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Free Federal Tax Filing 2012

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Free Federal Tax Filing 2012

Free federal tax filing 2012 Publication 587 - Main Content Table of Contents Qualifying for a DeductionExclusive Use Regular Use Trade or Business Use Principal Place of Business Place To Meet Patients, Clients, or Customers Separate Structure Figuring the DeductionUsing Actual Expenses Using the Simplified Method Daycare Facility Standard meal and snack rates. Free federal tax filing 2012 Sale or Exchange of Your HomeGain on Sale Depreciation Basis Adjustment Reporting the Sale More Information Business Furniture and EquipmentListed Property Property Bought for Business Use Personal Property Converted to Business Use Recordkeeping Where To DeductSelf-Employed Persons Employees Partners How To Get Tax HelpLow Income Taxpayer Clinics Worksheet To Figure the Deduction for Business Use of Your HomeInstructions for the Worksheet Worksheets To Figure the Deduction for Business Use of Your Home (Simplified Method) Instructions for the Simplified Method Worksheet Instructions for the Daycare Facility Worksheet Instructions for the Area Adjustment Worksheet Qualifying for a Deduction Generally, you cannot deduct items related to your home, such as mortgage interest, real estate taxes, utilities, maintenance, rent, depreciation, or property insurance, as business expenses. Free federal tax filing 2012 However, you may be able to deduct expenses related to the business use of part of your home if you meet specific requirements. Free federal tax filing 2012 Even then, the deductible amount of these types of expenses may be limited. Free federal tax filing 2012 Use this section and Figure A, later, to decide if you can deduct expenses for the business use of your home. Free federal tax filing 2012 To qualify to deduct expenses for business use of your home, you must use part of your home: Exclusively and regularly as your principal place of business (defined later), Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, In the case of a separate structure which is not attached to your home, in connection with your trade or business, On a regular basis for certain storage use (see Storage of inventory or product samples , later), For rental use (see Publication 527), or As a daycare facility (see Daycare Facility , later). Free federal tax filing 2012 Additional tests for employee use. Free federal tax filing 2012   If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use. Free federal tax filing 2012 You must meet the tests discussed earlier plus: Your business use must be for the convenience of your employer, and You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer. Free federal tax filing 2012 If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home. Free federal tax filing 2012 Exclusive Use To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. Free federal tax filing 2012 The area used for business can be a room or other separately identifiable space. Free federal tax filing 2012 The space does not need to be marked off by a permanent partition. Free federal tax filing 2012 You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes. Free federal tax filing 2012 Example. Free federal tax filing 2012 You are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns. Free federal tax filing 2012 Your family also uses the den for recreation. Free federal tax filing 2012 The den is not used exclusively in your trade or business, so you cannot claim a deduction for the business use of the den. Free federal tax filing 2012 Exceptions to Exclusive Use You do not have to meet the exclusive use test if either of the following applies. Free federal tax filing 2012 You use part of your home for the storage of inventory or product samples (discussed next). Free federal tax filing 2012 You use part of your home as a daycare facility, discussed later under Daycare Facility . Free federal tax filing 2012 Note. Free federal tax filing 2012 With the exception of these two uses, any portion of the home used for business purposes must meet the exclusive use test. Free federal tax filing 2012 Storage of inventory or product samples. Free federal tax filing 2012    If you use part of your home for storage of inventory or product samples, you can deduct expenses for the business use of your home without meeting the exclusive use test. Free federal tax filing 2012 However, you must meet all the following tests. Free federal tax filing 2012 You sell products at wholesale or retail as your trade or business. Free federal tax filing 2012 You keep the inventory or product samples in your home for use in your trade or business. Free federal tax filing 2012 Your home is the only fixed location of your trade or business. Free federal tax filing 2012 You use the storage space on a regular basis. Free federal tax filing 2012 The space you use is a separately identifiable space suitable for storage. Free federal tax filing 2012 Example. Free federal tax filing 2012 Your home is the only fixed location of your business of selling mechanics' tools at retail. Free federal tax filing 2012 You regularly use half of your basement for storage of inventory and product samples. Free federal tax filing 2012 You sometimes use the area for personal purposes. Free federal tax filing 2012 The expenses for the storage space are deductible even though you do not use this part of your basement exclusively for business. Free federal tax filing 2012 Regular Use To qualify under the regular use test, you must use a specific area of your home for business on a regular basis. Free federal tax filing 2012 Incidental or occasional business use is not regular use. Free federal tax filing 2012 You must consider all facts and circumstances in determining whether your use is on a regular basis. Free federal tax filing 2012 Trade or Business Use To qualify under the trade-or-business-use test, you must use part of your home in connection with a trade or business. Free federal tax filing 2012 If you use your home for a profit-seeking activity that is not a trade or business, you cannot take a deduction for its business use. Free federal tax filing 2012 Example. Free federal tax filing 2012 You use part of your home exclusively and regularly to read financial periodicals and reports, clip bond coupons, and carry out similar activities related to your own investments. Free federal tax filing 2012 You do not make investments as a broker or dealer. Free federal tax filing 2012 So, your activities are not part of a trade or business and you cannot take a deduction for the business use of your home. Free federal tax filing 2012 Principal Place of Business You can have more than one business location, including your home, for a single trade or business. Free federal tax filing 2012 To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that trade or business. Free federal tax filing 2012 To determine whether your home is your principal place of business, you must consider: The relative importance of the activities performed at each place where you conduct business, and The amount of time spent at each place where you conduct business. Free federal tax filing 2012 Your home office will qualify as your principal place of business if you meet the following requirements. Free federal tax filing 2012 You use it exclusively and regularly for administrative or management activities of your trade or business. Free federal tax filing 2012 You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Free federal tax filing 2012 If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. Free federal tax filing 2012 However, see the later discussions under Place To Meet Patients, Clients, or Customers and Separate Structure for other ways to qualify to deduct home office expenses. Free federal tax filing 2012 Administrative or management activities. Free federal tax filing 2012   There are many activities that are administrative or managerial in nature. Free federal tax filing 2012 The following are a few examples. Free federal tax filing 2012 Billing customers, clients, or patients. Free federal tax filing 2012 Keeping books and records. Free federal tax filing 2012 Ordering supplies. Free federal tax filing 2012 Setting up appointments. Free federal tax filing 2012 Forwarding orders or writing reports. Free federal tax filing 2012 Administrative or management activities performed at other locations. Free federal tax filing 2012   The following activities performed by you or others will not disqualify your home office from being your principal place of business. Free federal tax filing 2012 You have others conduct your administrative or management activities at locations other than your home. Free federal tax filing 2012 (For example, another company does your billing from its place of business. Free federal tax filing 2012 ) You conduct administrative or management activities at places that are not fixed locations of your business, such as in a car or a hotel room. Free federal tax filing 2012 You occasionally conduct minimal administrative or management activities at a fixed location outside your home. Free federal tax filing 2012 You conduct substantial nonadministrative or nonmanagement business activities at a fixed location outside your home. Free federal tax filing 2012 (For example, you meet with or provide services to customers, clients, or patients at a fixed location of the business outside your home. Free federal tax filing 2012 ) You have suitable space to conduct administrative or management activities outside your home, but choose to use your home office for those activities instead. Free federal tax filing 2012 Please click here for the text description of the image. Free federal tax filing 2012 Can you deduct business use of the home expenses? Example 1. Free federal tax filing 2012 John is a self-employed plumber. Free federal tax filing 2012 Most of John's time is spent at customers' homes and offices installing and repairing plumbing. Free federal tax filing 2012 He has a small office in his home that he uses exclusively and regularly for the administrative or management activities of his business, such as phoning customers, ordering supplies, and keeping his books. Free federal tax filing 2012 John writes up estimates and records of work completed at his customers' premises. Free federal tax filing 2012 He does not conduct any substantial administrative or management activities at any fixed location other than his home office. Free federal tax filing 2012 John does not do his own billing. Free federal tax filing 2012 He uses a local bookkeeping service to bill his customers. Free federal tax filing 2012 John's home office qualifies as his principal place of business for deducting expenses for its use. Free federal tax filing 2012 He uses the home office for the administrative or managerial activities of his plumbing business and he has no other fixed location where he conducts these administrative or managerial activities. Free federal tax filing 2012 His choice to have his billing done by another company does not disqualify his home office from being his principal place of business. Free federal tax filing 2012 He meets all the qualifications, including principal place of business, so he can deduct expenses (subject to certain limitations, explained later) for the business use of his home. Free federal tax filing 2012 Example 2. Free federal tax filing 2012 Pamela is a self-employed sales representative for several different product lines. Free federal tax filing 2012 She has an office in her home that she uses exclusively and regularly to set up appointments and write up orders and other reports for the companies whose products she sells. Free federal tax filing 2012 She occasionally writes up orders and sets up appointments from her hotel room when she is away on business overnight. Free federal tax filing 2012 Pamela's business is selling products to customers at various locations throughout her territory. Free federal tax filing 2012 To make these sales, she regularly visits customers to explain the available products and take orders. Free federal tax filing 2012 Pamela's home office qualifies as her principal place of business for deducting expenses for its use. Free federal tax filing 2012 She conducts administrative or management activities there and she has no other fixed location where she conducts substantial administrative or management activities. Free federal tax filing 2012 The fact that she conducts some administrative or management activities in her hotel room (not a fixed location) does not disqualify her home office from being her principal place of business. Free federal tax filing 2012 She meets all the qualifications, including principal place of business, so she can deduct expenses (subject to certain limitations, explained later) for the business use of her home. Free federal tax filing 2012 Example 3. Free federal tax filing 2012 Paul is a self-employed anesthesiologist. Free federal tax filing 2012 He spends the majority of his time administering anesthesia and postoperative care in three local hospitals. Free federal tax filing 2012 One of the hospitals provides him with a small shared office where he could conduct administrative or management activities. Free federal tax filing 2012 Paul very rarely uses the office the hospital provides. Free federal tax filing 2012 He uses a room in his home that he has converted to an office. Free federal tax filing 2012 He uses this room exclusively and regularly to conduct all the following activities. Free federal tax filing 2012 Contacting patients, surgeons, and hospitals regarding scheduling. Free federal tax filing 2012 Preparing for treatments and presentations. Free federal tax filing 2012 Maintaining billing records and patient logs. Free federal tax filing 2012 Satisfying continuing medical education requirements. Free federal tax filing 2012 Reading medical journals and books. Free federal tax filing 2012 Paul's home office qualifies as his principal place of business for deducting expenses for its use. Free federal tax filing 2012 He conducts administrative or management activities for his business as an anesthesiologist there and he has no other fixed location where he conducts substantial administrative or management activities for this business. Free federal tax filing 2012 His choice to use his home office instead of the one provided by the hospital does not disqualify his home office from being his principal place of business. Free federal tax filing 2012 His performance of substantial nonadministrative or nonmanagement activities at fixed locations outside his home also does not disqualify his home office from being his principal place of business. Free federal tax filing 2012 He meets all the qualifications, including principal place of business, so he can deduct expenses (subject to certain limitations, explained later) for the business use of his home. Free federal tax filing 2012 Example 4. Free federal tax filing 2012 Kathleen is employed as a teacher. Free federal tax filing 2012 She is required to teach and meet with students at the school and to grade papers and tests. Free federal tax filing 2012 The school provides her with a small office where she can work on her lesson plans, grade papers and tests, and meet with parents and students. Free federal tax filing 2012 The school does not require her to work at home. Free federal tax filing 2012 Kathleen prefers to use the office she has set up in her home and does not use the one provided by the school. Free federal tax filing 2012 She uses this home office exclusively and regularly for the administrative duties of her teaching job. Free federal tax filing 2012 Kathleen must meet the convenience-of-the-employer test, even if her home qualifies as her principal place of business for deducting expenses for its use. Free federal tax filing 2012 Her employer provides her with an office and does not require her to work at home, so she does not meet the convenience-of-the-employer test and cannot claim a deduction for the business use of her home. Free federal tax filing 2012 More Than One Trade or Business The same home office can be the principal place of business for two or more separate business activities. Free federal tax filing 2012 Whether your home office is the principal place of business for more than one business activity must be determined separately for each of your trade or business activities. Free federal tax filing 2012 You must use the home office exclusively and regularly for one or more of the following purposes. Free federal tax filing 2012 As the principal place of business for one or more of your trades or businesses. Free federal tax filing 2012 As a place to meet or deal with patients, clients, or customers in the normal course of one or more of your trades or businesses. Free federal tax filing 2012 If your home office is a separate structure, in connection with one or more of your trades or businesses. Free federal tax filing 2012 You can use your home office for more than one business activity, but you cannot use it for any nonbusiness (i. Free federal tax filing 2012 e. Free federal tax filing 2012 , personal) activities. Free