. Free e file irs The personal representative must file a statement in duplicate with each return stating that these amounts have not been claimed on the federal estate tax return (Form 706), and waiving the right to claim such a deduction on Form 706 in the future. Free e file irs Medical expenses not paid by estate. Free e file irs   If you paid medical expenses for your deceased spouse or dependent, claim the expenses on your tax return for the year in which you paid them, whether they are paid before or after the decedent's death. Free e file irs If the decedent was a child of divorced or separated parents, the medical expenses can usually be claimed by both the custodial and noncustodial parent to the extent paid by that parent during the year. Free e file irs Insurance reimbursements. Free e file irs   Insurance reimbursements of previously deducted medical expenses due a decedent at the time of death and later received by the decedent's estate are includible in the income tax return of the estate (Form 1041) for the year the reimbursements are received. Free e file irs The reimbursements are also includible in the decedent's gross estate. Free e file irs No deduction for funeral expenses can be taken on the final Form 1040 of a decedent. Free e file irs These expenses may be deductible for estate tax purposes on Form 706. Free e file irs Deduction for Losses A decedent's net operating loss deduction from a prior year and any capital losses (including capital loss carryovers) can be deducted only on the decedent's final income tax return. Free e file irs A net operating loss on the decedent's final income tax return can be carried back to prior years. Free e file irs (See Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts. Free e file irs ) You cannot deduct any unused net operating loss or capital loss on the estate's income tax return. Free e file irs At-risk loss limits. Free e file irs   Special at-risk rules apply to most activities that are engaged in as a trade or business or for the production of income. Free e file irs   These rules limit the deductible loss to the amount which the individual was considered at-risk in the activity. Free e file irs An individual generally will be considered at-risk to the extent of the money and the adjusted basis of property that he or she contributed to the activity and certain amounts the individual borrowed for use in the activity. Free e file irs An individual will be considered at-risk for amounts borrowed only if he or she was personally liable for the repayment or if the amounts borrowed were secured by property other than that used in the activity. Free e file irs The individual is not considered at-risk for borrowed amounts if the lender has an interest in the activity or if the lender is related to a person who has an interest in the activity. Free e file irs For more information, see Publication 925, Passive Activity and At-Risk Rules. Free e file irs Passive activity rules. Free e file irs   A passive activity is any trade or business activity in which the taxpayer does not materially participate. Free e file irs To determine material participation, see Publication 925. Free e file irs Rental activities are passive activities regardless of the taxpayer's participation, unless the taxpayer meets certain eligibility requirements. Free e file irs   Individuals, estates, and trusts can offset passive activity losses only against passive activity income. Free e file irs Passive activity losses or credits not allowed in one tax year can be carried forward to the next year. Free e file irs   If a passive activity interest is transferred because a taxpayer dies, the accumulated unused passive activity losses are allowed as a deduction against the decedent's income in the year of death. Free e file irs Losses are allowed only to the extent they are greater than the excess of the transferee's (recipient of the interest transferred) basis in the property over the decedent's adjusted basis in the property immediately before death. Free e file irs The part of the accumulated losses equal to the excess is not allowed as a deduction for any tax year. Free e file irs   Use Form 8582, Passive Activity Loss Limitations, to summarize losses and income from passive activities and to figure the amounts allowed. Free e file irs For more information, see Publication 925. Free e file irs Credits, Other Taxes, and Payments Discussed below are some of the tax credits, types of taxes that may be owed, income tax withheld, and estimated tax payments reported on the final return of a decedent. Free e file irs Credits On the final income tax return, you can claim any tax credits that applied to the decedent before death. Free e file irs Some of these credits are discussed next. Free e file irs Earned income credit. Free e file irs   If the decedent was an eligible individual, you can claim the earned income credit on the decedent's final return even though the return covers less than 12 months. Free e file irs If the allowable credit is more than the tax liability for the year, the excess is refunded. Free e file irs   For more information, see Publication 596, Earned Income Credit (EIC). Free e file irs Credit for the elderly or the disabled. Free e file irs   This credit is allowable on a decedent's final income tax return if the decedent met both of the following requirements in the year of death. Free e file irs The decedent: Was a “qualified individual,” and Had income (adjusted gross income (AGI) and nontaxable social security and pensions) less than certain limits. Free e file irs   For details on qualifying for or figuring the credit, see Publication 524, Credit for the Elderly or the Disabled. Free e file irs Child tax credit. Free e file irs   If the decedent had a qualifying child, you may be able to claim the child tax credit on the decedent's final return even though the return covers less than 12 months. Free e file irs You may be able to claim the additional child tax credit and get a refund if the credit is more than the decedent's liability. Free e file irs For more information, see the Instructions for Form 1040. Free e file irs Adoption credit. Free e file irs   Depending upon when the adoption was finalized, this credit may be taken on a decedent's final income tax return if the decedent: Adopted an eligible child and paid qualified adoption expenses, or Has a carryforward of an adoption credit from a prior year. Free e file irs   Also, if the decedent is survived by a spouse who meets the filing status of qualifying widow(er), unused adoption credit may be carried forward and used following the death of the decedent. Free e file irs See Form 8839, Qualified Adoption Expenses, and its instructions for more details. Free e file irs General business tax credit. Free e file irs   The general business credit available to a taxpayer is limited. Free e file irs Any credit arising in a tax year beginning before 1998 that has not been used up can be carried forward for up to 15 years. Free e file irs Any unused credit arising in a tax year beginning after 1997 has a 1-year carryback and a 20-year carryforward period. Free e file irs   After the carryforward period, a deduction may be allowed for any unused business credit. Free e file irs If the taxpayer dies before the end of the carryforward period, the deduction generally is allowed in the year of death. Free e file irs   For more information on the general business credit, see Publication 334, Tax Guide for Small Business. Free e file irs Other Taxes Taxes other than income tax that may be owed on the final return of a decedent include self-employment tax and alternative minimum tax, which are reported on Form 1040. Free e file irs Self-employment tax. Free e file irs   Self-employment tax may be owed on the final return if either of the following applied to the decedent in the year of death: Net earnings from self-employment (excluding income described in (2)) were $400 or more; or Wages from services performed as a church employee were $108. Free e file irs 28 or more. Free e file irs Alternative minimum tax (AMT). Free e file irs   The tax laws give special treatment to certain types of income and allow special deductions and credits for certain types of expenses. Free e file irs The alternative minimum tax (AMT) was enacted so taxpayers who benefit from these laws still pay at least a minimum amount of tax. Free e file irs In general, the AMT is the excess of the tentative minimum tax over the regular tax shown on the return. Free e file irs Form 6251. Free e file irs    Use Form 6251, Alternative Minimum Tax—Individuals, to determine if this tax applies to the decedent. Free e file irs See the form instructions for information on when you must attach Form 6251 to Form 1040. Free e file irs Form 8801. Free e file irs   If the decedent paid AMT in a previous year or had a credit carryforward, the decedent may be eligible for a minimum tax credit. Free e file irs See Form 8801, Credit for Prior Year Minimum Tax—Individuals, Estates, and Trusts. Free e file irs Payments of Tax The income tax withheld from the decedent's salary, wages, pensions, or annuities, and the amount paid as estimated tax are credits (advance payments of tax) that must be claimed on the final return. Free e file irs Tax Forgiveness for Armed Forces Members, Victims of Terrorism, and Astronauts Income tax liability may be forgiven for a decedent who dies due to service in a combat zone, due to military or terrorist actions, as a result of a terrorist attack, or while serving in the line of duty as an astronaut. Free e file irs Combat Zone If a member of the Armed Forces of the United States dies while in active service in a combat zone or from wounds, disease, or injury incurred in a combat zone, the decedent's income tax liability is abated (forgiven) for the entire year in which death occurred and for any prior tax year ending on or after the first day the person served in a combat zone in active service. Free e file irs For this purpose, a qualified hazardous duty area is treated as a combat zone. Free e file irs If the tax (including interest, additions to the tax, and additional amounts) for these years has been assessed, the assessment will be forgiven. Free e file irs If the tax has been collected (regardless of the date of collection), that tax will be credited or refunded. Free e file irs Any of the decedent's income tax for tax years before those mentioned above that remains unpaid as of the actual (or presumptive) date of death will not be assessed. Free e file irs If any unpaid tax (including interest, additions to the tax, and additional amounts) has been assessed, this assessment will be forgiven. Free e file irs Also, if any tax was collected after the date of death, that amount will be credited or refunded. Free e file irs The date of death of a member of the Armed Forces reported as missing in action or as a prisoner of war is the date his or her name is removed from missing status for military pay purposes. Free e file irs This is true even if death actually occurred earlier. Free e file irs For other tax information for members of the Armed Forces, see Publication 3, Armed Forces' Tax Guide. Free e file irs Military or Terrorist Actions The decedent's income tax liability is forgiven if, at death, he or she was a military or civilian employee of the United States who died because of wounds or injury incurred: While a U. Free e file irs S. Free e file irs employee, and In a military or terrorist action. Free e file irs The forgiveness applies to the tax year in which death occurred and for any earlier tax year, beginning with the year before the year in which the wounds or injury occurred. Free e file irs Example. Free e file irs The income tax liability of a civilian employee of the United States who died in 2013 because of wounds incurred while a U. Free e file irs S. Free e file irs employee in a terrorist attack that occurred in 2008 will be forgiven for 2013 and for all prior tax years in the period 2007 through 2012. Free e file irs Refunds are allowed for the tax years for which the period for filing a claim for refund has not ended, as discussed later. Free e file irs Military or terrorist action defined. Free e file irs   A military or terrorist action means the following. Free e file irs Any terrorist activity that most of the evidence indicates was directed against the United States or any of its allies. Free e file irs Any military action involving the U. Free e file irs S. Free e file irs Armed Forces and resulting from violence or aggression against the United States or any of its allies, or the threat of such violence or aggression. Free e file irs   Terrorist activity includes criminal offenses intended to coerce, intimidate, or retaliate against the government or civilian population. Free e file irs Military action does not include training exercises. Free e file irs Any multinational force in which the United States is participating is treated as an ally of the United States. Free e file irs Determining if a terrorist activity or military action has occurred. Free e file irs   You may rely on published guidance from the IRS to