federal tax filing 2012 If you are an employee, any use of the home office in connection with your employment must be for the convenience of your employer. Free federal tax filing 2012 See Rental to employer , later, if you rent part of your home to your employer. Free federal tax filing 2012 Example. Free federal tax filing 2012 Tracy White is employed as a teacher. Free federal tax filing 2012 Her principal place of work is the school, which provides her office space to do her school work. Free federal tax filing 2012 She also has a mail order jewelry business. Free federal tax filing 2012 All her work in the jewelry business is done in her home office and the office is used exclusively for that business. Free federal tax filing 2012 If she meets all the other tests, she can deduct expenses for the business use of her home for the jewelry business. Free federal tax filing 2012 If Tracy also uses the office for work related to her teaching, she must meet the exclusive use test for both businesses to qualify for the deduction. Free federal tax filing 2012 As an employee, Tracy must also meet the convenience-of-the-employer test to qualify for the deduction. Free federal tax filing 2012 She does not meet this test for her work as a teacher, so she cannot claim a deduction for the business use of her home for either activity. Free federal tax filing 2012 Place To Meet Patients, Clients, or Customers If you meet or deal with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business if you meet both the following tests. Free federal tax filing 2012 You physically meet with patients, clients, or customers on your premises. Free federal tax filing 2012 Their use of your home is substantial and integral to the conduct of your business. Free federal tax filing 2012 Doctors, dentists, attorneys, and other professionals who maintain offices in their homes generally will meet this requirement. Free federal tax filing 2012 Using your home for occasional meetings and telephone calls will not qualify you to deduct expenses for the business use of your home. Free federal tax filing 2012 The part of your home you use exclusively and regularly to meet patients, clients, or customers does not have to be your principal place of business. Free federal tax filing 2012 Example. Free federal tax filing 2012 June Quill, a self-employed attorney, works 3 days a week in her city office. Free federal tax filing 2012 She works 2 days a week in her home office used only for business. Free federal tax filing 2012 She regularly meets clients there. Free federal tax filing 2012 Her home office qualifies for a business deduction because she meets clients there in the normal course of her business. Free federal tax filing 2012 Separate Structure You can deduct expenses for a separate free-standing structure, such as a studio, workshop, garage, or barn, if you use it exclusively and regularly for your business. Free federal tax filing 2012 The structure does not have to be your principal place of business or a place where you meet patients, clients, or customers. Free federal tax filing 2012 Example. Free federal tax filing 2012 John Berry operates a floral shop in town. Free federal tax filing 2012 He grows the plants for his shop in a greenhouse behind his home. Free federal tax filing 2012 He uses the greenhouse exclusively and regularly in his business, so he can deduct the expenses for its use, subject to certain limitations, explained later. Free federal tax filing 2012 Figuring the Deduction After you determine that you meet the tests under Qualifying for a Deduction , you can begin to figure how much you can deduct. Free federal tax filing 2012 When figuring the amount you can deduct for the business use of your home, you will use either your actual expenses or a simplified method. Free federal tax filing 2012 Electing to use the simplified method. Free federal tax filing 2012   The simplified method is an alternative to the calculation, allocation, and substantiation of actual expenses. Free federal tax filing 2012 You choose whether or not to figure your deduction using the simplified method each taxable year. Free federal tax filing 2012 See Using the Simplified Method , later. Free federal tax filing 2012 Rental to employer. Free federal tax filing 2012   If you rent part of your home to your employer and you use the rented part in performing services for your employer as an employee, your deduction for the business use of your home is limited. Free federal tax filing 2012 You can deduct mortgage interest, qualified mortgage insurance premiums, real estate taxes, and personal casualty losses for the rented part, subject to any limitations. Free federal tax filing 2012 However, you cannot deduct otherwise allowable trade or business expenses, business casualty losses, or depreciation related to the use of your home (or use the simplified method as an alternative to deducting these actual expenses) in performing services for your employer. Free federal tax filing 2012 Using Actual Expenses If you do not or cannot elect to use the simplified method for a home, you will figure your deduction for that home using your actual expenses. Free federal tax filing 2012 You will also need to figure the percentage of your home used for business and the limit on the deduction. Free federal tax filing 2012 If you are an employee or a partner, or you use your home in your farming business and you file Schedule F (Form 1040), you can use the Worksheet To Figure the Deduction for Business Use of Your Home, near the end of this publication, to help you figure your deduction. Free federal tax filing 2012 If you use your home in a trade or business and you file Schedule C (Form 1040), you will use Form 8829 to figure your deduction. Free federal tax filing 2012 Part-year use. Free federal tax filing 2012   You cannot deduct expenses for the business use of your home incurred during any part of the year you did not use your home for business purposes. Free federal tax filing 2012 For example, if you begin using part of your home for business on July 1, and you meet all the tests from that date until the end of the year, consider only your expenses for the last half of the year in figuring your allowable deduction. Free federal tax filing 2012 Expenses related to tax-exempt income. Free federal tax filing 2012   Generally, you cannot deduct expenses that are related to tax-exempt allowances. Free federal tax filing 2012 However, if you receive a tax-exempt parsonage allowance or a tax-exempt military allowance, your expenses for mortgage interest and real estate taxes are deductible under the normal rules. Free federal tax filing 2012 No deduction is allowed for other expenses related to the tax-exempt allowance. Free federal tax filing 2012   If your housing is provided free of charge and the value of the housing is tax exempt, you cannot deduct the rental value of any portion of the housing. Free federal tax filing 2012 Actual Expenses You must divide the expenses of operating your home between personal and business use. Free federal tax filing 2012 The part of a home operating expense you can use to figure your deduction depends on both of the following. Free federal tax filing 2012 Whether the expense is direct, indirect, or unrelated. Free federal tax filing 2012 The percentage of your home used for business. Free federal tax filing 2012 Table 1, next, describes the types of expenses you may have and the extent to which they are deductible. Free federal tax filing 2012 Table 1. Free federal tax filing 2012 Types of Expenses  Expense  Description  Deductibility Direct Expenses only for  the business part  of your home. Free federal tax filing 2012 Deductible in full. Free federal tax filing 2012 *   Examples:  Painting or repairs  only in the area  used for business. Free federal tax filing 2012 Exception: May be only partially  deductible in a daycare facility. Free federal tax filing 2012 See Daycare Facility , later. Free federal tax filing 2012 Indirect Expenses for  keeping up and running your  entire home. Free federal tax filing 2012 Deductible based on the percentage of your home used for business. Free federal tax filing 2012 *   Examples:  Insurance, utilities, and  general repairs. Free federal tax filing 2012   Unrelated Expenses only for  the parts of your  home not used  for business. Free federal tax filing 2012 Not deductible. Free federal tax filing 2012   Examples:  Lawn care or painting  a room not used  for business. Free federal tax filing 2012   *Subject to the deduction limit, discussed later. Free federal tax filing 2012 Form 8829 and the Worksheet To Figure the Deduction for Business Use of Your Home have separate columns for direct and indirect expenses. Free federal tax filing 2012 Certain expenses are deductible whether or not you use your home for business. Free federal tax filing 2012 If you qualify to deduct business use of the home expenses, use the business percentage of these expenses to figure your total business use of the home deduction. Free federal tax filing 2012 These expenses include the following. Free federal tax filing 2012 Real estate taxes. Free federal tax filing 2012 Qualified mortgage insurance premiums. Free federal tax filing 2012 Deductible mortgage interest. Free federal tax filing 2012 Casualty losses. Free federal tax filing 2012 Other expenses are deductible only if you use your home for business. Free federal tax filing 2012 You can use the business percentage of these expenses to figure your total business use of the home deduction. Free federal tax filing 2012 These expenses generally include (but are not limited to) the following. Free federal tax filing 2012 Depreciation (covered under Depreciating Your Home , later). Free federal tax filing 2012 Insurance. Free federal tax filing 2012 Rent paid for the use of property you do not own but use in your trade or business. Free federal tax filing 2012 Repairs. Free federal tax filing 2012 Security system. Free federal tax filing 2012 Utilities and services. Free federal tax filing 2012 Real estate taxes. Free federal tax filing 2012   To figure the business part of your real estate taxes, multiply the real estate taxes paid by the percentage of your home used for business. Free federal tax filing 2012   For more information on the deduction for real estate taxes, see Publication 530, Tax Information for Homeowners. Free federal tax filing 2012 Deductible mortgage interest. Free federal tax filing 2012   To figure the business part of your deductible mortgage interest, multiply this interest by the percentage of your home used for business. Free federal tax filing 2012 You can include interest on a second mortgage in this computation. Free federal tax filing 2012 If your total mortgage debt is more than $1,000,000 or your home equity debt is more than $100,000, your deduction may be limited. Free federal tax filing 2012 For more information on what interest is deductible, see Publication 936, Home Mortgage Interest Deduction. Free federal tax filing 2012 Qualified mortgage insurance premiums. Free federal tax filing 2012   To figure the business part of your qualified mortgage insurance premiums, multiply the premiums by the percentage of your home used for business. Free federal tax filing 2012 You can include premiums for insurance on a second mortgage in this computation. Free federal tax filing 2012 If your adjusted gross income is more than $100,000 ($50,000 if your filing status is married filing separately), your deduction may be limited. Free federal tax filing 2012 For more information, see Publication 936, and Line 13 in the Instructions for Schedule A (Form 1040). Free federal tax filing 2012 Casualty losses. Free federal tax filing 2012    If you have a casualty loss on your home that you use for business, treat the casualty loss as a direct expense, an indirect expense, or an unrelated expense, depending on the property affected. Free federal tax filing 2012 A direct expense is the loss on the portion of the property you use only in your business. Free federal tax filing 2012 Use the entire loss to figure the business use of the home deduction. Free federal tax filing 2012 An indirect expense is the loss on property you use for both business and personal purposes. Free federal tax filing 2012 Use only the business portion to figure the deduction. Free federal tax filing 2012 An unrelated expense is the loss on property you do not use in your business. Free federal tax filing 2012 Do not use any of the loss to figure the deduction. Free federal tax filing 2012 Example. Free federal tax filing 2012 You meet the rules to take a deduction for an office in your home that is 10% of the total area of your house. Free federal tax filing 2012 A storm damages your roof. Free federal tax filing 2012 This is an indirect expense as the roof is part of the whole house and is considered to be used both for business and personal purposes. Free federal tax filing 2012 You would complete Form 4684, Casualties and Thefts, to report your loss. Free federal tax filing 2012 You complete both section A (Personal Use Property) and section B (Business and Income-Producing Property) as your home is used both for business and personal purposes. Free federal tax filing 2012 Since you use 90% of your home for personal purposes, use 90% of the cost or adjusted basis of your home, insurance or other reimbursement, and fair market value, both before and after the storm, to figure the amounts to enter on lines 2, 3, 5, and 6 of Form 4684. Free federal tax filing 2012 Since you use 10% of your home for business purposes, use 10% of the cost or adjusted basis of your home, insurance or other reimbursement, and fair market value, both before and after the storm, to figure the amounts to enter on lines 20, 21, 23, and 24 of Form 4684. Free federal tax filing 2012 Forms and worksheets to use. Free federal tax filing 2012   If you are filing Schedule C (Form 1040), get Form 8829 and follow the instructions for casualty losses. Free federal tax filing 2012 If you are an employee or a partner, or you file Schedule F (Form 1040), use the Worksheet To Figure the Deduction for Business Use of Your Home, near the end of this publication. Free federal tax filing 2012 You will also need to get Form 4684. Free federal tax filing 2012 More information. Free federal tax filing 2012   For more information on casualty losses, see Publication 547, Casualties, Disasters, and Thefts. Free federal tax filing 2012 Insurance. Free federal tax filing 2012   You can deduct the cost of insurance that covers the business part of your home. Free federal tax filing 2012 However, if your insurance premium gives you coverage for a period that extends past the end of your tax year, you can deduct only the business percentage of the part of the premium that gives you coverage for your tax year. Free federal tax filing 2012 You can deduct the business percentage of the part that applies to the following year in that year. Free federal tax filing 2012 Rent. Free federal tax filing 2012   If you rent the home you occupy and meet the requirements for business use of the home, you can deduct part of the rent you pay. Free federal tax filing 2012 To figure your deduction, multiply your rent payments by the percentage of your home used for business. Free federal tax filing 2012   If you own your home, you cannot deduct the fair rental value of your home. Free federal tax filing 2012 However, see Depreciating Your Home , later. Free federal tax filing 2012 Repairs. Free federal tax filing 2012   The cost of repairs that relate to your business, including labor (other than your own labor), is a deductible expense. Free federal tax filing 2012 For example, a furnace repair benefits the entire home. Free federal tax filing 2012 If you use 10% of your home for business, you can deduct 10% of the cost of the furnace repair. Free federal tax filing 2012   Repairs keep your home in good working order over its useful life. Free federal tax filing 2012 Examples of common repairs are patching walls and floors, painting, wallpapering, repairing roofs and gutters, and mending leaks. Free federal tax filing 2012 However, repairs are sometimes treated as a permanent improvement and are not deductible. Free federal tax filing 2012 See Permanent improvements , later, under Depreciating Your Home. Free federal tax filing 2012 Security system. Free federal tax filing 2012   If you install a security system that protects all the doors and windows in your home, you can deduct the business part of the expenses you incur to maintain and monitor the system. Free federal tax filing 2012 You also can take a depreciation deduction for the part of the cost of the security system relating to the business use of your home. Free federal tax filing 2012 Utilities and services. Free federal tax filing 2012   Expenses for utilities and services, such as electricity, gas, trash removal, and cleaning services, are primarily personal expenses. Free federal tax filing 2012 However, if you use part of your home for business, you can deduct the business part of these expenses. Free federal tax filing 2012 Generally, the business percentage for utilities is the same as the percentage of your home used for business. Free federal tax filing 2012 Telephone. Free federal tax filing 2012   The basic local telephone service charge, including taxes, for the first telephone line into your home (i. Free federal tax filing 2012 e. Free federal tax filing 2012 , landline) is a nondeductible personal expense. Free federal tax filing 2012 However, charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for business, are deductible business expenses. Free federal tax filing 2012 Do not include these expenses as a cost of using your home for business. Free federal tax filing 2012 Deduct these charges separately on the appropriate form or schedule. Free federal tax filing 2012 For example, if you file Schedule C (Form 1040), deduct these expenses on line 25, Utilities (instead of line 30, Expenses for business use of your home). Free federal tax filing 2012 Depreciating Your Home If you own your home and qualify to deduct expenses for its business use, you can claim a deduction for depreciation. Free federal tax filing 2012 Depreciation is an allowance for the wear and tear on the part of your home used for business. Free federal tax filing 2012 You cannot depreciate the cost or value of the land. Free federal tax filing 2012 You recover its cost when you sell or otherwise dispose of the property. Free federal tax filing 2012 Before you figure your depreciation deduction, you need to know the following information. Free federal tax filing 2012 The month and year you started using your home for business. Free federal tax filing 2012 The adjusted basis and fair market value of your home (excluding land) at the time you began using it for business. Free federal tax filing 2012 The cost of any improvements before and after you began using the property for business. Free federal tax filing 2012 The percentage of your home used for business. Free federal tax filing 2012 See Business Percentage , later. Free federal tax filing 2012 Adjusted basis defined. Free federal tax filing 2012   The adjusted basis of your home is generally its cost, plus the cost of any permanent improvements you made to it, minus any casualty losses or depreciation deducted in earlier tax years. Free federal tax filing 2012 For a discussion of adjusted basis, see Publication 551. Free federal tax filing 2012 Permanent improvements. Free federal tax filing 2012   A permanent improvement increases the value of property, adds to its life, or gives it a new or different use. Free federal tax filing 2012 Examples of improvements are replacing electric wiring or plumbing, adding a new roof or addition, paneling, or remodeling. Free federal tax filing 2012    You must carefully distinguish between repairs and improvements. Free federal tax filing 2012 See Repairs , earlier, under Actual Expenses. Free federal tax filing 2012 You also must keep accurate records of these expenses. Free federal tax filing 2012 These records will help you decide whether an expense is a deductible or a capital (added to the basis) expense. Free federal tax filing 2012 However, if you make repairs as part of an extensive remodeling or restoration of your home, the entire job is an improvement. Free federal tax filing 2012 Example. Free federal tax filing 2012 You buy an older home and fix up two rooms as a beauty salon. Free federal tax filing 2012 You patch the plaster on the ceilings and walls, paint, repair the floor, install an outside door, and install new wiring, plumbing, and other equipment. Free federal tax filing 2012 Normally, the patching, painting, and floor work are repairs and the other expenses are permanent improvements. Free federal tax filing 2012 However, because the work gives your property a new use, the entire remodeling job is a permanent improvement and its cost is added to the basis of the property. Free federal tax filing 2012 You cannot deduct any portion of it as a repair expense. Free federal tax filing 2012 Adjusting for depreciation deducted in earlier years. Free federal tax filing 2012   Decrease the basis of your property by the depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you properly selected. Free federal tax filing 2012 If you deducted less depreciation than you could have under the method you selected, decrease the basis by the amount you could have deducted under that method. Free federal tax filing 2012 If you did not deduct any depreciation, decrease the basis by the amount you could have deducted. Free federal tax filing 2012   If you deducted more depreciation than you should have, decrease your basis by the amount you should have deducted, plus the part of the excess depreciation you deducted that actually decreased your tax liability for any year. Free federal tax filing 2012   If you deducted the incorrect amount of depreciation, see Publication 946. Free federal tax filing 2012 Fair market value defined. Free federal tax filing 2012   The fair market value of your home is the price at which the property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Free federal tax filing 2012 Sales of similar property, on or about the date you begin using your home for business, may be helpful in determining the property's fair market value. Free federal tax filing 2012 Figuring the depreciation deduction for the current year. Free federal tax filing 2012   If you began using your home for business before 2013, continue to use the same depreciation method you used in past tax years. Free federal tax filing 2012   If you began using your home for business for the first time in 2013, depreciate the business part as nonresidential real property under the modified accelerated cost recovery system (MACRS). Free federal tax filing 2012 Under MACRS, nonresidential real property is depreciated using the straight line method over 39 years. Free federal tax filing 2012 For more information on MACRS and other methods of depreciation, see Publication 946. Free federal tax filing 2012   To figure the depreciation deduction, you must first figure the part of the cost of your home that can be depreciated (depreciable basis). Free federal tax filing 2012 The depreciable basis is figured by multiplying the percentage of your home used for business by the smaller of the following. Free federal tax filing 2012 The adjusted basis of your home (excluding land) on the date you began using your home for business. Free federal tax filing 2012 The fair market value of your home (excluding land) on the date you began using your home for business. Free federal tax filing 2012 Depreciation table. Free federal tax filing 2012   If 2013 was the first year you used your home for business, you can figure your 2013 depreciation for the business part of your home by using the appropriate percentage from the following table. Free federal tax filing 2012 Table 2. Free federal tax filing 2012 MACRS Percentage Table for 39-Year Nonresidential Real Property Month First Used for Business Percentage To Use 1 2. Free federal tax filing 2012 461% 2 2. Free federal tax filing 2012 247% 3 2. Free federal tax filing 2012 033% 4 1. Free federal tax filing 2012 819% 5 1. Free federal tax filing 2012 605% 6 1. Free federal tax filing 2012 391% 7 1. Free federal tax filing 2012 177% 8 0. Free federal tax filing 2012 963% 9 0. Free federal tax filing 2012 749% 10 0. Free federal tax filing 2012 535% 11 0. Free federal tax filing 2012 321% 12 0. Free federal tax filing 2012 107%   Multiply the depreciable basis of the business part of your home by the percentage from the table for the first month you use your home for business. Free federal tax filing 2012 See Publication 946 for the percentages for the remaining tax years of the recovery period. Free federal tax filing 2012 Example. Free federal tax filing 2012 In May, George Miller began to use one room in his home exclusively and regularly to meet clients. Free federal tax filing 2012 This room is 8% of the square footage of his home. Free federal tax filing 2012 He bought the home in 2003 for $125,000. Free federal tax filing 2012 He determined from his property tax records that his adjusted basis in the house (exclusive of land) is $115,000. Free federal tax filing 2012 In May, the house had a fair market value of $165,000. Free federal tax filing 2012 He multiplies his adjusted basis of $115,000 (which is less than the fair market value) by 8%. Free federal tax filing 2012 The result is $9,200, his depreciable basis for the business part of the house. Free federal tax filing 2012 George files his return based on the calendar year. Free federal tax filing 2012 May is the 5th month of his tax year. Free federal tax filing 2012 He multiplies his depreciable basis of $9,200 by 1. Free federal tax filing 2012 605% (. Free federal tax filing 2012 01605), the percentage from the table for the 5th month. Free federal tax filing 2012 His depreciation deduction is $147. Free federal tax filing 2012 66. Free federal tax filing 2012 Depreciating permanent improvements. Free federal tax filing 2012   Add the costs of permanent improvements made before you began using your home for business to the basis of your property. Free federal tax filing 2012 Depreciate these costs as part of the cost of your home as explained earlier. Free federal tax filing 2012 The costs of improvements made after you begin using your home for business (that affect the business part of your home, such as a new roof) are depreciated separately. Free federal tax filing 2012 Multiply the cost of the improvement by the business-use percentage and depreciate the result over the recovery period that would apply to your home if you began using it for business at the same time as the improvement. Free federal tax filing 2012 For improvements made this year, the recovery period is 39 years. Free federal tax filing 2012 For the percentage to use for the first year, see Table 2, earlier. Free federal tax filing 2012 For more information on recovery periods, see Publication 946. Free federal tax filing 2012 Business Percentage To find the business percentage, compare the size of the part of your home that you use for business to your whole house. Free federal tax filing 2012 Use the resulting percentage to figure the business part of the expenses for operating your entire home. Free federal tax filing 2012 You can use any reasonable method to determine the business percentage. Free federal tax filing 2012 The following are two commonly used methods for figuring the percentage. Free federal tax filing 2012 Divide the area (length multiplied by the width) used for business by the total area of your home. Free federal tax filing 2012 If the rooms in your home are all about the same size, you can divide the number of rooms used for business by the total number of rooms in your home. Free federal tax filing 2012 Example 1. Free federal tax filing 2012 Your office is 240 square feet (12 feet × 20 feet). Free federal tax filing 2012 Your home is 1,200 square feet. Free federal tax filing 2012 Your office is 20% (240 ÷ 1,200) of the total area of your home. Free federal tax filing 2012 Your business percentage is 20%. Free federal tax filing 2012 Example 2. Free federal tax filing 2012 You use one room in your home for business. Free federal tax filing 2012 Your home has 10 rooms, all about equal size. Free federal tax filing 2012 Your office is 10% (1 ÷ 10) of the total area of your home. Free federal tax filing 2012 Your business percentage is 10%. Free federal tax filing 2012 Use lines 1-7 of Form 8829, or lines 1-3 on the Worksheet To Figure the Deduction for Business Use of Your Home (near the end of this publication) to figure your business percentage. Free federal tax filing 2012 Deduction Limit If your gross income from the business use of your home equals or exceeds your total business expenses (including depreciation), you can deduct all your business expenses related to the use of your home. Free federal tax filing 2012 If your gross income from the business use of your home is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited. Free federal tax filing 2012 Your deduction of otherwise nondeductible expenses, such as insurance, utilities, and depreciation of your home (with depreciation of your home taken last), that are allocable to the business, is limited to the gross income from the business use of your home minus the sum of the following. Free federal tax filing 2012 The business part of expenses you could deduct even if you did not use your home for business (such as mortgage interest, real estate taxes, and casualty and theft losses that are allowable as itemized deductions on Schedule A (Form 1040)). Free federal tax filing 2012 These expenses are discussed in detail under Actual Expenses , earlier. Free federal tax filing 2012 The business expenses that relate to the business activity in the home (for example, business phone, supplies, and depreciation on equipment), but not to the use of the home itself. Free federal tax filing 2012 If you are self-employed, do not include in (2) above your deduction for one-half of your self-employment tax. Free federal tax filing 2012 Carryover of unallowed expenses. Free federal tax filing 2012   If your deductions are greater than the current year's limit, you can carry over the excess to the next year in which you use actual expenses. Free federal tax filing 2012 They are subject to the deduction limit for that year, whether or not you live in the same home during that year. Free federal tax filing 2012 Figuring the deduction limit and carryover. Free federal tax filing 2012   If you are an employee or a partner, or you file Schedule F (Form 1040), use the Worksheet To Figure the Deduction for Business Use of Your Home, near the end of this publication. Free federal tax filing 2012 If you file Schedule C (Form 1040), figure your deduction limit and carryover on Form 8829. Free federal tax filing 2012 Example. Free federal tax filing 2012 You meet the requirements for deducting expenses for the business use of your home. Free federal tax filing 2012 You use 20% of your home for business. Free federal tax filing 2012 In 2013, your business expenses and the expenses for the business use of your home are deducted from your gross income in the following order. Free federal tax filing 2012    Gross income from business $6,000 Minus:   Deductible mortgage interest and real estate taxes (20%) 3,000 Business expenses not related to the use of your home (100%) (business phone, supplies, and depreciation on equipment) 2,000 Deduction limit $1,000 Minus other expenses allocable to business use of home:   Maintenance, insurance, and utilities (20%) 800 Depreciation allowed (20% = $1,600 allowable, but subject to balance of deduction limit) 200 Other expenses up to the deduction limit $1,000 Depreciation carryover to 2014 ($1,600 − $200) (subject to deduction limit in 2014) $1,400   You can deduct all of the business part of your deductible mortgage interest and real estate taxes ($3,000). Free federal tax filing 2012 You also can deduct all of your business expenses not related to the use of your home ($2,000). Free federal tax filing 2012 Additionally, you can deduct all of the business part of your expenses for maintenance, insurance, and utilities, because the total ($800) is less than the $1,000 deduction limit. Free federal tax filing 2012 Your deduction for depreciation for the business use of your home is limited to $200 ($1,000 minus $800) because of the deduction limit. Free federal tax filing 2012 You can carry over the $1,400 balance and add it to your depreciation for 2014, subject to your deduction limit in 2014. Free federal tax filing 2012 More than one place of business. Free federal tax filing 2012   If part of the gross income from your trade or business is from the business use of part of your home and part is from a place other than your home, you must determine the part of your gross income from the business use of your home before you figure the deduction limit. Free federal tax filing 2012 In making this determination, consider the time you spend at each location, the business investment in each location, and any other relevant facts and circumstances. Free federal tax filing 2012 If your home office qualifies as your principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business. Free federal tax filing 2012 For more information on transportation costs, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Free federal tax filing 2012 Using the Simplified Method The simplified method is an alternative to the calculation, allocation, and substantiation of actual expenses. Free federal tax filing 2012 In most cases, you will figure your deduction by multiplying $5, the prescribed rate, by the area of your home used for a qualified business use. Free federal tax filing 2012 The area you use to figure your deduction is limited to 300 square feet. Free federal tax filing 2012 See Simplified Amount , later, for information about figuring the amount of the deduction. Free federal tax filing 2012 For more information about the simplified method, see Revenue Procedure 2013-13, 2013-06 I. Free federal tax filing 2012 R. Free federal tax filing 2012 B. Free federal tax filing 2012 478, available at www. Free federal tax filing 2012 irs. Free federal tax filing 2012 gov/irb/2013-06_IRB/ar09. Free