determine if a particular event is considered a terrorist activity or military action. Free e file irs Specified Terrorist Victim The Victims of Terrorism Tax Relief Act of 2001 (the Act) provides tax relief for those injured or killed as a result of terrorist attacks, certain survivors of those killed as a result of terrorist attacks, and others who were affected by terrorist attacks. Free e file irs Under the Act, the federal income tax liability of those killed in the following attacks (specified terrorist victim) is forgiven for certain tax years. Free e file irs The April 19, 1995, terrorist attack on the Alfred P. Free e file irs Murrah Federal Building (Oklahoma City). Free e file irs The September 11, 2001, terrorist attacks. Free e file irs The terrorist attacks involving anthrax occurring after September 10, 2001, and before January 1, 2002. Free e file irs The Act also exempts from federal income tax the following types of income. Free e file irs Qualified disaster relief payments made after September 10, 2001, to cover personal, family, living, or funeral expenses incurred because of a terrorist attack. Free e file irs Certain disability payments received in tax years ending after September 10, 2001, for injuries sustained in a terrorist attack. Free e file irs Certain death benefits paid by an employer to the survivor of an employee because the employee died as a result of a terrorist attack. Free e file irs Payments from the September 11th Victim Compensation Fund 2001. Free e file irs The Act also reduces the estate tax of individuals who die as a result of a terrorist attack. Free e file irs See Publication 3920, Tax Relief for Victims of Terrorist Attacks, for more information. Free e file irs Astronauts Legislation extended the tax relief available under the Victims of Terrorism Tax Relief Act of 2001 (the Act) to astronauts who died in the line of duty after December 31, 2002. Free e file irs The decedent's income tax liability is forgiven for the tax year in which death occurs, and for the tax year prior to death. Free e file irs For information on death benefit payments and the reduction of federal estate taxes, see Publication 3920. Free e file irs However, the discussions in that publication under Death Benefits and Estate Tax Reduction should be modified for astronauts (for example, by using the date of death of the astronaut instead of September 11, 2001). Free e file irs For more information on the Act, see Publication 3920. Free e file irs Claim for Credit or Refund If any of these tax-forgiveness situations applies to a prior year tax, any tax paid for which the period for filing a claim has not ended will be credited or refunded. Free e file irs If any tax is still due, it will be canceled. Free e file irs The normal period for filing a claim for credit or refund is 3 years after the return was filed or 2 years after the tax was paid, whichever is later. Free e file irs If death occurred in a combat zone or from wounds, disease, or injury incurred in a combat zone, the period for filing the claim is extended by: The amount of time served in the combat zone (including any period in which the individual was in missing status), plus The period of continuous qualified hospitalization for injury from service in the combat zone, if any, plus The next 180 days. Free e file irs Qualified hospitalization means any hospitalization outside the United States and any hospitalization in the United States of not more than 5 years. Free e file irs This extended period for filing the claim also applies to a member of the Armed Forces who was deployed outside the United States in a designated contingency operation. Free e file irs Filing a claim. Free e file irs   Use the following procedures to file a claim. Free e file irs If a U. Free e file irs S. Free e file irs individual income tax return (Form 1040, 1040A, or 1040EZ) has not been filed, you should make a claim for refund of any withheld income tax or estimated tax payments by filing Form 1040. Free e file irs Form W-2, Wage and Tax Statement, must accompany all returns. Free e file irs If a U. Free e file irs S. Free e file irs individual income tax return has been filed, you should make a claim for refund by filing Form 1040X. Free e file irs You must file a separate Form 1040X for each year in question. Free e file irs   You must file these returns and claims at the following address for regular mail (U. Free e file irs S. Free e file irs Postal Service). Free e file irs    Internal Revenue Service 333 W. Free e file irs Pershing, P5–6503 Kansas City, MO 64108   Identify all returns and claims for refund by writing “Iraq—KIA,” “Enduring Freedom—KIA,” “Kosovo Operation—KIA,” “Desert Storm—KIA,” or “Former Yugoslavia—KIA” in bold letters on the top of page 1 of the return or claim. Free e file irs On the applicable return, write the same phrase on the line for total tax. Free e file irs If the individual was killed in a terrorist or military action, put “KITA” on the front of the return and on the line for total tax. Free e file irs   Include an attachment showing the computation of the decedent's tax liability and a computation of the amount to be forgiven. Free e file irs On joint returns, make an allocation of the tax as described below under Joint returns. Free e file irs If you cannot make a proper allocation, attach a statement of all income and deductions allocable to each spouse and the IRS will make the proper allocation. Free e file irs   You must attach Form 1310 to all returns and claims for refund. Free e file irs However, for exceptions to filing Form 1310, see Form 1310. Free e file irs Statement of Person Claiming Refund Due a Deceased Taxpayer, under Refund, earlier. Free e file irs   You must also attach proof of death that includes a statement that the individual was a U. Free e file irs S. Free e file irs employee on the date of injury and on the date of death and died as the result of a military or terrorist action. Free e file irs For military and civilian employees of the Department of Defense, attach DD Form 1300, Report of Casualty. Free e file irs For other U. Free e file irs S. Free e file irs civilian employees killed in the United States, attach a death certificate and a certification (letter) from the federal employer. Free e file irs For other U. Free e file irs S. Free e file irs civilian employees killed overseas, attach a certification from the Department of State. Free e file irs   If you do not have enough tax information to file a timely claim for refund, you can suspend the period for filing a claim by filing Form 1040X. Free e file irs Attach Form 1310, any required documentation currently available, and a statement that you will file an amended claim as soon as you have the required tax information. Free e file irs Joint returns. Free e file irs   If a joint return was filed, only the decedent's part of the income tax liability is eligible for forgiveness. Free e file irs Determine the decedent's tax liability as follows. Free e file irs Figure the income tax for which the decedent would have been liable if a separate return had been filed. Free e file irs Figure the income tax for which the spouse would have been liable if a separate return had been filed. Free e file irs Multiply the joint tax liability by a fraction. Free e file irs The numerator of the fraction is the amount in (1), above. Free e file irs The denominator of the fraction is the total of (1) and (2). Free e file irs   The resulting amount from (3) above is the decedent's tax liability eligible for forgiveness. Free e file irs Filing Reminders To minimize the time needed to process the decedent's final return and issue any refund, be sure to follow these procedures. Free e file irs Write “DECEASED,” the decedent's name, and the date of death across the top of the tax return. Free e file irs If a personal representative has been appointed, the personal representative must sign the return. Free e file irs If it is a joint return, the surviving spouse must also sign it. Free e file irs If you are the decedent's spouse filing a joint return with the decedent and no personal representative has been appointed, write “Filing as surviving spouse” in the area where you sign the return. Free e file irs If no personal representative has been appointed and if there is no surviving spouse, the person in charge of the decedent's property must file and sign the return as “personal representative. Free e file irs ” To claim a refund for the decedent, do the following. Free e file irs If you are the decedent's spouse filing a joint return with the decedent, file only the tax return to claim the refund. Free e file irs If you are the personal representative and the return is not a joint return filed with the decedent's surviving spouse, file the return and attach a copy of the certificate that shows your appointment by the court. Free e file irs (A power of attorney or a copy of the decedent's will is not acceptable evidence of your appointment as the personal representative. Free e file irs ) If you are filing an amended return, attach Form 1310 and a copy of the certificate of appointment (or, if you have already sent the certificate of appointment to IRS, write “Certificate Previously Filed” at the bottom of Form 1310). Free e file irs If you are not filing a joint return as the surviving spouse and a personal representative has not been appointed, file the return and attach Form 1310. Free e file irs Other Tax Information Discussed below is information about the effect of an individual's death on the income tax liability of the survivors (including widows and widowers), the beneficiaries, and the estate. Free e file irs Tax Benefits for Survivors Survivors can qualify for certain benefits when filing their own income tax returns. Free e file irs Joint return by surviving spouse. Free e file irs   A surviving spouse can file a joint return for the year of death and may qualify for special tax rates for the following 2 years, as explained under Qualifying widows and widowers, later. Free e file irs Decedent as your dependent. Free e file irs   If the decedent qualified as your dependent for a part of the year before death, you can claim the exemption for the dependent on your tax return, regardless of when death occurred during the year. Free e file irs   If the decedent was your qualifying child, you may be able to claim the child tax credit or the earned income credit. Free e file irs To determine if you qualify for the child tax credit, see the instructions for Form 1040, line 51; Form 1040A, line 33; or Form 1040NR, line 48. Free e file irs To determine if you qualify for the earned income credit, see the instructions for Form 1040, lines 64a and 64b or Form 1040A, lines 38a and 38b. Free e file irs Qualifying widows and widowers. Free e file irs   If your spouse died within the 2 tax years preceding the year for which your return is being filed, you may be eligible to claim the filing status of qualifying widow(er) with dependent child and qualify to use the married-filing-jointly tax rates. Free e file irs Requirements. Free e file irs   Generally, you qualify for this special benefit if you meet all of the following requirements. Free e file irs You were entitled to file a joint return with your spouse for the year of death—whether or not you actually filed jointly. Free e file irs You did not remarry before the end of the current tax year. Free e file irs You have a child, stepchild, or foster child who qualifies as your dependent for the tax year. Free e file irs You provide more than half the cost of maintaining your home, which is the principal residence of that child for the entire year except for temporary absences. Free e file irs Example. Free e file irs William Burns' wife died in 2010. Free e file irs William has not remarried and continued throughout 2011 and 2012 to maintain a home for himself and his dependent child. Free e file irs For 2010, he was entitled to file a joint return for himself and his deceased wife. Free e file irs For 2011 and 2012, he qualifies to file as a qualifying widower with dependent child. Free e file irs For later years, he may qualify to file as a head of household. Free e file irs Figuring your tax. Free e file irs   Check the box on line 5 (Form 1040 or 1040A) under Filing Status on your tax return. Free e file irs Use the Tax Rate Schedule or the column in the Tax Table for Married filing jointly, which gives you the split-income benefits. Free e file irs   The last year you can file jointly with, or claim an exemption for, your deceased spouse is the year of death. Free e file irs Joint return filing rules. Free e file irs   If you are the surviving spouse and a personal representative is handling the estate for the decedent, you should coordinate filing your return for the year of death with this personal representative. Free e file irs See Joint Return under Final Income Tax Return for Decedent—Form 1040, earlier. Free e file irs Income in Respect of a Decedent All income the decedent would have received had death not occurred that was not properly includible on the final return, discussed earlier, is income in respect