federal tax filing 2012 html. Free federal tax filing 2012 Actual expenses and depreciation of your home. Free federal tax filing 2012   If you elect to use the simplified method, you cannot deduct any actual expenses for the business except for business expenses that are not related to the use of the home. Free federal tax filing 2012 You also cannot deduct any depreciation (including any additional first-year depreciation) or section 179 expense for the portion of the home that is used for a qualified business use. Free federal tax filing 2012 The depreciation deduction allowable for that portion of the home is deemed to be zero for a year you use the simplified method. Free federal tax filing 2012 If you figure your deduction for business use of the home using actual expenses in a subsequent year, you will have to use the appropriate optional depreciation table for MACRS to figure your depreciation. Free federal tax filing 2012 More information. Free federal tax filing 2012   For more information about claiming depreciation in a subsequent year, see Revenue Procedure 2013-13, 2013-06 I. Free federal tax filing 2012 R. Free federal tax filing 2012 B. Free federal tax filing 2012 478, available at www. Free federal tax filing 2012 irs. Free federal tax filing 2012 gov/irb/2013-06_IRB/ar09. Free federal tax filing 2012 html. Free federal tax filing 2012 See Publication 946 for the optional depreciation tables Although you cannot deduct any depreciation or section 179 expense for the portion of your home used for a qualified business use, you may still claim depreciation or the section 179 expense deduction on other assets used in the business (for example, furniture and equipment). Free federal tax filing 2012 Expenses deductible without regard to business use. Free federal tax filing 2012   When using the simplified method, treat as personal expenses those business expenses related to the use of the home that are deductible without regard to whether there is a qualified business use of the home. Free federal tax filing 2012 These expenses include mortgage interest, real estate taxes, and casualty losses, subject to any limitations. Free federal tax filing 2012 See Where To Deduct , later. Free federal tax filing 2012 If you also rent part of your home, you must still allocate these expenses between rental use and personal use (for this purpose, personal use includes business use reported using the simplified method). Free federal tax filing 2012 No deduction of carryover of actual expenses. Free federal tax filing 2012   If you used actual expenses to figure your deduction for business use of the home in a prior year and your deduction was limited, you cannot deduct the disallowed amount carried over from the prior year during a year you figure your deduction using the simplified method. Free federal tax filing 2012 Instead, you will continue to carry over the disallowed amount to the next year that you use actual expenses to figure your deduction. Free federal tax filing 2012 Electing the Simplified Method You choose whether or not to figure your deduction using the simplified method each taxable year. Free federal tax filing 2012 Make the election for a home by using the simplified method to figure the deduction for the qualified business use of that home on a timely filed, original federal income tax return. Free federal tax filing 2012 An election for a taxable year, once made, is irrevocable. Free federal tax filing 2012 A change from using the simplified method in one year to actual expenses in a succeeding taxable year, or vice-versa, is not a change in method of accounting and does not require the consent of the Commissioner. Free federal tax filing 2012 Shared use. Free federal tax filing 2012   If you share your home with someone else who also uses the home in a business that qualifies for this deduction, each of you make your own election. Free federal tax filing 2012 More than one qualified business use. Free federal tax filing 2012   If you conduct more than one business that qualifies for this deduction in your home, your election to use the simplified method applies to all your qualified business uses of that home. Free federal tax filing 2012 More than one home. Free federal tax filing 2012   If you used more than one home during the year (for example, you moved during the year), you can elect to use the simplified method for only one of the homes. Free federal tax filing 2012 You must figure the deduction for any other home using actual expenses. Free federal tax filing 2012 Simplified Amount Your deduction for the qualified business use of a home is the sum of each amount you figure for a separate qualified business use of your home. Free federal tax filing 2012 To figure your deduction for the business use of a home using the simplified method, you will need to know the following information for each qualified business use of the home. Free federal tax filing 2012 The allowable area of your home used in conducting the business. Free federal tax filing 2012 If you did not conduct the business for the entire year in the home or the area changed during the year, you will need to know the allowable area you used and the number of days you conducted the business for each month. Free federal tax filing 2012 The gross income from the business use of your home. Free federal tax filing 2012 The amount of the business expenses that are not related to the use of your home. Free federal tax filing 2012 If the qualified business use is for a daycare facility that uses space in your home on a regular (but not exclusive) basis, you will also need to know the percentage of time that part of your home is used for daycare. Free federal tax filing 2012 To figure the amount you can deduct for qualified business use of your home using the simplified method, follow these 3 steps. Free federal tax filing 2012 Multiply the allowable area by $5 (or less than $5 if the qualified business use is for a daycare that uses space in your home on a regular, but not exclusive, basis). Free federal tax filing 2012 See Allowable area and Space used regularly for daycare , later. Free federal tax filing 2012 Subtract the expenses from the business that are not related to the use of the home from the gross income related to the business use of the home. Free federal tax filing 2012 If these expenses are greater than the gross income from the business use of the home, then you cannot take a deduction for this business use of the home. Free federal tax filing 2012 See Gross income limitation , later. Free federal tax filing 2012 Take the smaller of the amounts from (1) and (2). Free federal tax filing 2012 This is the amount you can deduct for this qualified business use of your home using the simplified method. Free federal tax filing 2012 If you are an employee or a partner, or you use your home in your farming business and file Schedule F (Form 1040), you can use the Simplified Method Worksheet, near the end of this publication, to help you figure your deduction. Free federal tax filing 2012 If you use your home in a trade or business and you file Schedule C (Form 1040), you will use the Simplified Method Worksheet in your Instructions for Schedule C to figure your deduction. Free federal tax filing 2012 Allowable area. Free federal tax filing 2012   In most cases, the allowable area is the smaller of the actual area (in square feet) of your home used in conducting the business and 300 square feet. Free federal tax filing 2012 Your allowable area may be smaller if you conducted the business as a qualified joint venture with your spouse, the area used by the business was shared with another qualified business use, you used the home for the business for only part of the year, or the area used by the business changed during the year. Free federal tax filing 2012 You can use the Area Adjustment Worksheet (for simplified method), near the end of this publication, to help you figure your allowable area for a qualified business use. Free federal tax filing 2012 Area used by a qualified joint venture. Free federal tax filing 2012   If the qualified business use of the home is also a qualified joint venture, you and your spouse will figure the deduction for the business use separately. Free federal tax filing 2012 Split the actual area used in conducting business between you and your spouse in the same manner you split your other tax attributes. Free federal tax filing 2012 Then, each spouse will figure the allowable area separately. Free federal tax filing 2012 For more information about qualified joint ventures, see Qualified Joint Venture in the Instructions for Schedule C. Free federal tax filing 2012 Shared use. Free federal tax filing 2012   If you share your home with someone else who uses the home to conduct business that also qualifies for this deduction, you may not include the same square feet to figure your deduction as the other person. Free federal tax filing 2012 You must allocate the shared space between you and the other person in a reasonable manner. Free federal tax filing 2012 Example. Free federal tax filing 2012 Kristin and Lindsey are roommates. Free federal tax filing 2012 Kristin uses 300 square feet of their home for a qualified business use. Free federal tax filing 2012 Lindsey uses 200 square feet of their home for a separate qualified business use. Free federal tax filing 2012 The qualified business uses share 100 square feet. Free federal tax filing 2012 In addition to the portion that they do not share, Kristin and Lindsey can both claim 50 of the 100 square feet or divide the 100 square feet between them in any reasonable manner. Free federal tax filing 2012 If divided evenly, Kristin could claim 250 square feet using the simplified method and Lindsey could claim 150 square feet. Free federal tax filing 2012 More than one qualified business use. Free federal tax filing 2012   If you conduct more than one business qualifying for the deduction, you are limited to a maximum of 300 square feet for all of the businesses. Free federal tax filing 2012 Allocate the actual square footage used (up to the maximum of 300 square feet) among your qualified business uses in a reasonable manner. Free federal tax filing 2012 However, do not allocate more square feet to a qualified business use than you actually use for that business. Free federal tax filing 2012 Rental use. Free federal tax filing 2012   The simplified method does not apply to rental use. Free federal tax filing 2012 A rental use that qualifies for the deduction must be figured using actual expenses. Free federal tax filing 2012 If the rental use and a qualified business use share the same area, you will have to allocate the actual area used between the two uses. Free federal tax filing 2012 You cannot use the same area to figure a deduction for the qualified business use as you are using to figure the deduction for the rental use. Free federal tax filing 2012 Part-year use or area changes. Free federal tax filing 2012   If your qualified business use was for a portion of the taxable year (for example, a seasonal business or a business that begins during the taxable year) or you changed the square footage of your qualified business use, your deduction is limited to the average monthly allowable square footage. Free federal tax filing 2012 You calculate the average monthly allowable square footage by adding the amount of allowable square feet you used in each month and dividing the sum by 12. Free federal tax filing 2012 When determining the average monthly allowable square footage, you cannot take more than 300 square feet into account for any one month. Free federal tax filing 2012 Additionally, if your qualified business use was less than 15 days in a month, you must use -0- for that month. Free federal tax filing 2012 Example 1. Free federal tax filing 2012 Andy files his federal income tax return on a calendar year basis. Free federal tax filing 2012 On July 20, he began using 420 square feet of his home for a qualified business use. Free federal tax filing 2012 He continued to use the 420 square feet until the end of the year. Free federal tax filing 2012 His average monthly allowable square footage is 125 square feet, which is figured using 300 square feet for each month August through December divided by the number of months in the taxable year ((0 + 0 + 0 + 0 + 0 + 0 + 0 + 300 + 300 + 300 + 300 + 300)/12). Free federal tax filing 2012 Example 2. Free federal tax filing 2012 Amy files her federal income tax return on a calendar year basis. Free federal tax filing 2012 On April 20, she began using 100 square feet of her home for a qualified business use. Free federal tax filing 2012 On August 5, she expanded the area of her qualified use to 330 square feet. Free federal tax filing 2012 Amy continued to use the 330 square feet until the end of the year. Free federal tax filing 2012 Her average monthly allowable square footage is 150 square feet, which is figured using 100 square feet for May through July and 300 square feet for August through December divided by the number of months in the taxable year ((0 + 0 + 0 + 0 + 100 + 100 +100 + 300 + 300 + 300 + 300 + 300)/12). Free federal tax filing 2012 Gross income limitation. Free federal tax filing 2012   Your deduction for business use of the home is limited to an amount equal to the gross income derived from the qualified business use of the home reduced by the business deductions that are unrelated to the use of your home. Free federal tax filing 2012 If the business deductions that are unrelated to the use of your home are greater than the gross income derived from the qualified business use of your home, then you cannot take a deduction for this qualified business use of your home. Free federal tax filing 2012 Business expenses not related to use of the home. Free federal tax filing 2012   These expenses relate to the business activity in the home, but not to the use of the home itself. Free federal tax filing 2012 You can still deduct business expenses that are unrelated to the use of the home. Free federal tax filing 2012 See Where To Deduct , later. Free federal tax filing 2012 Examples of business expenses that are unrelated to the use of the home are advertising, wages, supplies, dues, and depreciation for equipment. Free federal tax filing 2012 Space used regularly for daycare. Free federal tax filing 2012   If you do not use the area of your home exclusively for daycare, you must reduce the prescribed rate (maximum $5 per square foot) before figuring your deduction. Free federal tax filing 2012 The reduced rate will equal the prescribed rate times a fraction. Free federal tax filing 2012 The numerator of the fraction is the number of hours that the space was used during the year for daycare and the denominator is the total number of hours during the year that the space was available for all uses. Free federal tax filing 2012 You can use the Daycare Facility Worksheet (for simplified method), near the end of this publication, to help you figure the reduced rate. Free federal tax filing 2012    If you used at least 300 square feet for daycare regularly and exclusively during the year, then you do not need to reduce the prescribed rate or complete the Daycare Facility Worksheet. Free federal tax filing 2012 Daycare Facility If you use space in your home on a regular basis for providing daycare, you may be able to claim a deduction for that part of your home even if you use the same space for nonbusiness purposes. Free federal tax filing 2012 To qualify for this exception to the exclusive use rule, you must meet both of the following requirements. Free federal tax filing 2012 You must be in the trade or business of providing daycare for children, persons age 65 or older, or persons who are physically or mentally unable to care for themselves. Free federal tax filing 2012 You must have applied for, been granted, or be exempt from having, a license, certification, registration, or approval as a daycare center or as a family or group daycare home under state law. Free federal tax filing 2012 You do not meet this requirement if your application was rejected or your license or other authorization was revoked. Free federal tax filing 2012 Figuring the deduction. Free federal tax filing 2012   If you elect to use the simplified method for your home, figure your deduction as described earlier in Using the Simplified Method under Figuring the Deduction. Free federal tax filing 2012    If you are figuring your deduction using actual expenses and you regularly use part of your home for daycare, figure what part is used for daycare, as explained in Business Percentage , earlier, under Figuring the Deduction. Free federal tax filing 2012 If you also use that part exclusively for daycare, deduct all the allocable expenses, subject to the deduction limit, as explained earlier. Free federal tax filing 2012   If the use of part of your home as a daycare facility is regular, but not exclusive, you must figure the percentage of time that part of your home is used for daycare. Free federal tax filing 2012 A room that is available for use throughout each business day and that you regularly use in your business is considered to be used for daycare throughout each business day. Free federal tax filing 2012 You do not have to keep records to show the specific hours the area was used for business. Free federal tax filing 2012 You can use the area occasionally for personal reasons. Free federal tax filing 2012 However, a room you use only occasionally for business does not qualify for the deduction. Free federal tax filing 2012 To find the percentage of time you actually use your home for business, compare the total time used for business to the total time that part of your home can be used for all purposes. Free federal tax filing 2012 You can compare the hours of business use in a week with the number of hours in a week (168). Free federal tax filing 2012 Or you can compare the hours of business use for the year with the number of hours in the year (8,760 in 2013). Free federal tax filing 2012 If you started or stopped using your home for daycare in 2013, you must prorate the number of hours based on the number of days the home was available for daycare. Free federal tax filing 2012 Example 1. Free federal tax filing 2012 Mary Lake used her basement to operate a daycare business for children. Free federal tax filing 2012 She figures the business percentage of the basement as follows. Free federal tax filing 2012 Square footage of the basement Square footage of her home = 1,600 3,200 = 50%           She used the basement for daycare an average of 12 hours a day, 5 days a week, for 50 weeks a year. Free federal tax filing 2012 During the other 12 hours a day, the family could use the basement. Free federal tax filing 2012 She figures the percentage of time the basement was used for daycare as follows. Free federal tax filing 2012 Number of hours used for daycare (12 x 5 x 50) Total number of hours in the year (24 x 365) = 3,000 8,760 = 34. Free federal tax filing 2012 25%           Mary can deduct 34. Free federal tax filing 2012 25% of any direct expenses for the basement. Free federal tax filing 2012 However, because her indirect expenses are for the entire house, she can deduct only 17. Free federal tax filing 2012 13% of the indirect expenses. Free federal tax filing 2012 She figures the percentage for her indirect expenses as follows. Free federal tax filing 2012 Business percentage of the basement 50% Multiplied by: Percentage of time used for daycare × 34. Free federal tax filing 2012 25% Percentage for indirect expenses 17. Free federal tax filing 2012 13% Mary completes Form 8829, Part I, figuring the percentage of her home used for business, including the percentage of time the basement was used. Free federal tax filing 2012 In Part II, Mary figures her deductible expenses. Free federal tax filing 2012 She uses the following information to complete Part II. Free federal tax filing 2012 Gross income from her daycare business $50,000 Expenses not related to the business use of the home $25,000 Tentative profit $25,000 Rent $8,400 Utilities $850 Painting the basement $500 Mary enters her tentative profit, $25,000, on line 8. Free federal tax filing 2012 (This figure is the same as the amount on line 29 of her Schedule C (Form 1040). Free federal tax filing 2012 ) The expenses she paid for rent and utilities relate to her entire home. Free federal tax filing 2012 Therefore, she enters the amount paid for rent on line 18, column (b), and the amount paid for utilities on line 20, column (b). Free federal tax filing 2012 She shows the total of these expenses on line 22, column (b). Free federal tax filing 2012 For line 23, she multiplies the amount on line 22, column (b) by the percentage on line 7 and enters the result, $1,585. Free federal tax filing 2012 Mary paid $500 to have the basement painted. Free federal tax filing 2012 The painting is a direct expense. Free federal tax filing 2012 However, because she did not use the basement exclusively for daycare, she must multiply $500 by the percentage of time the basement was used for daycare (34. Free federal tax filing 2012 25% – line 6). Free federal tax filing 2012 She enters $171 (34. Free federal tax filing 2012 25% × $500) on line 19, column (a). Free federal tax filing 2012 She adds line 22, column (a), and line 23 and enters $1,756 ($171 + $1,585) on line 25. Free federal tax filing 2012 This is less than her deduction limit (line 15), so she can deduct the entire amount. Free federal tax filing 2012 She follows the instructions to complete the rest of Part II and enters $1,756 on lines 33 and 35. Free federal tax filing 2012 She then carries the $1,756 to line 30 of her Schedule C (Form 1040). Free federal tax filing 2012 Example 2. Free federal tax filing 2012 Assume the same facts as in Example 1 except that Mary also has another room that was available each business day for children to take naps in. Free federal tax filing 2012 Although she did not keep a record of the number of hours the room was actually used for naps, it was used for part of each business day. Free federal tax filing 2012 Since the room was available for business use during regular operating hours each business day and was used regularly in the business, it is considered used for daycare throughout each business day. Free federal tax filing 2012 The basement and room are 60% of the total area of her home. Free federal tax filing 2012 In figuring her expenses, 34. Free federal tax filing 2012 25% of any direct expenses for the basement and room are deductible. Free federal tax filing 2012 In addition, 20. Free federal tax filing 2012 55% (34. Free federal tax filing 2012 25% × 60%) of her indirect expenses are deductible. Free federal tax filing 2012 Example 3. Free federal tax filing 2012 Assume the same facts as in Example 1 except that Mary stopped using her home for a daycare facility on June 24, 2013. Free federal tax filing 2012 She used the basement for daycare an average of 12 hours a day, 5 days a week, but for only 25 weeks of the year. Free federal tax filing 2012 During the other 12 hours a day, the family could still use the basement. Free federal tax filing 2012 She figures the percentage of time the basement was used for business as follows. Free federal tax filing 2012 Number of hours used for daycare (12 x 5 x 25) Total number of hours during period used (24 x 175) = 1,500 4,200 = 35. Free federal tax filing 2012 71%           Mary can deduct 35. Free federal tax filing 2012 71% of any direct expenses for the basement. Free federal tax filing 2012 However, because her indirect expenses are for the entire house, she can deduct only 17. Free federal tax filing 2012 86% of the indirect expenses. Free federal tax filing 2012 She figures the percentage for her indirect expenses as follows. Free federal tax filing 2012 Business percentage of the basement 50% Multiplied by: Percentage of time used for daycare × 35. Free federal tax filing 2012 71% Percentage for indirect expenses 17. Free federal tax filing 2012 86% Meals. Free federal tax filing 2012   If you provide food for your daycare recipients, do not include the expense as a cost of using your home for business. Free federal tax filing 2012 Claim it as a separate deduction on your Schedule C (Form 1040). Free federal tax filing 2012 You can never deduct the cost of food consumed by you or your family. Free federal tax filing 2012 You can deduct as a business expense 100% of the actual cost of food consumed by your daycare recipients (see Standard meal and snack rates , later, for an optional method for eligible children) and generally only 50% of the cost of food consumed by your employees. Free federal tax filing 2012 However, you can deduct 100% of the cost of food consumed by your employees if its value can be excluded from their wages as a de minimis fringe benefit. Free federal tax filing 2012 For more information on meals that meet these requirements, see Meals in chapter 2 of Publication 15-B, Employer's Tax Guide to Fringe Benefits. Free federal tax filing 2012   If you deduct the actual cost of food for your daycare business, keep a separate record (with receipts) of your family's food costs. Free federal tax filing 2012   Reimbursements you receive from a sponsor under the Child and Adult Care Food Program of the Department of Agriculture are taxable only to the extent they exceed your expenses for food for eligible children. Free federal tax filing 2012 If your reimbursements are more than your expenses for food, show the difference as income in Part I of Schedule C (Form 1040). Free federal tax filing 2012 If your food expenses are greater than the reimbursements, show the difference as an expense in Part V of Schedule C (Form 1040). Free federal tax filing 2012 Do not include payments or expenses for your own children if they are eligible for the program. Free federal tax filing 2012 Follow this procedure even if you receive a Form 1099-MISC, Miscellaneous Income, reporting a payment from the sponsor. Free federal tax filing 2012 Standard meal and snack rates. Free federal tax filing 2012   If you qualify as a family daycare provider, you can use the standard meal and snack rates, instead of actual costs, to compute the deductible cost of meals and snacks provided to eligible children. Free federal tax filing 2012 For these purposes: A family daycare provider is a person engaged in the business of providing family daycare. Free federal tax filing 2012 Family daycare is childcare provided to eligible children in the home of the family daycare provider. Free federal tax filing 2012 The care must be non-medical, not involve a transfer of legal custody, and generally last less than 24 hours each day. Free federal tax filing 2012 Eligible children are minor children receiving family daycare in the home of the family daycare provider. Free federal tax filing 2012 Eligible children do not include children who are full-time or part-time residents in the home where the childcare is provided or children whose parents or guardians are residents of the same home. Free federal tax filing 2012 Eligible children do not include children who receive daycare services for personal reasons of the provider. Free federal tax filing 2012 For example, if a provider provides daycare services for a relative as a favor to that relative, that child is not an eligible child. Free federal tax filing 2012   You can compute the deductible cost of each meal and snack you actually purchased and served to an eligible child during the time period you provided family daycare using the standard meal and snack rates shown in Table 3, later. Free federal tax filing 2012 You can use the standard meal and snack rates for a maximum of one breakfast, one lunch, one dinner, and three snacks per eligible child per day. Free federal tax filing 2012 If you receive reimbursement for a particular meal or snack, you can deduct only the portion of the applicable standard meal or snack rate that is more than the amount of the reimbursement. Free federal tax filing 2012   You can use either the standard meal and snack rates or actual costs to calculate the deductible cost of food provided to eligible children in the family daycare for any particular tax year. Free federal tax filing 2012 If you choose to use the standard meal and snack rates for a particular tax year, you must use the rates for all your deductible food costs for eligible children during that tax year. Free federal tax filing 2012 However, if you use the standard meal and snack rates in any tax year, you can use actual costs to compute the deductible cost of food in any other tax year. Free federal tax filing 2012   If you use the standard meal and snack rates, you must maintain records to substantiate the computation of the total amount deducted for the cost of food provided to eligible children. Free federal tax filing 2012 The records kept should include the name of each child, dates and hours of attendance in the daycare, and the type and quantity of meals and snacks served. Free federal tax filing 2012 This information can be recorded in a log similar to the one shown in Exhibit A, near the end of this publication. Free federal tax filing 2012   The standard meal and snack rates include beverages, but do not include non-food supplies used for food preparation, service, or storage, such as containers, paper products, or utensils. Free federal tax filing 2012 These expenses can be claimed as a separate deduction on your Schedule C (Form 1040). Free federal tax filing 2012     Table 3. Free federal tax filing 2012 Standard Meal and Snack Rates1 Location of Family Daycare Provider Breakfast Lunch Dinner Snack States other than Alaska an
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Free federal tax filing 2012 17. Free federal tax filing 2012   Individual Retirement Arrangements (IRAs) Table of Contents What's New Reminders Introduction Useful Items - You may want to see: Traditional IRAsWho Can Open a Traditional IRA? When and How Can a Traditional IRA Be Opened? How Much Can Be Contributed? When Can Contributions Be Made? How Much Can You Deduct? Nondeductible Contributions Inherited IRAs Can You Move Retirement Plan Assets? When Can You Withdraw or Use IRA Assets? When Must You Withdraw IRA Assets? (Required Minimum Distributions) Are Distributions Taxable? What Acts Result in Penalties or Additional Taxes? Roth IRAsWhat Is a Roth IRA? When Can a Roth IRA Be Opened? Can You Contribute to a Roth IRA? Can You Move Amounts Into a Roth IRA? Are Distributions Taxable? What's New Traditional IRA contribution and deduction limit. Free federal tax filing 2012  The contribution limit to your traditional IRA for 2013 will be increased to the smaller of the following amounts: $5,500, or Your taxable compensation for the year. Free federal tax filing 2012 If you were age 50 or older before 2014, the most that can be contributed to your traditional IRA for 2013 will be the smaller of the following amounts: $6,500, or Your taxable compensation for the year. Free federal tax filing 2012 For more information, see How Much Can Be Contributed? later. Free federal tax filing 2012 Roth IRA contribution limit. Free federal tax filing 2012  If contributions on your behalf are made only to Roth IRAs, your contribution limit for 2013 will generally be the lesser of: $5,500, or Your taxable compensation for the year. Free federal tax filing 2012 If you were age 50 or older before 2014 and contributions on your behalf were made only to Roth IRAs, your contribution limit for 2013 will generally be the lesser of: $6,500, or Your taxable compensation for the year. Free federal tax filing 2012 However, if your modified adjusted gross income (AGI) is above a certain amount, your contribution limit may be reduced. Free federal tax filing 2012 For more information, see How Much Can Be Contributed? under Can You Contribute to a Roth IRA? later. Free federal tax filing 2012 Modified AGI limit for traditional IRA contributions increased. Free federal tax filing 2012  For 2013, if you were covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is: More than $95,000 but less than $115,000 for a married couple filing a joint return or a qualifying widow(er), More than $59,000 but less than $69,000 for a single individual or head of household, or Less than $10,000 for a married individual filing a separate return. Free federal tax filing 2012 If you either lived with your spouse or file a joint return, and your spouse was covered by a retirement plan at work, but you were not, your deduction is phased out if your modified AGI is more than $178,000 but less than $188,000. Free federal tax filing 2012 If your modified AGI is $188,000 or more, you cannot take a deduction for contributions to a traditional IRA. Free federal tax filing 2012 See How Much Can You Deduct , later. Free federal tax filing 2012 Modified AGI limit for Roth IRA contributions increased. Free federal tax filing 2012  For 2013, your Roth IRA contribution limit is reduced (phased out) in the following situations. Free federal tax filing 2012 Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $178,000. Free federal tax filing 2012 You cannot make a Roth IRA contribution if your modified AGI is $188,000 or more. Free federal tax filing 2012 Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2013 and your modified AGI is at least $112,000. Free federal tax filing 2012 You cannot make a Roth IRA contribution if your modified AGI is $127,000 or more. Free federal tax filing 2012 Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. Free federal tax filing 2012 You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more. Free federal tax filing 2012 See Can You Contribute to a Roth IRA , later. Free federal tax filing 2012 Net Investment Income Tax. Free federal tax filing 2012   For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan including IRAs (for example; 401(a), 403(a), 403(b), 408, 408A, or 457(b) plans). Free federal tax filing 2012 However, these distributions are taken into account when determining the modified adjusted gross income threshold. Free federal tax filing 2012 Distributions from a nonqualified retirement plan are included in net investment income. Free federal tax filing 2012 See Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts, and its instructions for more information. Free federal tax filing 2012 Name change. Free federal tax filing 2012  All spousal