of a decedent. Free e file irs If the decedent is a specified terrorist victim (see Specified Terrorist Victim, earlier), income received after the date of death and before the end of the decedent's tax year (determined without regard to death) is excluded from the recipient's gross income. Free e file irs This exclusion does not apply to certain income. Free e file irs For more information, see Publication 3920. Free e file irs How To Report Income in respect of a decedent must be included in the income of one of the following. Free e file irs The decedent's estate, if the estate receives it. Free e file irs The beneficiary, if the right to income is passed directly to the beneficiary and the beneficiary receives it. Free e file irs Any person to whom the estate properly distributes the right to receive it. Free e file irs If you have to include income in respect of a decedent in your gross income and an estate tax return (Form 706) was filed for the decedent, you may be able to claim a deduction for the estate tax paid on that income. Free e file irs See Estate Tax Deduction, later. Free e file irs Example 1. Free e file irs Frank Johnson owned and operated an apple orchard. Free e file irs He used the cash method of accounting. Free e file irs He sold and delivered 1,000 bushels of apples to a canning factory for $2,000, but did not receive payment before his death. Free e file irs The proceeds from the sale are income in respect of a decedent. Free e file irs When the estate was settled, payment had not been made and the estate transferred the right to the payment to his widow. Free e file irs When Frank's widow collects the $2,000, she must include that amount in her return. Free e file irs It is not reported on the final return of the decedent or on the return of the estate. Free e file irs Example 2. Free e file irs Assume the same facts as in Example 1, except that Frank used the accrual method of accounting. Free e file irs The amount accrued from the sale of the apples would be included on his final return. Free e file irs Neither the estate nor the widow would realize income in respect of a decedent when the money is later paid. Free e file irs Example 3. Free e file irs On February 1, George High, a cash method taxpayer, sold his tractor for $3,000, payable March 1 of the same year. Free e file irs His adjusted basis in the tractor was $2,000. Free e file irs George died on February 15, before receiving payment. Free e file irs The gain to be reported as income in respect of a decedent is the $1,000 difference between the decedent's basis in the property and the sale proceeds. Free e file irs In other words, the income in respect of a decedent is the gain the decedent would have realized had he lived. Free e file irs Example 4. Free e file irs Cathy O'Neil was entitled to a large salary payment at the date of her death. Free e file irs The amount was to be paid in five annual installments. Free e file irs The estate, after collecting two installments, distributed the right to the remaining installments to you, the beneficiary. Free e file irs The payments are income in respect of a decedent. Free e file irs None of the payments were includible on Cathy's final return. Free e file irs The estate must include in its income the two installments it received, and you must include in your income each of the three installments as you receive them. Free e file irs Example 5. Free e file irs You inherited the right to receive renewal commissions on life insurance sold by your father before his death. Free e file irs You inherited the right from your mother, who acquired it by bequest from your father. Free e file irs Your mother died before she received all the commissions she had the right to receive, so you received the rest. Free e file irs The commissions are income in respect of a decedent. Free e file irs None of these commissions were includible in your father's final return. Free e file irs The commissions received by your mother were included in her income. Free e file irs The commissions you received are not includible in your mother's income, even on her final return. Free e file irs You must include them in your income. Free e file irs Character of income. Free e file irs   The character of the income you receive in respect of a decedent remains the same as it would have been to the decedent if he or she were alive. Free e file irs If the income would have been a capital gain to the decedent, it will be a capital gain to you. Free e file irs Transfer of right to income. Free e file irs   If you transfer your right to income in respect of a decedent, you must include in your income the greater of: The amount you receive for the right, or The fair market value of the right you transfer. Free e file irs   If you make a gift of such a right, you must include in your income the fair market value of the right at the time of the gift. Free e file irs   If the right to income from an installment obligation is transferred, the amount you must include in income is reduced by the basis of the obligation. Free e file irs See Installment obligations, later. Free e file irs Transfer defined. Free e file irs   A transfer for this purpose includes a sale, exchange, or other disposition, the satisfaction of an installment obligation at other than face value, or the cancellation of an installment obligation. Free e file irs Installment obligations. Free e file irs   If the decedent sold property using the installment method and you are collecting payments on an installment obligation acquired from the decedent, use the same gross profit percentage the decedent used to figure the part of each payment that represents profit. Free e file irs Include in your income the same profit the decedent would have included had death not occurred. Free e file irs For more information, see Publication 537, Installment Sales. Free e file irs   If you dispose of an installment obligation acquired from a decedent (other than by transfer to the obligor), the rules explained in Publication 537 for figuring gain or loss on the disposition apply to you. Free e file irs Transfer to obligor. Free e file irs   A transfer of a right to income, discussed earlier, has occurred if the decedent (seller) sold property using the installment method and the installment obligation was transferred to the obligor (buyer or person legally obligated to pay the installments). Free e file irs A transfer also occurs if the obligation was canceled either at death or by the estate or person receiving the obligation from the decedent. Free e file irs An obligation that becomes unenforceable is treated as having been canceled. Free e file irs   If such a transfer occurs, the amount included in the income of the transferor (the estate or beneficiary) is the greater of the amount received or the fair market value of the installment obligation at the time of transfer, reduced by the basis of the obligation. Free e file irs The basis of the obligation is the decedent's basis, adjusted for all installment payments received after the decedent's death and before the transfer. Free e file irs   If the decedent and obligor were related persons, the fair market value of the obligation cannot be less than its face value. Free e file irs Specific Types of Income in Respect of a Decedent This section explains and provides examples of some specific types of income in respect of a decedent. Free e file irs Wages. Free e file irs   The entire amount of wages or other employee compensation earned by the decedent but unpaid at the time of death is income in respect of a decedent. Free e file irs The income is not reduced by any amounts withheld by the employer. Free e file irs If the income is $600 or more, the employer should report it in box 3 of Form 1099-MISC, Miscellaneous Income, and give the recipient a copy of the form or a similar statement. Free e file irs   Wages paid as income in respect of a decedent are not subject to federal income tax withholding. Free e file irs However, if paid during the calendar year of death, they are subject to withholding for social security and Medicare taxes. Free e file irs These taxes should be included on the decedent's Form W-2 along with the taxes withheld before death. Free e file irs These wages are not included in box 1 of Form W-2. Free e file irs   Wages paid as income in respect of a decedent after the year of death generally are not subject to withholding for any federal taxe
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The Free E File Irs

Free e file irs 7. Free e file irs   Interest Income Table of Contents Reminder Introduction Useful Items - You may want to see: General InformationSSN for joint account. Free e file irs Custodian account for your child. Free e file irs Penalty for failure to supply SSN. Free e file irs Reporting backup withholding. Free e file irs Savings account with parent as trustee. Free e file irs Interest not reported on Form 1099-INT. Free e file irs Nominees. Free e file irs Incorrect amount. Free e file irs Information reporting requirement. Free e file irs Taxable InterestInterest subject to penalty for early withdrawal. Free e file irs Money borrowed to invest in certificate of deposit. Free e file irs U. Free e file irs S. Free e file irs Savings Bonds Education Savings Bond Program U. Free e file irs S. Free e file irs Treasury Bills, Notes, and Bonds Bonds Sold Between Interest Dates Insurance State or Local Government Obligations Original Issue Discount (OID) When To Report Interest IncomeConstructive receipt. Free e file irs How To Report Interest IncomeSchedule B (Form 1040A or 1040). Free e file irs Reporting tax-exempt interest. Free e file irs U. Free e file irs S. Free e file irs savings bond interest previously reported. Free e file irs Reminder Foreign-source income. Free e file irs  If you are a U. Free e file irs S. Free e file irs citizen with interest income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt by U. Free e file irs S. Free e file irs law. Free e file irs This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer. Free e file irs Introduction This chapter discusses the following topics. Free e file irs Different types of interest income. Free e file irs What interest is taxable and what interest is nontaxable. Free e file irs When to report interest income. Free e file irs How to report interest income on your tax return. Free e file irs In general, any interest you receive or that is credited to your account and can be withdrawn is taxable income. Free e file irs Exceptions to this rule are discussed later in this chapter. Free e file irs You may be able to deduct expenses you have in earning this income on Schedule A (Form 1040) if you itemize your deductions. Free e file irs See Money borrowed to invest in certificate of deposit , later, and chapter 28. Free e file irs Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 1212 Guide to Original Issue Discount (OID) Instruments Form (and Instructions) Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends 8815 Exclusion of Interest From Series EE and I U. Free e file irs S. Free e file irs Savings Bonds Issued After 1989 8818 Optional Form To Record Redemption of Series EE and I U. Free e file irs S. Free e file irs Savings Bonds Issued After 1989 General Information A few items of general interest are covered here. Free e file irs Recordkeeping. Free e file irs You should keep a list showing sources and interest amounts received during the year. Free e file irs Also, keep the forms you receive showing your interest income (Forms 1099-INT, for example) as an important part of your records. Free e file irs Tax on unearned income of certain children. Free e file irs    Part of a child's 2013 unearned income may be taxed at the parent's tax rate. Free e file irs If so, Form 8615, Tax for Certain Children Who Have Unearned Income, must be completed and attached to the child's tax return. Free e file irs If not, Form 8615 is not required and the child's income is taxed at his or her own tax rate. Free e file irs   Some parents can choose to include the child's interest and dividends on the parent's return. Free e file irs If you can, use Form 8814, Parents' Election To Report Child's Interest and Dividends, for this purpose. Free e file irs   For more information about the tax on unearned income of children and the parents' election, see chapter 31. Free e file irs Beneficiary of an estate or trust. Free e file irs   Interest you receive as a beneficiary of an estate or trust is generally taxable income. Free e file irs You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. Free e file irs , from the fiduciary. Free e file irs Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040. Free e file irs Social security number (SSN). Free e file irs   You must give your name and SSN or individual tax identification number (ITIN) to any person required by federal tax law to make a return, statement, or other document that relates to you. Free e file irs This includes payers of interest. Free e file irs If you do not give your SSN or ITIN to the payer of interest, you may have to pay a penalty. Free e file irs SSN for joint account. Free e file irs   If the funds in a joint account belong to one person, list that person's name first on the account and give that person's SSN to the payer. Free e file irs (For information on who owns the funds in a joint account, see Joint accounts , later. Free e file irs ) If the joint account contains combined funds, give the SSN of the person whose name is listed first on the account. Free e file irs This is because only one name and SSN can be shown on Form 1099. Free e file irs   These rules apply both to joint ownership by a married couple and to joint ownership by other individuals. Free e file irs For example, if you open a joint savings account with your child using funds belonging to the child, list the child's name first on the account and give the child's SSN. Free e file irs Custodian account for your child. Free e file irs   If your child is the actual owner of an account that is recorded in your name as custodian for the child, give the child's SSN to the payer. Free e file irs For example, you must give your child's SSN to the payer of interest on an account owned by your child, even though the interest is paid to you as custodian. Free e file irs Penalty for failure to supply SSN. Free e file irs   If you do not give your SSN to the payer of interest, you may have to pay a penalty. Free e file irs See Failure to supply SSN under Penalties in chapter 1. Free e file irs Backup withholding also may apply. Free e file irs Backup withholding. Free e file irs   Your interest income is generally not subject to regular withholding. Free e file irs However, it may be subject to backup withholding to ensure that income tax is collected on the income. Free e file irs Under backup withholding, the payer of interest must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate. Free e file irs   Backup withholding may also be required if the IRS has determined that you underreported your interest or dividend income. Free e file irs For more information, see Backup Withholding in chapter 4. Free e file irs Reporting backup withholding. Free e file irs   If backup withholding is deducted from your interest income, the payer must give you a Form 1099-INT for the year indicating the amount withheld. Free e file irs The Form 1099-INT will show any backup withholding as “Federal income tax withheld. Free e file irs ” Joint accounts. Free e file irs   If two or more persons hold property (such as a savings account or bond) as joint tenants, tenants by the entirety, or tenants in common, each person's share of any interest from the property is determined by local law. Free e file irs Income from property given to a child. Free e file irs   Property you give as a parent to your child under the Model Gifts of Securities to Minors Act, the Uniform Gifts to Minors Act, or any similar law becomes the child's property. Free e file irs   Income from the property is taxable to the child, except that any part used to satisfy a legal obligation to support the child is taxable to the parent or guardian having that legal obligation. Free e file irs Savings account with parent as trustee. Free e file irs   Interest income from a savings account opened for a minor child, but placed in the name and subject to the order of the parents as trustees, is taxable to the child if, under the law of the state in which the child resides, both of the following are true. Free e file irs The savings account legally belongs to the child. Free e file irs The parents are not legally permitted to use any of the funds to support the child. Free e file irs Form 1099-INT. Free e file irs   Interest income is generally reported to you on Form 1099-INT, or a similar statement, by banks, savings and loans, and other payers of interest. Free e file irs This form shows you the interest you received during the year. Free e file irs Keep this form for your records. Free e file irs You do not have to attach it to your tax return. Free e file irs   Report on your tax return the total interest income you receive for the tax year. Free e file irs Interest not reported on Form 1099-INT. Free e file irs   Even if you do not receive Form 1099-INT, you must still report all of your interest income. Free e file irs For example, you may receive distributive shares of interest from partnerships or S corporations. Free e file irs This interest is reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deduction, Credits, etc. Free e file irs , or Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. Free e file irs Nominees. Free e file irs   Generally, if someone receives interest as a nominee for you, that person must give you a Form 1099-INT showing the interest received on your behalf. Free e file irs   If you receive a Form 1099-INT that includes amounts belonging to another person, see the discussion on nominee distributions under How To Report Interest Income in chapter 1 of Publication 550, or Schedule B (Form 1040A or 1040) instructions. Free e file irs Incorrect amount. Free e file irs   If you receive a Form 1099-INT that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. Free e file irs The new Form 1099-INT you receive will be marked “Corrected. Free e file irs ” Form 1099-OID. Free e file irs   Reportable interest income also may be shown on Form 1099-OID, Original Issue Discount. Free e file irs For more information about amounts shown on this form, see Original Issue Discount (OID) , later in this chapter. Free e file irs Exempt-interest dividends. Free e file irs   Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. Free e file irs (However, see Information reporting requirement , next. Free e file irs ) Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. Free e file irs You do not reduce your basis for distributions that are exempt-interest dividends. Free e file irs Information reporting requirement. Free e file irs   Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file. Free e file irs This is an information reporting requirement and does not change the exempt-interest dividends into taxable income. Free e file irs Note. Free e file irs Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. Free e file irs See Alternative Minimum Tax (AMT) in chapter 30 for more information. Free e file irs Chapter 1 of Publication 550 contains a discussion on private activity bonds under State or Local Government Obligations. Free e file irs Interest on VA dividends. Free e file irs   Interest on insurance dividends left on deposit with the Department of Veterans Affairs (VA) is not taxable. Free e file irs This includes interest paid on dividends on converted United States Government Life Insurance and on National Service Life Insurance policies. Free e file irs Individual retirement arrangements (IRAs). Free e file irs   Interest on a Roth IRA generally is not taxable. Free e file irs Interest on a traditional IRA is tax deferred. Free e file irs You generally do not include it in your income until you make withdrawals from the IRA. Free e file irs See chapter 17. Free e file irs Taxable Interest Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. Free e file irs The following are some sources of taxable interest. Free e file irs Dividends that are actually interest. Free e file irs   Certain distributions commonly called dividends are actually interest. Free e file irs You must report as interest so-called “dividends” on deposits or on share accounts in: Cooperative banks, Credit unions, Domestic building and loan associations, Domestic savings and loan associations, Federal savings and loan associations, and Mutual savings banks. Free e file irs  The “dividends” will be shown as interest income on Form 1099-INT. Free e file irs Money market funds. Free e file irs   Money market funds pay dividends and are offered by nonbank financial institutions, such as mutual funds and stock brokerage houses. Free e file irs Generally, amounts you receive from money market funds should be reported as dividends, not as interest. Free e file irs Certificates of deposit and other deferred interest accounts. Free e file irs   If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the account. Free e file irs You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. Free e file irs The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. Free e file irs If interest is deferred for more than 1 year, see Original Issue Discount (OID) , later. Free e file irs Interest subject to penalty for early withdrawal. Free e file irs   If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. Free e file irs You must report the total amount of interest paid or credited to your account during the year, without subtracting the penalty. Free e file irs See Penalty on early withdrawal of savings in chapter 1 of Publication 550 for more information on how to report the interest and deduct the penalty. Free e file irs Money borrowed to invest in certificate of deposit. Free e file irs   The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. Free e file irs You must report the total interest you earn on the certificate in your income. Free e file irs If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income. Free e file irs See Interest Expenses in chapter 3 of Publication 550. Free e file irs Example. Free e file irs You deposited $5,000 with a bank and borrowed $5,000 from the bank to make up the $10,000 minimum deposit required to buy a 6-month certificate of deposit. Free e file irs The certificate earned $575 at maturity in 2013, but you received only $265, which represented the $575 you earned minus $310 interest charged on your $5,000 loan. Free e file irs The bank gives you a Form 1099-INT for 2013 showing the $575 interest you earned. Free e file irs The bank also gives you a statement showing that you paid $310 interest for 2013. Free e file irs You must include the $575 in your income. Free e file irs If you itemize your deductions on Schedule A (Form 1040), you can deduct $310, subject to the net investment income limit. Free e file irs Gift for opening account. Free e file irs   If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest. Free e file irs   For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. Free e file irs For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. Free e file irs The value is determined by the cost to the financial institution. Free e file irs Example. Free e file irs You open a savings account at your local bank and deposit $800. Free e file irs The account earns $20 interest. Free e file irs You also receive a $15 calculator. Free e file irs If no other interest is credited to your account during the year, the Form 1099-INT you receive will show $35 interest for the year. Free e file irs You must report $35 interest income on your tax return. Free e file irs Interest on insurance dividends. Free e file irs   Interest on insurance dividends left on deposit with an insurance company that can be withdrawn annually is taxable to you in the year it is credited to your account. Free e file irs However, if you can withdraw it only on the anniversary date of the policy (or other specified date), the interest is taxable in the year that date occurs. Free e file irs Prepaid insurance premiums. Free e file irs   Any increase in the value of prepaid insurance premiums, advance premiums, or premium deposit funds is interest if it is applied to the payment of premiums due on insurance policies or made available for you to withdraw. Free e file irs U. Free e file irs S. Free e file irs obligations. Free e file irs   Interest on U. Free e file irs S. Free e file irs obligations, such as U. Free e file irs S. Free e file irs Treasury bills, notes, and bonds, issued by any agency or instrumentality of the United States is taxable for federal income tax purposes. Free e file irs Interest on tax refunds. Free e file irs   Interest you receive on tax refunds is taxable income. Free e file irs Interest on condemnation award. Free e file irs   If the condemning authority pays you interest to compensate you for a delay in payment of an award, the interest is taxable. Free e file irs Installment sale payments. Free e file irs   If a contract for the sale or exchange of property provides for deferred payments, it also usually provides for interest payable with the deferred payments. Free e file irs That interest is taxable when you receive it. Free e file irs If little or no interest is provided for in a deferred payment contract, part of each payment may be treated as interest. Free e file irs See Unstated Interest and Original Issue Discount in Publication 537, Installment Sales. Free e file irs Interest on annuity contract. Free e file irs   Accumulated interest on an annuity contract you sell before its maturity date is taxable. Free e file irs Usurious interest. Free e file irs   Usurious interest is interest charged at an illegal rate. Free e file irs This is taxable as interest unless state law automatically changes it to a payment on the principal. Free e file irs Interest income on frozen deposits. Free e file irs   Exclude from your gross income interest on frozen deposits. Free e file irs A deposit is frozen if, at the end of the year, you cannot withdraw any