IRAs have been renamed Kay Bailey Hutchison Spousal IRAs. Free federal tax filing 2012 There are no changes to the rules regarding these IRAs. Free federal tax filing 2012 See Kay Bailey Hutchison Spousal IRA Limit , later, for more information. Free federal tax filing 2012 Reminders 2014 limits. Free federal tax filing 2012   You can find information about the 2014 contribution and AGI limits in Publication 590. Free federal tax filing 2012 Contributions to both traditional and Roth IRAs. Free federal tax filing 2012   For information on your combined contribution limit if you contribute to both traditional and Roth IRAs, see Roth IRAs and traditional IRAs under How Much Can Be Contributed? in Roth IRAs, later. Free federal tax filing 2012 Statement of required minimum distribution. Free federal tax filing 2012  If a minimum distribution from your IRA is required, the trustee, custodian, or issuer that held the IRA at the end of the preceding year must either report the amount of the required minimum distribution to you, or offer to calculate it for you. Free federal tax filing 2012 The report or offer must include the date by which the amount must be distributed. Free federal tax filing 2012 The report is due January 31 of the year in which the minimum distribution is required. Free federal tax filing 2012 It can be provided with the year-end fair market value statement that you normally get each year. Free federal tax filing 2012 No report is required for IRAs of owners who have died. Free federal tax filing 2012 IRA interest. Free federal tax filing 2012  Although interest earned from your IRA is generally not taxed in the year earned, it is not tax-exempt interest. Free federal tax filing 2012 Tax on your traditional IRA is generally deferred until you take a distribution. Free federal tax filing 2012 Do not report this interest on your tax return as tax-exempt interest. Free federal tax filing 2012 Form 8606. Free federal tax filing 2012   To designate contributions as nondeductible, you must file Form 8606, Nondeductible IRAs. Free federal tax filing 2012 The term “50 or older” is used several times in this chapter. Free federal tax filing 2012 It refers to an IRA owner who is age 50 or older by the end of the tax year. Free federal tax filing 2012 Introduction An individual retirement arrangement (IRA) is a personal savings plan that gives you tax advantages for setting aside money for your retirement. Free federal tax filing 2012 This chapter discusses the following topics. Free federal tax filing 2012 The rules for a traditional IRA (any IRA that is not a Roth or SIMPLE IRA). Free federal tax filing 2012 The Roth IRA, which features nondeductible contributions and tax-free distributions. Free federal tax filing 2012 Simplified Employee Pensions (SEPs) and Savings Incentive Match Plans for Employees (SIMPLEs) are not discussed in this chapter. Free federal tax filing 2012 For more information on these plans and employees' SEP IRAs and SIMPLE IRAs that are part of these plans, see Publications 560 and 590. Free federal tax filing 2012 For information about contributions, deductions, withdrawals, transfers, rollovers, and other transactions, see Publication 590. Free federal tax filing 2012 Useful Items - You may want to see: Publication 560 Retirement Plans for Small Business 590 Individual Retirement Arrangements (IRAs) Form (and Instructions) 5329 Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts 8606 Nondeductible IRAs Traditional IRAs In this chapter, the original IRA (sometimes called an ordinary or regular IRA) is referred to as a “traditional IRA. Free federal tax filing 2012 ” A traditional IRA is any IRA that is not a Roth IRA or a SIMPLE IRA. Free federal tax filing 2012 Two advantages of a traditional IRA are: You may be able to deduct some or all of your contributions to it, depending on your circumstances, and Generally, amounts in your IRA, including earnings and gains, are not taxed until they are distributed. Free federal tax filing 2012 Who Can Open a Traditional IRA? You can open and make contributions to a traditional IRA if: You (or, if you file a joint return, your spouse) received taxable compensation during the year, and You were not age 70½ by the end of the year. Free federal tax filing 2012 What is compensation?   Generally, compensation is what you earn from working. Free federal tax filing 2012 Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services. Free federal tax filing 2012 The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Free federal tax filing 2012   Scholarship and fellowship payments are compensation for this purpose only if shown in box 1 of Form W-2. Free federal tax filing 2012   Compensation also includes commissions and taxable alimony and separate maintenance payments. Free federal tax filing 2012 Self-employment income. Free federal tax filing 2012   If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of: The deduction for contributions made on your behalf to retirement plans, and The deductible part of your self-employment tax. Free federal tax filing 2012   Compensation includes earnings from self-employment even if they are not subject to self-employment tax because of your religious beliefs. Free federal tax filing 2012 Nontaxable combat pay. Free federal tax filing 2012   For IRA purposes, if you were a member of the U. Free federal tax filing 2012 S. Free federal tax filing 2012 Armed Forces, your compensation includes any nontaxable combat pay you receive. Free federal tax filing 2012 What is not compensation?   Compensation does not include any of the following items. Free federal tax filing 2012 Earnings and profits from property, such as rental income, interest income, and dividend income. Free federal tax filing 2012 Pension or annuity income. Free federal tax filing 2012 Deferred compensation received (compensation payments postponed from a past year). Free federal tax filing 2012 Income from a partnership for which you do not provide services that are a material income-producing factor. Free federal tax filing 2012 Conservation Reserve Program (CRP) payments reported on Schedule SE (Form 1040), line 1b. Free federal tax filing 2012 Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs. Free federal tax filing 2012 When and How Can a Traditional IRA Be Opened? You can open a traditional IRA at any time. Free federal tax filing 2012 However, the time for making contributions for any year is limited. Free federal tax filing 2012 See When Can Contributions Be Made , later. Free federal tax filing 2012 You can open different kinds of IRAs with a variety of organizations. Free federal tax filing 2012 You can open an IRA at a bank or other financial institution or with a mutual fund or life insurance company. Free federal tax filing 2012 You can also open an IRA through your stockbroker. Free federal tax filing 2012 Any IRA must meet Internal Revenue Code requirements. Free federal tax filing 2012 Kinds of traditional IRAs. Free federal tax filing 2012   Your traditional IRA can be an individual retirement account or annuity. Free federal tax filing 2012 It can be part of either a simplified employee pension (SEP) or an employer or employee association trust account. Free federal tax filing 2012 How Much Can Be Contributed? There are limits and other rules that affect the amount that can be contributed to a traditional IRA. Free federal tax filing 2012 These limits and other rules are explained below. Free federal tax filing 2012 Community property laws. Free federal tax filing 2012   Except as discussed later under Kay Bailey Hutchison Spousal IRA limit , each spouse figures his or her limit separately, using his or her own compensation. Free federal tax filing 2012 This is the rule even in states with community property laws. Free federal tax filing 2012 Brokers' commissions. Free federal tax filing 2012   Brokers' commissions paid in connection with your traditional IRA are subject to the contribution limit. Free federal tax filing 2012 Trustees' fees. Free federal tax filing 2012   Trustees' administrative fees are not subject to the contribution limit. Free federal tax filing 2012 Qualified reservist repayments. Free federal tax filing 2012   If you are (or were) a member of a reserve component and you were ordered or called to active duty after September 11, 2001, you may be able to contribute (repay) to an IRA amounts equal to any qualified reservist distributions you received. Free federal tax filing 2012 You can make these repayment contributions even if they would cause your total contributions to the IRA to be more than the general limit on contributions. Free federal tax filing 2012 To be eligible to make these repayment contributions, you must have received a qualified reservist distribution from an IRA or from a section 401(k) or 403(b) plan or similar arrangement. Free federal tax filing 2012   For more information, see Qualified reservist repayments under How Much Can Be Contributed? in chapter 1 of Publication 590. Free federal tax filing 2012 Contributions on your behalf to a traditional IRA reduce your limit for contributions to a Roth IRA. Free federal tax filing 2012 (See Roth IRAs, later. Free federal tax filing 2012 ) General limit. Free federal tax filing 2012   For 2013, the most that can be contributed to your traditional IRA generally is the smaller of the following amounts. Free federal tax filing 2012 $5,500 ($6,500 if you are 50 or older). Free federal tax filing 2012 Your taxable compensation (defined earlier) for the year. Free federal tax filing 2012 This is the most that can be contributed regardless of whether the contributions are to one or more traditional IRAs or whether all or part of the contributions are nondeductible. Free federal tax filing 2012 (See Nondeductible Contributions , later. Free federal tax filing 2012 ) Qualified reservist repayments do not affect this limit. Free federal tax filing 2012 Example 1. Free federal tax filing 2012 Betty, who is 34 years old and single, earned $24,000 in 2013. Free federal tax filing 2012 Her IRA contributions for 2013 are limited to $5,500. Free federal tax filing 2012 Example 2. Free federal tax filing 2012 John, an unmarried college student working part time, earned $3,500 in 2013. Free federal tax filing 2012 His IRA contributions for 2013 are limited to $3,500, the amount of his compensation. Free federal tax filing 2012 Kay Bailey Hutchison Spousal IRA limit. Free federal tax filing 2012   For 2013, if you file a joint return and your taxable compensation is less than that of your spouse, the most that can be contributed for the year to your IRA is the smaller of the following amounts. Free federal tax filing 2012 $5,500 ($6,500 if you are 50 or older). Free federal tax filing 2012 The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts. Free federal tax filing 2012 Your spouse's IRA contribution for the year to a traditional IRA. Free federal tax filing 2012 Any contribution for the year to a Roth IRA on behalf of your spouse. Free federal tax filing 2012 This means that the total combined contributions that can be made for the year to your IRA and your spouse's IRA can be as much as $11,000 ($12,000 if only one of you is 50 or older, or $13,000 if both of you are 50 or older). Free federal tax filing 2012 When Can Contributions Be Made? As soon as you open your traditional IRA, contributions can be made to it through your chosen sponsor (trustee or other administrator). Free federal tax filing 2012 Contributions must be in the form of money (cash, check, or money order). Free federal tax filing 2012 Property cannot be contributed. Free federal tax filing 2012 Contributions must be made by due date. Free federal tax filing 2012   Contributions can be made to your traditional IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions. Free federal tax filing 2012 Age 70½ rule. Free federal tax filing 2012   Contributions cannot be made to your traditional IRA for the year in which you reach age 70½ or for any later year. Free federal tax filing 2012   You attain age 70½ on the date that is 6 calendar months after the 70th anniversary of your birth. Free federal tax filing 2012 If you were born on or before June 30, 1943, you cannot contribute for 2013 or any later year. Free federal tax filing 2012 Designating year for which contribution is made. Free federal tax filing 2012   If an amount is contributed to your traditional IRA between January 1 and April 15, you should tell the sponsor which year (the current year or the previous year) the contribution is for. Free federal tax filing 2012 If you do not tell the sponsor which year it is for, the sponsor can assume, and report to the IRS, that the contribution is for the current year (the year the sponsor received it). Free federal tax filing 2012 Filing before a contribution is made. Free federal tax filing 2012   You can file your return claiming a traditional IRA contribution before the contribution is actually made. Free federal tax filing 2012 Generally, the contribution must be made by the due date of your return, not including extensions. Free federal tax filing 2012 Contributions not required. Free federal tax filing 2012   You do not have to contribute to your traditional IRA for every tax year, even if you can. Free federal tax filing 2012 How Much Can You Deduct? Generally, you can deduct the lesser of: The contributions to your traditional IRA for the year, or The general limit (or the Kay Bailey Hutchison Spousal IRA limit, if it applies). Free federal tax filing 2012 However, if you or your spouse was covered by an employer retirement plan, you may not be able to deduct this amount. Free federal tax filing 2012 See Limit If Covered by Employer Plan , later. Free federal tax filing 2012 You may be able to claim a credit for contributions to your traditional IRA. Free federal tax filing 2012 For more information, see chapter 37. Free federal tax filing 2012 Trustees' fees. Free federal tax filing 2012   Trustees' administrative fees that are billed separately and paid in connection with your traditional IRA are not deductible as IRA contributions. Free federal tax filing 2012 However, they may be deductible as a miscellaneous itemized deduction on Schedule A (Form 1040). Free federal tax filing 2012 See chapter 28. Free federal tax filing 2012 Brokers' commissions. Free federal tax filing 2012   Brokers' commissions are part of your IRA contribution and, as such, are deductible subject to the limits. Free federal tax filing 2012 Full deduction. Free federal tax filing 2012   If neither you nor your spouse was covered for any part of the year by an employer retirement plan, you can take a deduction for total contributions to one or more traditional IRAs of up to the lesser of: $5,500 ($6,500 if you are age 50 or older in 2013). Free federal tax filing 2012 100% of your compensation. Free federal tax filing 2012 This limit is reduced by any contributions made to a 501(c)(18) plan on your behalf. Free federal tax filing 2012 Kay Bailey Hutchison Spousal IRA. Free federal tax filing 2012   In the case of a married couple with unequal compensation who file a joint return, the deduction for contributions to the traditional IRA of the spouse with less compensation is limited to the lesser of the following amounts. Free federal tax filing 2012 $5,500 ($6,500 if the spouse with the lower compensation is age 50 or older in 2013). Free federal tax filing 2012 The total compensation includible in the gross income of both spouses for the year reduced by the following three amounts. Free federal tax filing 2012 The IRA deduction for the year of the spouse with the greater compensation. Free federal tax filing 2012 Any designated nondeductible contribution for the year made on behalf of the spouse with the greater compensation. Free federal tax filing 2012 Any contributions for the year to a Roth IRA on behalf of the spouse with the greater compensation. Free federal tax filing 2012 This limit is reduced by any contributions to a 501(c)(18) plan on behalf of the spouse with the lesser compensation. Free federal tax filing 2012 Note. Free federal tax filing 2012 If you were divorced or legally separated (and did not remarry) before the end of the year, you cannot deduct any contributions to your spouse's IRA. Free federal tax filing 2012 After a divorce or legal separation, you can deduct only contributions to your own IRA. Free federal tax filing 2012 Your deductions are subject to the rules for single individuals. Free federal tax filing 2012 Covered by an employer retirement plan. Free federal tax filing 2012   If you or your spouse was covered by an employer retirement plan at any time during the year for which contributions were made, your deduction may be further limited. Free federal tax filing 2012 This is discussed later under Limit If Covered by Employer Plan . Free federal tax filing 2012 Limits on the amount you can deduct do not affect the amount that can be contributed. Free federal tax filing 2012 See Nondeductible Contributions , later. Free federal tax filing 2012 Are You Covered by an Employer Plan? The Form W-2 you receive from your employer has a box used to indicate whether you were covered for the year. Free federal tax filing 2012 The “Retirement plan” box should be checked if you were covered. Free federal tax filing 2012 Reservists and volunteer firefighters should also see Situations in Which You Are Not Covered by an Employer Plan , later. Free federal tax filing 2012 If you are not certain whether you were covered by your employer's retirement plan, you should ask your employer. Free federal tax filing 2012 Federal judges. Free federal tax filing 2012   For purposes of the IRA deduction, federal judges are covered by an employer retirement plan. Free federal tax filing 2012 For Which Year(s) Are You Covered by an Employer Plan? Special rules apply to determine the tax years for which you are covered by an employer plan. Free federal tax filing 2012 These rules differ depending on whether the plan is a defined contribution plan or a defined benefit plan. Free federal tax filing 2012 Tax year. Free federal tax filing 2012   Your tax year is the annual accounting period you use to keep records and report income and expenses on your income tax return. Free federal tax filing 2012 For almost all people, the tax year is the calendar year. Free federal tax filing 2012 Defined contribution plan. Free federal tax filing 2012   Generally, you are covered by a defined contribution plan for a tax year if amounts are contributed or allocated to your account for the plan year that ends with or within that tax year. Free federal tax filing 2012   A defined contribution plan is a plan that provides for a separate account for each person covered by the plan. Free federal tax filing 2012 Types of defined contribution plans include profit-sharing plans, stock bonus plans, and money purchase pension plans. Free federal tax filing 2012 Defined benefit plan. Free federal tax filing 2012   If you are eligible to participate in your employer's defined benefit plan for the plan year that ends within your tax year, you are covered by the plan. Free federal tax filing 2012 This rule applies even if you: Declined to participate in the plan, Did not make a required contribution, or Did not perform the minimum service required to accrue a benefit for the year. Free federal tax filing 2012   A defined benefit plan is any plan that is not a defined contribution plan. Free federal tax filing 2012 Defined benefit plans include pension plans and annuity plans. Free federal tax filing 2012 No vested interest. Free federal tax filing 2012   If you accrue a benefit for a plan year, you are covered by that plan even if you have no vested interest in (legal right to) the accrual. Free federal tax filing 2012 Situations in Which You Are Not Covered by an Employer Plan Unless you are covered under another employer plan, you are not covered by an employer plan if you are in one of the situations described below. Free federal tax filing 2012 Social security or railroad retirement. Free federal tax filing 2012   Coverage under social security or railroad retirement is not coverage under an employer retirement plan. Free federal tax filing 2012 Benefits from a previous employer's plan. Free federal tax filing 2012   If you receive retirement benefits from a previous employer's plan, you are not covered by that plan. Free federal tax filing 2012 Reservists. Free federal tax filing 2012   If the only reason you participate in a plan is because you are a member of a reserve unit of the armed forces, you may not be covered by the plan. Free federal tax filing 2012 You are not covered by the plan if both of the following conditions are met. Free federal tax filing 2012 The plan you participate in is established for its employees by: The United States, A state or political subdivision of a state, or An instrumentality of either (a) or (b) above. Free federal tax filing 2012 You did not serve more than 90 days on active duty during the year (not counting duty for training). Free federal tax filing 2012 Volunteer firefighters. Free federal tax filing 2012   If the only reason you participate in a plan is because you are a volunteer firefighter, you may not be covered by the plan. Free federal tax filing 2012 You are not covered by the plan if both of the following conditions are met. Free federal tax filing 2012 The plan you participate in is established for its employees by: The United States, A state or political subdivision of a state, or An instrumentality of either (a) or (b) above. Free federal tax filing 2012 Your accrued retirement benefits at the beginning of the year will not provide more than $1,800 per year at retirement. Free federal tax filing 2012 Limit If Covered by Employer Plan If either you or your spouse was covered by an employer retirement plan, you may be entitled to only a partial (reduced) deduction or no deduction at all, depending on your income and your filing status. Free federal tax filing 2012 Your deduction begins to decrease (phase out) when your income rises above a certain amount and is eliminated altogether when it reaches a higher amount. Free federal tax filing 2012 These amounts vary depending on your filing status. Free federal tax filing 2012 To determine if your deduction is subject to phaseout, you must determine your modified adjusted gross income (AGI) and your filing status. Free federal tax filing 2012 See Filing status and Modified adjusted gross income (AGI) , later. Free federal tax filing 2012 Then use Table 17-1 or 17-2 to determine if the phaseout applies. Free federal tax filing 2012 Social security recipients. Free federal tax filing 2012   Instead of using Table 17-1 or Table 17-2, use the worksheets in Appendix B of Publication 590 if, for the year, all of the following apply. Free federal tax filing 2012 You received social security benefits. Free federal tax filing 2012 You received taxable compensation. Free federal tax filing 2012 Contributions were made to your traditional IRA. Free federal tax filing 2012 You or your spouse was covered by an employer retirement plan. Free federal tax filing 2012 Use those worksheets to figure your IRA deduction, your nondeductible contribution, and the taxable portion, if any, of your social security benefits. Free federal tax filing 2012 Deduction phaseout. Free federal tax filing 2012   If you were covered by an employer retirement plan and you did not receive any social security retirement benefits, your IRA deduction may be reduced or eliminated depending on your filing status and modified AGI as shown in Table 17-1. Free federal tax filing 2012 Table 17-1. Free federal tax filing 2012 Effect of Modified AGI1 on Deduction if You Are Covered by Retirement Plan at Work If you are covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction. Free federal tax filing 2012 IF your filing status is. Free federal tax filing 2012 . Free federal tax filing 2012 . Free federal tax filing 2012   AND your modified AGI is. Free federal tax filing 2012 . Free federal tax filing 2012 . Free federal tax filing 2012   THEN you can take. Free federal tax filing 2012 . Free federal tax filing 2012 . Free federal tax filing 2012 single   or  head of household   $59,000 or less   a full deduction. Free federal tax filing 2012   more than $59,000 but less than $69,000   a partial deduction. Free federal tax filing 2012   $69,000 or more   no deduction. Free federal tax filing 2012 married filing jointly   or  qualifying widow(er)   $95,000 or less   a full deduction. Free federal tax filing 2012   more than $95,000 but less than $115,000   a partial deduction. Free federal tax filing 2012   $115,000 or more   no deduction. Free federal tax filing 2012 married filing separately2   less than $10,000   a partial deduction. Free federal tax filing 2012   $10,000 or more   no deduction. Free federal tax filing 2012 1Modified AGI (adjusted gross income). Free federal tax filing 2012 See Modified adjusted gross income (AGI) . Free federal tax filing 2012 2If you did not live with your spouse at any time during the year, your filing status is considered Single for this purpose (therefore, your IRA deduction is determined under the “Single” column). Free federal tax filing 2012 If your spouse is covered. Free federal tax filing 2012   If you are not covered by an employer retirement plan, but your spouse is, and you did not receive any social security benefits, your IRA deduction may be reduced or eliminated entirely depending on your filing status and modified AGI as shown in Table 17-2. Free federal tax filing 2012 Filing status. Free federal tax filing 2012   Your filing status depends primarily on your marital status. Free federal tax filing 2012 For this purpose, you need to know if your filing status is single or head of household, married filing jointly or qualifying widow(er), or married filing separately. Free federal tax filing 2012 If you need more information on filing status, see chapter 2. Free federal tax filing 2012 Lived apart from spouse. Free federal tax filing 2012   If you did not live with your spouse at any time during the year and you file a separate return, your filing status, for this purpose, is single. Free federal tax filing 2012 Table 17-2. Free federal tax filing 2012 Effect of Modified AGI1 on Deduction if You Are NOT Covered by Retirement Plan at Work If you are not covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction. Free federal tax filing 2012 IF your filing status is. Free federal tax filing 2012 . Free federal tax filing 2012 . Free federal tax filing 2012   AND your modified AGI is. Free federal tax filing 2012 . Free federal tax filing 2012 . Free federal tax filing 2012   THEN you can take. Free federal tax filing 2012 . Free federal tax filing 2012 . Free federal tax filing 2012 single, head of household, or qualifying widow(er)   any amount   a full deduction. Free federal tax filing 2012 married filing jointly or separately with a spouse who is not covered by a plan at work   any amount   a full deduction. Free federal tax filing 2012 married filing jointly with a spouse who is covered by a plan at work   $178,000 or less   a full deduction. Free federal tax filing 2012   more than $178,000 but less than $188,000   a partial deduction. Free federal tax filing 2012   $188,000 or more   no deduction. Free federal tax filing 2012 married filing separately with a spouse who is covered by a plan at work2   less than $10,000   a partial deduction. Free federal tax filing 2012   $10,000 or more   no deduction. Free federal tax filing 2012 1Modified AGI (adjusted gross income). Free federal tax filing 2012 See Modified adjusted gross income (AGI) . Free federal tax filing 2012 2You are entitled to the full deduction if you did not live with your spouse at any time during the year. Free federal tax filing 2012 Modified adjusted gross income (AGI). Free federal tax filing 2012   How you figure your modified AGI depends on whether you are filing Form 1040 or Form 1040A. Free federal tax filing 2012 If you made contributions to your IRA for 2013 and received a distribution from your IRA in 2013, see Publication 590. Free federal tax filing 2012 You may be able to use Worksheet 17-1 to figure your modified AGI. Free federal tax filing 2012    Do not assume that your modified AGI is the same as your compensation. Free federal tax filing 2012 Your modified AGI may include income in addition to your compensation (discussed earlier), such as interest, dividends, and income from IRA distributions. Free federal tax filing 2012 Form 1040. Free federal tax filing 2012   If you file Form 1040, refigure the amount on the page 1 “adjusted gross income” line without taking into account any of the following eight amounts. Free federal tax filing 2012 IRA deduction. Free federal tax filing 2012 Student loan interest deduction. Free federal tax filing 2012 Tuition and fees deduction. Free federal tax filing 2012 Domestic production activities deduction. Free federal tax filing 2012 Foreign earned income exclusion. Free federal tax filing 2012 Foreign housing exclusion or deduction. Free federal tax filing 2012 Exclusion of qualified savings bond interest shown on Form 8815, Exclusion of Interest From Series EE and I U. Free federal tax filing 2012 S. Free federal tax filing 2012 Savings Bonds Issued After 1989. Free federal tax filing 2012 Exclusion of employer-provided adoption benefits shown on Form 8839, Qualified Adoption Expenses. Free federal tax filing 2012 This is your modified AGI. Free federal tax filing 2012 Form 1040A. Free federal tax filing 2012   If you file Form 1040A, refigure the amount on the page 1 “adjusted gross income” line without taking into account any of the following amounts. Free federal tax filing 2012 IRA deduction. Free federal tax filing 2012 Student loan interest deduction. Free federal tax filing 2012 Tuition and fees deduction. Free federal tax filing 2012 Exclusion of qualified savings bond interest shown on Form 8815. Free federal tax filing 2012 This is your modified AGI. Free federal tax filing 2012 Both contributions for 2013 and distributions in 2013. Free federal tax filing 2012   If all three of the following apply, any IRA distributions you received in 2013 may be partly tax free and partly taxable. Free federal tax filing 2012 You received distributions in 2013 from one or more traditional IRAs. Free federal tax filing 2012 You made contributions to a traditional IRA for 2013. Free federal tax filing 2012 Some of those contributions may be nondeductible contributions. Free federal tax filing 2012 If this is your situation, you must figure the taxable part of the traditional IRA distribution before you can figure your modified AGI. Free federal tax filing 2012 To do this, you can use Worksheet 1-5, Figuring the Taxable Part of Your IRA Distribution, in Publication 590. Free federal tax filing 2012   If at least one of the above does not apply, figure your modified AGI using Worksheet 17-1, later. Free federal tax filing 2012    How to figure your reduced IRA deduction. Free federal tax filing 2012   You can figure your reduced IRA deduction for either Form 1040 or Form 1040A by using the worksheets in chapter 1 of Publication 590. Free federal tax filing 2012 Also, the instructions for Form 1040 and Form 1040A include similar worksheets that you may be able to use instead. Free federal tax filing 2012 Worksheet 17-1. Free federal tax filing 2012 Figuring Your Modified AGI Use this worksheet to figure your modified adjusted gross income for traditional IRA purposes. Free federal tax filing 2012 1. Free federal tax filing 2012 Enter your adjusted gross income (AGI) from Form 1040, line 38, or Form 1040A, line 22, figured without taking into account the amount from Form 1040, line 32, or Form 1040A, line 17 1. Free federal tax filing 2012   2. Free federal tax filing 2012 Enter any student loan interest deduction from Form 1040, line 33, or Form 1040A, line 18 2. Free federal tax filing 2012   3. Free federal tax filing 2012 Enter any tuition and fees deduction from Form 1040, line 34, or Form 1040A, line 19 3. Free federal tax filing 2012   4. Free federal tax filing 2012 Enter any domestic production activities deduction from Form 1040, line 35 4. Free federal tax filing 2012   5. Free federal tax filing 2012 Enter any foreign earned income and/or housing exclusion from Form 2555, line 45, or Form 2555-EZ, line 18 5. Free federal tax filing 2012   6. Free federal tax filing 2012 Enter any foreign housing deduction from Form 2555, line 50 6. Free federal tax filing 2012   7. Free federal tax filing 2012 Enter any excludable savings bond interest from Form 8815, line 14 7. Free federal tax filing 2012   8. Free federal tax filing 2012 Enter any excluded employer-provided adoption benefits from Form 8839, line 28 8. Free federal tax filing 2012   9. Free federal tax filing 2012 Add lines 1 through 8. Free federal tax filing 2012 This is your Modified AGI for traditional IRA purposes 9. Free federal tax filing 2012   Reporting Deductible Contributions If you file Form 1040, enter your IRA deduction on line 32 of that form. Free federal tax filing 2012 If you file Form 1040A, enter your IRA deduction on line 17. Free federal tax filing 2012 You cannot deduct IRA contributions on Form 1040EZ. Free federal tax filing 2012 Nondeductible Contributions Although your deduction for IRA contributions may be reduced or eliminated, contributions can be made to your IRA up to the general limit or, if it applies, the Kay Bailey Hutchison Spousal IRA limit. Free federal tax filing 2012 The difference between your total permitted contributions and your IRA deduction, if any, is your nondeductible contribution. Free federal tax filing 2012 Example. Free federal tax filing 2012 Mike is 28 years old and single. Free federal tax filing 2012 In 2013, he was covered by a retirement plan at work. Free federal tax filing 2012 His salary was $57,312. Free federal tax filing 2012 His modified AGI was $70,000. Free federal tax filing 2012 Mike made a $5,500 IRA contribution for 2013. Free federal tax filing 2012 Because he was covered by a retirement plan and his modified AGI was over $69,000, he cannot deduct his $5,500 IRA contribution. Free federal tax filing 2012 He must designate this contribution as a nondeductible contribution by reporting it on Form 8606, as explained next. Free federal tax filing 2012 Form 8606. Free federal tax filing 2012   