part of the deposit because: The financial institution is bankrupt or insolvent, or The state where the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt or insolvent. Free e file irs   The amount of interest you must exclude is the interest that was credited on the frozen deposits minus the sum of: The net amount you withdrew from these deposits during the year, and The amount you could have withdrawn as of the end of the year (not reduced by any penalty for premature withdrawals of a time deposit). Free e file irs If you receive a Form 1099-INT for interest income on deposits that were frozen at the end of 2013, see Frozen deposits under How To Report Interest Income in chapter 1 of Publication 550, for information about reporting this interest income exclusion on your tax return. Free e file irs   The interest you exclude is treated as credited to your account in the following year. Free e file irs You must include it in income in the year you can withdraw it. Free e file irs Example. Free e file irs $100 of interest was credited on your frozen deposit during the year. Free e file irs You withdrew $80 but could not withdraw any more as of the end of the year. Free e file irs You must include $80 in your income and exclude $20 from your income for the year. Free e file irs You must include the $20 in your income for the year you can withdraw it. Free e file irs Bonds traded flat. Free e file irs   If you buy a bond at a discount when interest has been defaulted or when the interest has accrued but has not been paid, the transaction is described as trading a bond flat. Free e file irs The defaulted or unpaid interest is not income and is not taxable as interest if paid later. Free e file irs When you receive a payment of that interest, it is a return of capital that reduces the remaining cost basis of your bond. Free e file irs Interest that accrues after the date of purchase, however, is taxable interest income for the year it is received or accrued. Free e file irs See Bonds Sold Between Interest Dates , later, for more information. Free e file irs Below-market loans. Free e file irs   In general, a below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Free e file irs See Below-Market Loans in chapter 1 of Publication 550 for more information. Free e file irs U. Free e file irs S. Free e file irs Savings Bonds This section provides tax information on U. Free e file irs S. Free e file irs savings bonds. Free e file irs It explains how to report the interest income on these bonds and how to treat transfers of these bonds. Free e file irs For other information on U. Free e file irs S. Free e file irs savings bonds, write to:  For series EE and I paper savings bonds: Bureau of the Public Debt Division of Customer Assistance P. Free e file irs O. Free e file irs Box 7012 Parkersburg, WV 26106-7012  For series EE and I electronic bonds: Bureau of the Public Debt Division of Customer Assistance P. Free e file irs O. Free e file irs Box 7015 Parkersburg, WV 26106–7015  For series HH/H: Bureau of the Public Debt Division of Customer Assistance P. Free e file irs O. Free e file irs Box 2186 Parkersburg, WV 26106-2186 Or, on the Internet, visit: www. Free e file irs treasurydirect. Free e file irs gov/indiv/indiv. Free e file irs htm. Free e file irs Accrual method taxpayers. Free e file irs   If you use an accrual method of accounting, you must report interest on U. Free e file irs S. Free e file irs savings bonds each year as it accrues. Free e file irs You cannot postpone reporting interest until you receive it or until the bonds mature. Free e file irs Accrual methods of accounting are explained in chapter 1 under Accounting Methods . Free e file irs Cash method taxpayers. Free e file irs   If you use the cash method of accounting, as most individual taxpayers do, you generally report the interest on U. Free e file irs S. Free e file irs savings bonds when you receive it. Free e file irs The cash method of accounting is explained in chapter 1 under Accounting Methods. Free e file irs But see Reporting options for cash method taxpayers , later. Free e file irs Series HH bonds. Free e file irs    These bonds were issued at face value. Free e file irs Interest is paid twice a year by direct deposit to your bank account. Free e file irs If you are a cash method taxpayer, you must report interest on these bonds as income in the year you receive it. Free e file irs   Series HH bonds were first offered in 1980 and last offered in August 2004. Free e file irs Before 1980, series H bonds were issued. Free e file irs Series H bonds are treated the same as series HH bonds. Free e file irs If you are a cash method taxpayer, you must report the interest when you receive it. Free e file irs   Series H bonds have a maturity period of 30 years. Free e file irs Series HH bonds mature in 20 years. Free e file irs The last series H bonds matured in 2009. Free e file irs Series EE and series I bonds. Free e file irs   Interest on these bonds is payable when you redeem the bonds. Free e file irs The difference between the purchase price and the redemption value is taxable interest. Free e file irs Series EE bonds. Free e file irs   Series EE bonds were first offered in January 1980 and have a maturity period of 30 years. Free e file irs   Before July 1980, series E bonds were issued. Free e file irs The original 10-year maturity period of series E bonds has been extended to 40 years for bonds issued before December 1965 and 30 years for bonds issued after November 1965. Free e file irs Paper series EE and series E bonds are issued at a discount. Free e file irs The face value is payable to you at maturity. Free e file irs Electronic series EE bonds are issued at their face value. Free e file irs The face value plus accrued interest is payable to you at maturity. Free e file irs As of January 1, 2012, paper savings bonds were no longer sold at financial institutions. Free e file irs   Owners of paper series EE bonds can convert them to electronic bonds. Free e file irs These converted bonds do not retain the denomination listed on the paper certificate but are posted at their purchase price (with accrued interest). Free e file irs Series I bonds. Free e file irs   Series I bonds were first offered in 1998. Free e file irs These are inflation-indexed bonds issued at their face amount with a maturity period of 30 years. Free e file irs The face value plus all accrued interest is payable to you at maturity. Free e file irs Reporting options for cash method taxpayers. Free e file irs   If you use the cash method of reporting income, you can report the interest on series EE, series E, and series I bonds in either of the following ways. Free e file irs Method 1. Free e file irs Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year they mature. Free e file irs (However, see Savings bonds traded , later. Free e file irs )  Note. Free e file irs Series EE bonds issued in 1983 matured in 2013. Free e file irs If you have used method 1, you generally must report the interest on these bonds on your 2013 return. Free e file irs The last series E bonds were issued in 1980 and matured in 2010. Free e file irs If you used method 1, you generally should have reported the interest on these bonds on your 2010 return. Free e file irs Method 2. Free e file irs Choose to report the increase in redemption value as interest each year. Free e file irs You must use the same method for all series EE, series E, and series I bonds you own. Free e file irs If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1. Free e file irs    If you plan to cash your bonds in the same year you will pay for higher education expenses, you may want to use method 1 because you may be able to exclude the interest from your income. Free e file irs To learn how, see Education Savings Bond Program, later. Free e file irs Change from method 1. Free e file irs   If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission from the IRS. Free e file irs In the year of change you must report all interest accrued to date and not previously reported for all your bonds. Free e file irs   Once you choose to report the interest each year, you must continue to do so for all series EE, series E, and series I bonds you own and for any you get later, unless you request permission to change, as explained next. Free e file irs Change from method 2. Free e file irs   To change from method 2 to method 1, you must request permission from the IRS. Free e file irs Permission for the change is automatically granted if you send the IRS a statement that meets all the following requirements. Free e file irs You have typed or printed the following number at the top: “131. Free e file irs ” It includes your name and social security number under “131. Free e file irs ” It includes the year of change (both the beginning and ending dates). Free e file irs It identifies the savings bonds for which you are requesting this change. Free e file irs It includes your agreement to: Report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, and Report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years. Free e file irs   You must attach this statement to your tax return for the year of change, which you must file by the due date (including extensions). Free e file irs   You can have an automatic extension of 6 months from the due date of your return for the year of change (excluding extensions) to file the statement with an amended return. Free e file irs On the statement, type or print “Filed pursuant to section 301. Free e file irs 9100-2. Free e file irs ” To get this extension, you must have filed your original return for the year of the change by the due date (including extensions). Free e file irs    By the date you file the original statement with your return, you must also send a signed copy to the address below. Free e file irs   Internal Revenue Service Attention: CC:IT&A (Automatic Rulings Branch) P. Free e file irs O. Free e file irs Box 7604 Benjamin Franklin Station Washington, DC 20044   If you use a private delivery service, send the signed copy to the address below. Free e file irs   Internal Revenue Service Attention: CC:IT&A (Automatic Rulings Branch) Room 5336 1111 Constitution Avenue, NW  Washington, DC 20224   Instead of filing this statement, you can request permission to change from method 2 to method 1 by filing Form 3115, Application for Change in Accounting Method. Free e file irs In that case, follow the form instructions for an automatic change. Free e file irs No user fee is required. Free e file irs Co-owners. Free e file irs   If a U. Free e file irs S. Free e file irs savings bond is issued in the names of co-owners, such as you and your child or you and your spouse, interest on the bond is generally taxable to the co-owner who bought the bond. Free e file irs One co-owner's funds used. Free e file irs    If you used your funds to buy the bond, you must pay the tax on the interest. Free e file irs This is true even if you let the other co-owner redeem the bond and keep all the proceeds. Free e file irs Under these circumstances, the co-owner who redeemed the bond will receive a Form 1099-INT at the time of redemption and must provide you with another Form 1099-INT showing the amount of interest from the bond taxable to you. Free e file irs The co-owner who redeemed the bond is a “nominee. Free e file irs ” See Nominee distributions under How To Report Interest Income in chapter 1 of Publication 550 for more information about how a person who is a nominee reports interest income belonging to another person. Free e file irs Both co-owners' funds used. Free e file irs   If you and the other co-owner each contribute part of the bond's purchase price, the interest is generally taxable to each of you, in proportion to the amount each of you paid. Free e file irs Community property. Free e file irs   If you and your spouse live in a community property state and hold bonds as community property, one-half of the interest is considered received by each of you. Free e file irs If you file separate returns, each of you generally must report one-half of the bond interest. Free e file irs For more information about community property, see Publication 555. Free e file irs Table 7-1. Free e file irs   These rules are also shown in Table 7-1. Free e file irs Ownership transferred. Free e file irs   If you bought series E, series EE, or series I bonds entirely with your own funds and had them reissued in your co-owner's name or beneficiary's name alone, you must include in your gross income for the year of reissue all interest that you earned on these bonds and have not previously reported. Free e file irs But, if the bonds were reissued in your name alone, you do not have to report the interest accrued at that time. Free e file irs   This same rule applies when bonds (other than bonds held as community property) are transferred between spouses or incident to divorce. Free e file irs Purchased jointly. Free e file irs   If you and a co-owner each contributed funds to buy series E, series EE, or series I bonds jointly and later have the bonds reissued in the co-owner's name alone, you must include in your gross income for the year of reissue your share of all the interest earned on the bonds that you have not previously reported. Free e file irs The former co-owner does not have to include in gross income at the time of reissue his or her share of the interest earned that was not reported before the transfer. Free e file irs This interest, however, as well as all interest earned after the reissue, is income to the former co-owner. Free e file irs   This income-reporting rule also applies when the bonds are reissued in the name of your former co-owner and a new co-owner. Free e file irs But the new co-owner will report only his or her share of the interest earned after the transfer. Free e file irs   If bonds that you and a co-owner bought jointly are reissued to each of you separately in the same proportion as your contribution to the purchase price, neither you nor your co-owner has to report at that time the interest earned before the bonds were reissued. Free e file irs    Table 7-1. Free e file irs Who Pays the Tax on U. Free e file irs S. Free e file irs Savings Bond Interest IF . Free e file irs . Free e file irs . Free e file irs THEN the interest must be reported by . Free e file irs . Free e file irs . Free e file irs you buy a bond in your name and the name of another person as co-owners, using only your own funds you. Free e file irs you buy a bond in the name of another person, who is the sole owner of the bond the person for whom you bought the bond. Free e file irs you and another person buy a bond as co-owners, each contributing part of the purchase price both you and the other co-owner, in proportion to the amount each paid for the bond. Free e file irs you and your spouse, who live in a community property state, buy a bond that is community property you and your spouse. Free e file irs If you file separate returns, both you and your spouse generally report one-half of the interest. Free e file irs Example 1. Free e file irs You and your spouse each spent an equal amount to buy a $1,000 series EE savings bond. Free e file irs The bond was issued to you and your spouse as co-owners. Free e file irs You both postpone reporting interest on the bond. Free e file irs You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. Free e file irs At that time neither you nor your spouse has to report the interest earned to the date of reissue. Free e file irs Example 2. Free e file irs You bought a $1,000 series EE savings bond entirely with your own funds. Free e file irs The bond was issued to you and your spouse as co-owners. Free e file irs You both postpone reporting interest on the bond. Free e file irs You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. Free e file irs You must report half the interest earned to the date of reissue. Free e file irs Transfer to a trust. Free e file irs   If you own series E, series EE, or series I bonds and transfer them to a trust, giving up all rights of ownership, you must include in your income for that year the interest earned to the date of transfer if you have not already reported it. Free e file irs However, if you are considered the owner of the trust and if the increase in value both before and after the transfer continues to be taxable to you, you can continue to defer reporting the interest earned each year. Free e file irs You must include the total interest in your income in the year you cash or dispose of the bonds or the year the bonds finally mature, whichever is earlier. Free e file irs   The same rules apply to previously unreported interest on series EE or series E bonds if the transfer to a trust consisted of series HH or series H bonds you acquired in a trade for the series EE or series E bonds. Free e file irs See Savings bonds traded , later. Free e file irs Decedents. Free e file irs   The manner of reporting interest income on series E, series EE, or series I bonds, after the death of the owner (decedent), depends on the accounting and income-reporting methods previously used by the decedent. Free e file irs This is explained in chapter 1 of Publication 550. Free e file irs Savings bonds traded. Free e file irs   If you postponed reporting the interest on your series EE or series E bonds, you did not recognize taxable income when you traded the bonds for series HH or series H bonds, unless you received cash in the trade. Free e file irs (You cannot trade series I bonds for series HH bonds. Free e file irs After August 31, 2004, you cannot trade any other series of bonds for series HH bonds. Free e file irs ) Any cash you received is income up to the amount of the interest earned on the bonds traded. Free e file irs When your series HH or series H bonds mature, or if you dispose of them before maturity, you report as interest the difference between their redemption value and your cost. Free e file irs Your cost is the sum of the amount you paid for the traded series EE or series E bonds plus any amount you had to pay at the time of the trade. Free e file irs Example. Free e file irs You traded series EE bonds (on which you postponed reporting the interest) for $2,500 in series HH bonds and $223 in cash. Free e file irs You reported the $223 as taxable income on your tax return. Free e file irs At the time of the trade, the series EE bonds had accrued interest of $523 and a redemption value of $2,723. Free e file irs You hold the series HH bonds until maturity, when you receive $2,500. Free e file irs You must report $300 as interest income in the year of maturity. Free e file irs This is the difference between their redemption value, $2,500, and your cost, $2,200 (the amount you paid for the series EE bonds). Free e file irs (It is also the difference between the accrued interest of $523 on the series EE bonds and the $223 cash received on the trade. Free e file irs ) Choice to report interest in year of trade. Free e file irs   You could have chosen to treat all of the previously unreported accrued interest on the series EE or series E bonds traded for series HH bonds as income in the year of the trade. Free e file irs If you made this choice, it is treated as a change from method 1. Free e file irs See Change from method 1 under Series EE and series I bonds, earlier. Free e file irs Form 1099-INT for U. Free e file irs S. Free e file irs savings bonds interest. Free e file irs   When you cash a bond, the bank or other payer that redeems it must give you a Form 1099-INT if the interest part of the payment you receive is $10 or more. Free e file irs Box 3 of your Form 1099-INT should show the interest as the difference between the amount you received and the amount paid for the bond. Free e file irs However, your Form 1099-INT may show more interest than you have to include on your income tax return. Free e file irs For example, this may happen if any of the following are true. Free e file irs You chose to report the increase in the redemption value of the bond each year. Free e file irs The interest shown on your Form 1099-INT will not be reduced by amounts previously included in income. Free e file irs You received the bond from a decedent. Free e file irs The interest shown on your Form 1099-INT will not be reduced by any interest reported by the decedent before death, or on the decedent's final return, or by the estate on the estate's income tax return. Free e file irs Ownership of the bond was transferred. Free e file irs The interest shown on your Form 1099-INT will not be reduced by interest that accrued before the transfer. Free e file irs You were named as a co-owner, and the other co-owner contributed funds to buy the bond. Free e file irs The interest shown on your Form 1099-INT will not be reduced by the amount you received as nominee for the other co-owner. Free e file irs (See Co-owners , earlier in this chapter, for more information about the reporting requirements. Free e file irs ) You received the bond in a taxable distribution from a retirement or profit-sharing plan. Free e file irs The interest shown on your Form 1099-INT will not be reduced by the interest portion of the amount taxable as a distribution from the plan and not taxable as interest. Free e file irs (This amount is generally shown on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Free e file irs , for the year of distribution. Free e file irs )   For more information on including the correct amount of interest on your return, see How To Report Interest Income , later. Free e file irs Publication 550 includes examples showing how to report these amounts. Free e file irs    Interest on U. Free e file irs S. Free e file irs savings bonds is exempt from state and local taxes. Free e file irs The Form 1099-INT you receive will indicate the amount that is for U. Free e file irs S. Free e file irs savings bond interest in box 3. Free e file irs Education Savings Bond Program You may be able to exclude from income all or part of the interest you receive on the redemption of qualified U. Free e file irs S. Free e file irs savings bonds during the year if you pay qualified higher educational expenses during the same year. Free e file irs This exclusion is known as the Education Savings Bond Program. Free e file irs You do not qualify for this exclusion if your filing status is married filing separately. Free e file irs Form 8815. Free e file irs   Use Form 8815 to figure your exclusion. Free e file irs Attach the form to your Form 1040 or Form 1040A. Free e file irs Qualified U. Free e file irs S. Free e file irs savings bonds. Free e file irs   A qualified U. Free e file irs S. Free e file irs savings bond is a series EE bond issued after 1989 or a series I bond. Free e file irs The bond must be issued either in your name (sole owner) or in your and your spouse's names (co-owners). Free e file irs You must be at least 24 years old before the bond's issue date. Free e file irs For example, a bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or child. Free e file irs    The issue date of a bond may be earlier than the date the bond is purchased because the issue date assigned to a bond is the first day of the month in which it is purchased. Free e file irs Beneficiary. Free e file irs   You can designate any individual (including a child) as a beneficiary of the bond. Free e file irs Verification by IRS. Free e file irs   If you claim the exclusion, the IRS will check it by using bond redemption information from the Department of the Treasury. Free e file irs Qualified expenses. Free e file irs   Qualified higher educational expenses are tuition and fees required for you, your spouse, or your dependent (for whom you claim an exemption) to attend an eligible educational institution. Free e file irs   Qualified expenses include any contribution you make to a qualified tuition program or to a Coverdell education savings account. Free e file irs   Qualified expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program. Free e file irs Eligible educational institutions. Free e file irs   These institutions include most public, private, and nonprofit universities, colleges, and vocational schools that are accredited and eligible to participate in student aid programs run by the U. Free e file irs S. Free e file irs Department of Education. Free e file irs Reduction for certain benefits. Free e file irs   You must reduce your qualified higher educational expenses by all of the following tax-free benefits. Free e file irs Tax-free part of scholarships and fellowships (see Scholarships and fellowships in chapter 12). Free e file irs Expenses used to figure the tax-free portion of distributions from a Coverdell ESA. Free e file irs Expenses used to figure the tax-free portion of distributions from a qualified tuition program. Free e file irs Any tax-free payments (other than gifts or inheritances) received for educational expenses, such as Veterans' educational assistance benefits, Qualified tuition reductions, or Employer-provided educational assistance. Free e file irs Any expense used in figuring the American Opportunity and lifetime learning credits. Free e file irs Amount excludable. Free e file irs   If the total proceeds (interest and principal) from the qualified U. Free e file irs S. Free e file irs savings bonds you redeem during the year are not more than your adjusted qualified higher educational expenses for the year, you may be able to exclude all of the interest. Free e file irs If the proceeds are more than the expenses, you may be able to exclude only part of the interest. Free e file irs   To determine the excludable amount, multiply the interest part of the proceeds by a fraction. Free e file irs The numerator of the fraction is the qualified higher educational expenses you paid during the year. Free e file irs The denominator of the fraction is the total proceeds you received during the year. Free e file irs Example. Free e file irs In February 2013, Mark and Joan, a married couple, cashed a qualified series EE U. Free e file irs S. Free e file irs savings bond they bought in April 1997. Free e file irs They received proceeds of $8,372 representing principal of $5,000 and interest of $3,372. Free e file irs In 2013, they paid $4,000 of their daughter's college tuition. Free e file irs They are not claiming an education credit for that amount, and their daughter does not have any tax-free educational assistance. Free e file irs They can exclude $1,611 ($3,372 × ($4,000 ÷ $8,372)) of interest in 2013. Free e file irs They must pay tax on the remaining $1,761 ($3,372 − $1,611) interest. Free e file irs Modified adjusted gross income limit. Free e file irs   The interest exclusion is limited if your modified adjusted gross income (modified AGI) is: $74,700 to $89,700 for taxpayers filing single or head of household, and $112,050 to $142,050 for married taxpayers filing jointly or for a qualifying widow(er) with dependent child. Free e file irs You do not qualify for the interest exclusion if your modified AGI is equal to or more than the upper limit for your filing status. Free e file irs   Modified AGI, for purposes of this exclusion, is adjusted gross income (Form 1040, line 37, or Form 1040A, line 21) figured before the interest exclusion, and modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion and deduction, Exclusion of income for bona fide residents of American Samoa, Exclusion for income from Puerto Rico, Exclusion for adoption benefits received under an employer's adoption assistance program, Deduction for tuition and fees, Deduction for student loan interest, and Deduction for domestic production activities. Free e file irs   Use the Line 9 Worksheet in the Form 8815 instructions to figure your modified AGI. Free e file irs If you claim any of the exclusion or deduction items listed above (except items 6, 7, and 8), add the amount of the exclusion or deduction (except items 6, 7, and 8) to the amount on line 5 of the worksheet, and enter the total on Form 8815, line 9, as your modified AGI. Free e file irs   If you have investment interest expense incurred to earn royalties and other investment income, see Education Savings Bond Program in chapter 1 of Publication 550. Free e file irs Recordkeeping. Free e file irs If you claim the interest exclusion, you must keep a written record of the qualified U. Free e file irs S. Free e file irs savings bonds you redeem. Free e file irs Your record must include the serial number, issue date, face value, and total redemption proceeds (principal and interest) of each bond. Free e file irs You can use Form 8818 to record this information. Free e file irs You should also keep bills, receipts, canceled checks, or other documentation that shows you paid qualified higher educational expenses during the year. Free e file irs U. Free e file irs S. Free e file irs Treasury Bills, Notes, and Bonds Treasury bills, notes, and bonds are direct debts (obligations) of the U. Free e file irs S. Free e file irs Government. Free e file irs Taxation of interest. Free e file irs   Interest income from Treasury bills, notes, and bonds is subject to federal income tax but is exempt from all state and local income taxes. Free e file irs You should receive Form 1099-INT showing the interest (in box 3) paid to you for the year. Free e file irs   Payments of principal and interest generally will be credited to your designated checking or savings account by direct deposit through the TreasuryDirect® system. Free e file irs Treasury bills. Free e file irs   These bills generally have a 4-week, 13-week, 26-week, or 52-week maturity period. Free e file irs They are generally issued at a discount in the amount of $100 and multiples of $100. Free e file irs The difference between the discounted price you pay for the bills and the face value you receive at maturity is interest income. Free e file irs Generally, you report this interest income when the bill is paid at maturity. Free e file irs If you paid a premium for a bill (more than the face value), you generally report the premium as a section 171 deduction when the bill is paid at maturity. Free e file irs Treasury notes and bonds. Free e file irs   Treasury notes have maturity periods of more than 1 year, ranging up to 10 years. Free e file irs Maturity periods for Treasury bonds are longer than 10 years. Free e file irs Both generally are issued in denominations of $100 to $1 million and generally pay interest every 6 months. Free e file irs Generally, you report this interest for the year paid. Free e file irs For more information, see U. Free e file irs S. Free e file irs Treasury Bills, Notes, and Bonds in chapter 1 of Publication 550. Free e file irs For other information on Treasury notes or bonds, write to:  Bureau of the Public Debt P. Free e file irs O. Free e file irs Box 7015 Parkersburg, WV 26106-7015 Or, on the Internet, visit: www. Free e file irs treasurydirect. Free e file irs gov/indiv/indiv. Free e file irs htm. Free e file irs For information on series EE, series I, and series HH savings bonds, see U. Free e file irs S. Free e file irs Savings Bonds , earlier. Free e file irs Treasury inflation-protected securities (TIPS). Free e file irs   These securities pay interest twice a year at a fixed rate, based on a principal amount adjusted to take into account inflation and deflation. Free e file irs For the tax treatment of these securities, see Inflation-Indexed Debt Instruments under Original Issue Discount (OID), in Publication 550. Free e file irs Bonds Sold Between Interest Dates If you sell a bond between interest payment dates, part of the sales price represents interest accrued to the date of sale. Free e file irs You must report that part of the sales price as interest income for the year of sale. Free e file irs If you buy a bond between interest payment dates, part of the purchase price represents interest accrued before the date of purchase. Free e file irs When that interest is paid to you, treat it as a return of your capital investment, rather than interest income, by reducing your basis in the bond. Free e file irs See Accrued interest on bonds under How To Report Interest Income in chapter 1 of Publication 550 for information on reporting the payment. Free e file irs Insurance Life insurance proceeds paid to you as beneficiary of the insured person are usually not taxable. Free e file irs But if you receive the proceeds in installments, you must usually report a part of each installment payment as interest income. Free e file irs For more information about insurance proceeds received in installments, see Publication 525, Taxable and Nontaxable Income. Free e file irs Annuity. Free e file irs   If you buy an annuity with life insurance proceeds, the annuity payments you receive are taxed as pension and annuity income from a nonqualified plan, not as interest income. Free e file irs See chapter 10 for information on pension and annuity income from nonqualified plans. Free e file irs State or Local Government Obligations Interest on a bond used to finance government operations generally is not taxable if the bond is issued by a state, the District of Columbia, a possession of the United States, or any of their political subdivisions. Free e file irs Bonds issued after 1982 (including tribal economic development bonds issued after February 17, 2009) by an Indian tribal government are treated as issued by a state. Free e file irs Interest on these bonds is generally tax exempt if the bonds are part of an issue of which substantially all proceeds are to be used in the exercise of any essential government function. Free e file irs For information on federally guaranteed bonds, mortgage revenue bonds, arbitrage bonds, private activity bonds, qualified tax credit bonds, and Build America bonds, see State or Local Government Obligations in chapter 1 of Publication 550. Free e file irs Information reporting requirement. Free e file irs   If you must file a tax return, you are required to show any tax-exempt interest you received on your return. Free e file irs This is an information reporting requirement only. Free e file irs It does not change tax-exempt interest to taxable interest. Free e file irs Original Issue Discount (OID) Original issue discount (OID) is a form of interest. Free e file irs You generally include OID in your income as it accrues over the term of the debt instrument, whether or not you receive any payments from the issuer. Free e file irs A debt instrument generally has OID when the instrument is issued for a price that is less than its stated redemption price at maturity. Free e file irs OID is the difference between the stated redemption price at maturity and the issue price. Free e file irs All debt instruments that pay no interest before maturity are presumed to be issued at a discount. Free e file irs Zero coupon bonds are one example of these instruments. Free e file irs The OID accrual rules generally do not apply to short-term obligations (those with a fixed maturity date of 1 year or less from date of issue). Free e file irs See Discount on Short-Term Obligations in chapter 1 of Publication 550. Free e file irs De minimis OID. Free e file irs   You can treat the discount as zero if it is less than one-fourth of 1% (. Free e file irs 0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. Free e file irs This small discount is known as “de minimis” OID. Free e file irs Example 1. Free e file irs You bought a 10-year bond with a stated redemption price at maturity of $1,000, issued at $980 with OID of $20. Free e file irs One-fourth of 1% of $1,000 (stated redemption price) times 10 (the number of full years from the date of original issue to maturity) equals $25. Free e file irs Because the $20 discount is less than $25, the OID is treated as zero. Free e file irs (If you hold the bond at maturity, you will recognize $20 ($1,000 − $980) of capital gain. Free e file irs ) Example 2. Free e file irs The facts are the same as in Example 1, except that the bond was issued at $950. Free e file irs The OID is $50. Free e file irs Because the $50 discount is more than the $25 figured in Example 1, you must include the OID in income as it accrues over the term of the bond. Free e file irs Debt instrument bought after original issue. Free e file irs   If you buy a debt instrument with de minimis OID at a premium, the discount is not includible in income. Free e file irs If you buy a debt instrument with de minimis OID at a discount, the discount is reported under the market discount rules. Free e file irs See Market Discount Bonds in chapter 1 of Publication 550. Free e file irs Exceptions to reporting OID. Free e file irs   The OID rules discussed in this chapter do not apply to the following debt instruments. Free e file irs Tax-exempt obligations. Free e file irs (However, see Stripped tax-exempt obligations under Stripped Bonds and Coupons in chapter 1 of Publication 550). Free e file irs U. Free e file irs S. Free e file irs savings bonds. Free e file irs Short-term debt instruments (those with a fixed maturity date of not more than 1 year from the date of issue). Free e file irs Obligations issued by an individual before March 2, 1984. Free e file irs Loans between individuals if all the following are true. Free e file irs The lender is not in the business of lending money. Free e file irs The amount of the loan, plus the amount of any outstanding prior loans between the same individuals, is $10,000 or less. Free e file irs Avoiding any federal tax is not one of the principal purposes of the loan. Free e file irs Form 1099-OID. Free e file irs   The issuer of the debt instrument (or your broker if you held the instrument through a broker) should give you Form 1099-OID, or a similar statement, if the total OID for the calendar year is $10 or more. Free e file irs Form 1099-OID will show, in box 1, the amount of OID for the part of the year that you held the bond. Free e file irs It also will show, in box 2, the stated interest you must include in your income. Free e file irs A copy of Form 1099-OID will be sent to the IRS. Free e file irs Do not file your copy with your return. Free e file irs Keep it for your records. Free e file irs   In most cases, you must report the entire amount in boxes 1 and 2 of Form 1099-OID as interest income. Free e file irs But see Refiguring OID shown on Form 1099-OID, later in this discussion, for more information. Free e file irs Form 1099-OID not received. Free e file irs   If you had OID for the year but did not receive a Form 1099-OID, you can find tables on IRS. Free e file irs gov that list total OID on certain debt instruments and have information that will help you figure OID. Free e file irs For the latest OID tables, go to www. Free e file irs irs. Free e file irs gov and enter “OID tables” in the Search box. Free e file irs If your debt instrument is not listed, consult the issuer for further information about the accrued OID for the year. Free e file irs Nominee. Free e file irs   If someone else is the holder of record (the registered owner) of an OID instrument belonging to you and receives a Form 1099-OID on your behalf, that person must give you a Form 1099-OID. Free e file irs Refiguring OID shown on Form 1099-OID. Free e file irs   You must refigure the OID shown in box 1 or box 8 of Form 1099-OID if either of the following apply. Free e file irs You bought the debt instrument after its original issue and paid a premium or an acquisition premium. Free e file irs The debt instrument is a stripped bond or a stripped coupon (including certain zero coupon instruments). Free e file irs For information about figuring the correct amount of OID to include in your income, see Figuring OID on Long-Term Debt Instruments in Publication 1212. Free e file irs Refiguring periodic interest shown on Form 1099-OID. Free e file irs   If you disposed of a debt instrument or acquired it from another holder during the year, see Bonds Sold Between Interest Dates , earlier, for information about the treatment of periodic interest that may be shown in box 2 of Form 1099-OID for that instrument. Free e file irs Certificates of deposit (CDs). Free e file irs   If you buy a CD with a maturity of more than 1 year, you must include in income each year a part of the total interest due and report it in the same manner as other OID. Free e file irs   This also applies to similar deposit arrangements with banks, building and loan associations, etc. Free e file irs , including: Time deposits, Bonus plans, Savings certificates, Deferred income certificates, Bonus savings certificates, and Growth savings certificates. Free e file irs Bearer CDs. Free e file irs   CDs issued after 1982 generally must be in registered form. Free e file irs Bearer CDs are CDs not in registered form. Free e file irs They are not issued in the depositor's name and are transferable from one individual to another. Free e file irs   Banks must provide the IRS and the person redeeming a bearer CD with a Form 1099-INT. Free e file irs More information. Free e file irs   See chapter 1 of Publication 550 for more information about OID and related topics, such as market discount bonds. Free e file irs When To Report Interest Income When to report your interest income depends on whether you use the cash method or an accrual method to report income. Free e file irs Cash method. Free e file irs   Most individual taxpayers use the cash method. Free e file irs If you use this method, you generally report your interest income in the year in which you actually or constructively receive it. Free e file irs However, there are special rules for reporting the discount on certain debt instruments. Free e file irs See U. Free e file irs S. Free e file irs Savings Bonds and Original Issue Discount (OID) , earlier. Free e file irs Example. Free e file irs On September 1, 2011, you loaned another individual $2,000 at 12%, compounded annually. Free e file irs You are not in the business of lending money. Free e file irs The note stated that principal and interest would be due on August 31, 2013. Free e file irs In 2013, you received $2,508. Free e file irs 80 ($2,000 principal and $508. Free e file irs 80 interest). Free e file irs If you use the cash method, you must include in income on your 2013 return the $508. Free e file irs 80 interest you received in that year. Free e file irs Constructive receipt. Free e file irs   You constructively receive income when it is credited to your account or made available to you. Free e file irs You do not need to have physical possession of it. Free e file irs For example, you are considered to receive interest, dividends, or other earnings on any deposit or account in a bank, savings and loan, or similar financial institution, or interest on life insurance policy dividends left to accumulate, when they are credited to your account and subject to your withdrawal. Free e file irs This is true even if they are not yet entered in your passbook. Free e file irs   You constructively receive income on the deposit or account even if you must: Make withdrawals in multiples of even amounts, Give a notice to withdraw before making the withdrawal, Withdraw all or part of the account to withdraw the earnings, or Pay a penalty on early withdrawals, unless the interest you are to receive on an early withdrawal or redemption is substantially less than the interest payable at maturity. Free e file irs Accrual method. Free e file irs   If you use an accrual method, you report your interest income when you earn it, whether or not you have received it. Free e file irs Interest is earned over the term of the debt instrument. Free e file irs Example. Free e file irs If, in the previous example, you use an accrual method, you must include the interest in your income as you earn it. Free e file irs You would report the interest as follows: 2011, $80; 2012, $249. Free e file irs 60; and 2013, $179. Free e file irs 20. Free e file irs Coupon bonds. Free e file irs   Interest on coupon bonds is taxable in the year the coupon becomes due and payable. Free e file irs It does not matter when you mail the coupon for payment. Free e file irs How To Report Interest Income Generally, you report all your taxable interest income on Form 1040, line 8a; Form 1040A, line 8a; or Form 1040EZ, line 2. Free e file irs You cannot use Form 1040EZ if your taxable interest income is more than $1,500. Free e file irs Instead, you must use Form 1040A or Form 1040. Free e file irs Form 1040A. Free e file irs   You must complete Schedule B (Form 1040A or 1040), Part I, if you file Form 1040A and any of the following are true. Free e file irs Your taxable interest income is more than $1,500. Free e file irs You are claiming the interest exclusion under the Education Savings Bond Program (discussed earlier). Free e file irs You received interest from a seller-financed mortgage, and the buyer used the property as a home. Free e file irs You received a Form 1099-INT for U. Free e file irs S. Free e file irs savings bond interest that includes amounts you reported before 2013. Free e file irs You received, as a nominee, interest that actually belongs to someone else. Free e file irs You received a Form 1099-INT for interest on frozen deposits. Free e file irs You are reporting OID in an amount less than the amount shown on Form 1099-OID. Free e file irs You received a Form 1099-INT for interest on a bond you bought between interest payment dates. Free e file irs You acquired taxable bonds after 1987 and choose to reduce interest income from the bonds by any amortizable bond premium (see Bond Premium Amortization in chapter 3 of Publication 550). Free e file irs List each payer's name and the amount of interest income received from each payer on line 1. Free e file irs If you received a Form 1099-INT or Form 1099-OID from a brokerage firm, list the brokerage firm as the payer. Free e file irs   You cannot use Form 1040A if you must use Form 1040, as described next. Free e file irs Form 1040. Free e file irs   You must use Form 1040 instead of Form 1040A or Form 1040EZ if: You forfeited interest income because of the early withdrawal of a time deposit; You acquired taxable bonds after 1987, you choose to reduce interest income from the bonds by any amortizable bond premium, and you are deducting the excess of bond premium amortization for the accrual period over the qualified stated interest for the period (see Bond Premium Amortization in chapter 3 of Publication 550); or You received tax-exempt interest from private activity bonds issued after August 7, 1986. Free e file irs Schedule B (Form 1040A or 1040). Free e file irs   You must complete Schedule B (Form 1040A or 1040), Part I, if you file Form 1040 and any of the following apply. Free e file irs Your taxable interest income is more than $1,500. Free e file irs You are claiming the interest exclusion under the Education Savings Bond Program (discussed earlier). Free e file irs You received interest from a seller-financed mortgage, and the buyer used the property as a home. Free e file irs You received a Form 1099-INT for U. Free e file irs S. Free e file irs savings bond interest that includes amounts you reported before 2013. Free e file irs You received, as a nominee, interest that actually belongs to someone else. Free e file irs You received a Form 1099-INT for interest on frozen deposits. Free e file irs You received a Form 1099-INT for interest on a bond you bought between interest payment dates. Free e file irs You are reporting OID in an amount less than the amount shown on Form 1099-OID. Free e file irs Statement (2) in the preceding list under Form 1040 is true. Free e file irs In Part I, line 1, list each payer's name and the amount received from each. Free e file irs If you received a Form 1099-INT or Form 1099-OID from a brokerage firm, list the brokerage firm as the payer. Free e file irs Reporting tax-exempt interest. Free e file irs   Total your tax-exempt interest (such as interest or accrued OID on certain state and municipal bonds, including tax-exempt interest on zero coupon municipal bonds) and exempt-interest dividends from a mutual fund as shown on Form 1099-INT, box 8, and on Form 1099-DIV, box 10. Free e file irs Add these amounts to any other tax-exempt interest you received. Free e file irs Report the total on line 8b of Form 1040A or 1040. Free e file irs   If you file Form 1040EZ, enter “TEI” and the amount in the space to the left of line 2. Free e file irs Do not add tax-exempt interest in the total on Form 1040EZ, line 2. Free e file irs   Form 1099-INT, box 9, and Form 1099-DIV, box 11, show the tax-exempt interest subject to the alternative minimum tax on Form 6251. Free e file irs These amounts are already included in the amounts on Form 1099-INT, box 8, and Form 1099-DIV, box 10. Free e file irs Do not add the amounts in Form 1099-INT, box 9 and Form 1099-DIV, box 11 to, or subtract them from, the amounts on Form 1099-INT, box 8, and Form 1099-DIV, box 10. Free e file irs    Do not report interest from an individual retirement account (IRA) as tax-exempt interest. Free e file irs Form 1099-INT. Free e file irs   Your taxable interest income, except for interest from U. Free e file irs S. Free e file irs savings bonds and Treasury obligations, is shown in box 1 of Form 1099-INT. Free e file irs Add this amount to any other taxable interest income you received. Free e file irs You must report all of your taxable interest income even if you do not receive a Form 1099-INT. Free e file irs Generally, contact your financial institution if you do not receive a Form 1099-INT by February 15. Free e file irs Your identifying number may be truncated on any paper Form 1099-INT you receive. Free e file irs   If you forfeited interest income because of the early withdrawal of a time deposit, the deductible amount will be shown on Form 1099-INT in box 2. Free e file irs See Penalty on early withdrawal of savings in chapter 1 of Publication 550. Free e file irs   Box 3 of Form 1099-INT shows the interest income you received from U. Free e file irs S. Free e file irs savings bonds, Treasury bills, Treasury notes, and Treasury bonds. Free e file irs Add the amount shown in box 3 to any other taxable interest income you received, unless part of the amount in box 3 was previously included in your interest income. Free e file irs If part of the amount shown in box 3 was previously included in your interest income, see U. Free e file irs S. Free e file irs savings bond interest previously reported , later. Free e file irs   Box 4 of Form 1099-INT will contain an amount if you were subject to backup withholding. Free e file irs Report the amount from box 4 on Form 1040EZ, line 7; on Form 1040A, line 36; or Form 1040, line 62 (federal income tax withheld). Free e file irs   Box 5 of Form 1099-INT shows investment expenses you may be able to deduct as an itemized deduction. Free e file irs See chapter 28 for more information about investment expenses. Free e file irs   If there are entries in boxes 6 and 7 of Form 1099-INT, you must file Form 1040. Free e file irs You may be able to take a credit for the amount shown in box 6 unless you deduct this amount on line 8 of Schedule A (Form 1040). Free e file irs To take the credit, you may have to file Form 1116, Foreign Tax Credit. Free e file irs For more information, see Publication 514, Foreign Tax Credit for Individuals. Free e file irs U. Free e file irs S. Free e file irs savings bond interest previously reported. Free e file irs   If you received a Form 1099-INT for U. Free e file irs S. Free e file irs savings bond interest, the form may show interest you do not have to report. Free e file irs See Form 1099-INT for U. Free e file irs S. Free e file irs savings bonds interest , earlier, under U. Free e file irs S. Free e file irs Savings Bonds. Free e file irs   On Schedule B (Form 1040A or 1040), Part I, line 1, report all the interest shown on your Form 1099-INT. Free e file irs Then follow these steps. Free e file irs Several lines above line 2, enter a subtotal of all interest listed on line 1. Free e file irs Below the subtotal enter “U. Free e file irs S. Free e file irs Savings Bond Interest Previously Reported” and enter amounts previously reported or interest accrued before you received the bond. Free e file irs Subtract these amounts from the subtotal and enter the result on line 2. Free e file irs More information. Free e file irs   For more information about how to report interest income, see chapter 1 of Publication 550 or the instructions for the form you must file. Free e file irs Prev  Up  Next   Home   More Online Publications