To designate contributions as nondeductible, you must file Form 8606. Free federal tax filing 2012   You do not have to designate a contribution as nondeductible until you file your tax return. Free federal tax filing 2012 When you file, you can even designate otherwise deductible contributions as nondeductible. Free federal tax filing 2012   You must file Form 8606 to report nondeductible contributions even if you do not have to file a tax return for the year. Free federal tax filing 2012 A Form 8606 is not used for the year that you make a rollover from a qualified retirement plan to a traditional IRA and the rollover includes nontaxable amounts. Free federal tax filing 2012 In those situations, a Form 8606 is completed for the year you take a distribution from that IRA. Free federal tax filing 2012 See Form 8606 under Distributions Fully or Partly Taxable, later. Free federal tax filing 2012 Failure to report nondeductible contributions. Free federal tax filing 2012   If you do not report nondeductible contributions, all of the contributions to your traditional IRA will be treated as deductible contributions when withdrawn. Free federal tax filing 2012 All distributions from your IRA will be taxed unless you can show, with satisfactory evidence, that nondeductible contributions were made. Free federal tax filing 2012 Penalty for overstatement. Free federal tax filing 2012   If you overstate the amount of nondeductible contributions on your Form 8606 for any tax year, you must pay a penalty of $100 for each overstatement, unless it was due to reasonable cause. Free federal tax filing 2012 Penalty for failure to file Form 8606. Free federal tax filing 2012   You will have to pay a $50 penalty if you do not file a required Form 8606, unless you can prove that the failure was due to reasonable cause. Free federal tax filing 2012    Tax on earnings on nondeductible contributions. Free federal tax filing 2012   As long as contributions are within the contribution limits, none of the earnings or gains on contributions (deductible or nondeductible) will be taxed until they are distributed. Free federal tax filing 2012 See When Can You Withdraw or Use IRA Assets , later. Free federal tax filing 2012 Cost basis. Free federal tax filing 2012   You will have a cost basis in your traditional IRA if you made any nondeductible contributions. Free federal tax filing 2012 Your cost basis is the sum of the nondeductible contributions to your IRA minus any withdrawals or distributions of nondeductible contributions. Free federal tax filing 2012 Inherited IRAs If you inherit a traditional IRA, you are called a beneficiary. Free federal tax filing 2012 A beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after he or she dies. Free federal tax filing 2012 Beneficiaries of a traditional IRA must include in their gross income any taxable distributions they receive. Free federal tax filing 2012 Inherited from spouse. Free federal tax filing 2012   If you inherit a traditional IRA from your spouse, you generally have the following three choices. Free federal tax filing 2012 You can: Treat it as your own IRA by designating yourself as the account owner. Free federal tax filing 2012 Treat it as your own by rolling it over into your IRA, or to the extent it is taxable, into a: Qualified employer plan, Qualified employee annuity plan (section 403(a) plan), Tax-sheltered annuity plan (section 403(b) plan), or Deferred compensation plan of a state or local government (section 457 plan). Free federal tax filing 2012 Treat yourself as the beneficiary rather than treating the IRA as your own. Free federal tax filing 2012 Treating it as your own. Free federal tax filing 2012   You will be considered to have chosen to treat the IRA as your own if: Contributions (including rollover contributions) are made to the inherited IRA, or You do not take the required minimum distribution for a year as a beneficiary of the IRA. Free federal tax filing 2012 You will only be considered to have chosen to treat the IRA as your own if: You are the sole beneficiary of the IRA, and You have an unlimited right to withdraw amounts from it. Free federal tax filing 2012   However, if you receive a distribution from your deceased spouse's IRA, you can roll that distribution over into your own IRA within the 60-day time limit, as long as the distribution is not a required distribution, even if you are not the sole beneficiary of your deceased spouse's IRA. Free federal tax filing 2012 Inherited from someone other than spouse. Free federal tax filing 2012   If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. Free federal tax filing 2012 This means that you cannot make any contributions to the IRA. Free federal tax filing 2012 It also means you cannot roll over any amounts into or out of the inherited IRA. Free federal tax filing 2012 However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary. Free federal tax filing 2012 For more information, see the discussion of inherited IRAs under Rollover From One IRA Into Another, later. Free federal tax filing 2012 Can You Move Retirement Plan Assets? You can transfer, tax free, assets (money or property) from other retirement plans (including traditional IRAs) to a traditional IRA. Free federal tax filing 2012 You can make the following kinds of transfers. Free federal tax filing 2012 Transfers from one trustee to another. Free federal tax filing 2012 Rollovers. Free federal tax filing 2012 Transfers incident to a divorce. Free federal tax filing 2012 Transfers to Roth IRAs. Free federal tax filing 2012   Under certain conditions, you can move assets from a traditional IRA or from a designated Roth account to a Roth IRA. Free federal tax filing 2012 You can also move assets from a qualified retirement plan to a Roth IRA. Free federal tax filing 2012 See Can You Move Amounts Into a Roth IRA? under Roth IRAs, later. Free federal tax filing 2012 Trustee-to-Trustee Transfer A transfer of funds in your traditional IRA from one trustee directly to another, either at your request or at the trustee's request, is not a rollover. Free federal tax filing 2012 Because there is no distribution to you, the transfer is tax free. Free federal tax filing 2012 Because it is not a rollover, it is not affected by the 1-year waiting period required between rollovers, discussed later under Rollover From One IRA Into Another . Free federal tax filing 2012 For information about direct transfers to IRAs from retirement plans other than IRAs, see Can You Move Retirement Plan Assets? in chapter 1 and Can You Move Amounts Into a Roth IRA? in chapter 2 of Publication 590. Free federal tax filing 2012 Rollovers Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute (roll over) to another retirement plan. Free federal tax filing 2012 The contribution to the second retirement plan is called a “rollover contribution. Free federal tax filing 2012 ” Note. Free federal tax filing 2012 An amount rolled over tax free from one retirement plan to another is generally includible in income when it is distributed from the second plan. Free federal tax filing 2012 Kinds of rollovers to a traditional IRA. Free federal tax filing 2012   You can roll over amounts from the following plans into a traditional IRA: A traditional IRA, An employer's qualified retirement plan for its employees, A deferred compensation plan of a state or local government (section 457 plan), or A tax-sheltered annuity plan (section 403(b) plan). Free federal tax filing 2012 Treatment of rollovers. Free federal tax filing 2012   You cannot deduct a rollover contribution, but you must report the rollover distribution on your tax return as discussed later under Reporting rollovers from IRAs and under Reporting rollovers from employer plans . Free federal tax filing 2012 Kinds of rollovers from a traditional IRA. Free federal tax filing 2012   You may be able to roll over, tax free, a distribution from your traditional IRA into a qualified plan. Free federal tax filing 2012 These plans include the federal Thrift Savings Fund (for federal employees), deferred compensation plans of state or local governments (section 457 plans), and tax-sheltered annuity plans (section 403(b) plans). Free federal tax filing 2012 The part of the distribution that you can roll over is the part that would otherwise be taxable (includible in your income). Free federal tax filing 2012 Qualified plans may, but are not required to, accept such rollovers. Free federal tax filing 2012 Time limit for making a rollover contribution. Free federal tax filing 2012   You generally must make the rollover contribution by the 60th day after the day you receive the distribution from your traditional IRA or your employer's plan. Free federal tax filing 2012 The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. Free federal tax filing 2012 For more information, see Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. Free federal tax filing 2012 Extension of rollover period. Free federal tax filing 2012   If an amount distributed to you from a traditional IRA or a qualified employer retirement plan is a frozen deposit at any time during the 60-day period allowed for a rollover, special rules extend the rollover period. Free federal tax filing 2012 For more information, see Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. Free federal tax filing 2012 More information. Free federal tax filing 2012   For more information on rollovers, see Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. Free federal tax filing 2012 Rollover From One IRA Into Another You can withdraw, tax free, all or part of the assets from one traditional IRA if you reinvest them within 60 days in the same or another traditional IRA. Free federal tax filing 2012 Because this is a rollover, you cannot deduct the amount that you reinvest in an IRA. Free federal tax filing 2012 Waiting period between rollovers. Free federal tax filing 2012   Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. Free federal tax filing 2012 You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover. Free federal tax filing 2012   The 1-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA. Free federal tax filing 2012 Example. Free federal tax filing 2012 You have two traditional IRAs, IRA-1 and IRA-2. Free federal tax filing 2012 You make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). Free federal tax filing 2012 You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA. Free federal tax filing 2012 However, the rollover from IRA-1 into IRA-3 does not prevent you from making a tax-free rollover from IRA-2 into any other traditional IRA. Free federal tax filing 2012 This is because you have not, within the last year, rolled over, tax free, any distribution from IRA-2 or made a tax-free rollover into IRA-2. Free federal tax filing 2012 Exception. Free federal tax filing 2012   For an exception for distributions from failed financial institutions, see Rollover From One IRA Into Another under Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. Free federal tax filing 2012 Partial rollovers. Free federal tax filing 2012   If you withdraw assets from a traditional IRA, you can roll over part of the withdrawal tax free and keep the rest of it. Free federal tax filing 2012 The amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions). Free federal tax filing 2012 The amount you keep may be subject to the 10% additional tax on early distributions, discussed later under What Acts Result in Penalties or Additional Taxes? . Free federal tax filing 2012 Required distributions. Free federal tax filing 2012   Amounts that must be distributed during a particular year under the required distribution rules (discussed later) are not eligible for rollover treatment. Free federal tax filing 2012 Inherited IRAs. Free federal tax filing 2012   If you inherit a traditional IRA from your spouse, you generally can roll it over, or you can choose to make the inherited IRA your own. Free federal tax filing 2012 See Treating it as your own , earlier. Free federal tax filing 2012 Not inherited from spouse. Free federal tax filing 2012   If you inherit a traditional IRA from someone other than your spouse, you cannot roll it over or allow it to receive a rollover contribution. Free federal tax filing 2012 You must withdraw the IRA assets within a certain period. Free federal tax filing 2012 For more information, see When Must You Withdraw Assets? in chapter 1 of Publication 590. Free federal tax filing 2012 Reporting rollovers from IRAs. Free federal tax filing 2012   Report any rollover from one traditional IRA to the same or another traditional IRA on lines 15a and 15b, Form 1040, or lines 11a and 11b, Form 1040A, as follows. Free federal tax filing 2012   Enter the total amount of the distribution on Form 1040, line 15a, or Form 1040A, line 11a. Free federal tax filing 2012 If the total amount on Form 1040, line 15a, or Form 1040A, line 11a, was rolled over, enter zero on Form 1040, line 15b, or Form 1040A, line 11b. Free federal tax filing 2012 If the total distribution was not rolled over, enter the taxable portion of the part that was not rolled over on Form 1040, line 15b, or Form 1040A, line 11b. Free federal tax filing 2012 Put “Rollover” next to Form 1040, line 15b, or Form 1040A, line 11b. Free federal tax filing 2012 See your tax return instructions. Free federal tax filing 2012   If you rolled over the distribution into a qualified plan (other than an IRA) or you make the rollover in 2014, attach a statement explaining what you did. Free federal tax filing 2012 Rollover From Employer's Plan Into an IRA You can roll over into a traditional IRA all or part of an eligible rollover distribution you receive from your (or your deceased spouse's): Employer's qualified pension, profit-sharing, or stock bonus plan; Annuity plan; Tax-sheltered annuity plan (section 403(b) plan); or Governmental deferred compensation plan (section 457 plan). Free federal tax filing 2012 A qualified plan is one that meets the requirements of the Internal Revenue Code. Free federal tax filing 2012 Eligible rollover distribution. Free federal tax filing 2012   Generally, an eligible rollover distribution is any distribution of all or part of the balance to your credit in a qualified retirement plan except the following. Free federal tax filing 2012 A required minimum distribution (explained later under When Must You Withdraw IRA Assets? (Required Minimum Distributions) ). Free federal tax filing 2012 A hardship distribution. Free federal tax filing 2012 Any of a series of substantially equal periodic distributions paid at least once a year over: Your lifetime or life expectancy, The lifetimes or life expectancies of you and your beneficiary, or A period of 10 years or more. Free federal tax filing 2012 Corrective distributions of excess contributions or excess deferrals, and any income allocable to the excess, or of excess annual additions and any allocable gains. Free federal tax filing 2012 A loan treated as a distribution because it does not satisfy certain requirements either when made or later (such as upon default), unless the participant's accrued benefits are reduced (offset) to repay the loan. Free federal tax filing 2012 Dividends on employer securities. Free federal tax filing 2012 The cost of life insurance coverage. Free federal tax filing 2012 Any nontaxable amounts that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. Free federal tax filing 2012 To recover your basis when you take distributions from your IRA, you must complete Form 8606 for the year of the distribution. Free federal tax filing 2012 See Form 8606 under Distributions Fully or Partly Taxable, later. Free federal tax filing 2012 Rollover by nonspouse beneficiary. Free federal tax filing 2012   A direct transfer from a deceased employee's qualified pension, profit-sharing, or stock bonus plan; annuity plan; tax-sheltered annuity (section 403(b)) plan; or governmental deferred compensation (section 457) plan to an IRA set up to receive the distribution on your behalf can be treated as an eligible rollover distribution if you are the designated beneficiary of the plan and not the employee's spouse. Free federal tax filing 2012 The IRA is treated as an inherited IRA. Free federal tax filing 2012 For more information about inherited IRAs, see Inherited IRAs , earlier. Free federal tax filing 2012 Reporting rollovers from employer plans. Free federal tax filing 2012    Enter the total distribution (before income tax or other deductions were withheld) on Form 1040, line 16a, or Form 1040A, line 12a. Free federal tax filing 2012 This amount should be shown in box 1 of Form 1099-R. Free federal tax filing 2012 From this amount, subtract any contributions (usually shown in box 5 of Form 1099-R) that were taxable to you when made. Free federal tax filing 2012 From that result, subtract the amount that was rolled over either directly or within 60 days of receiving the distribution. Free federal tax filing 2012 Enter the remaining amount, even if zero, on Form 1040, line 16b, or Form 1040A, line 12b. Free federal tax filing 2012 Also, enter "Rollover" next to Form 1040, line 16b, or Form 1040A, line 12b. Free federal tax filing 2012 Transfers Incident to Divorce If an interest in a traditional IRA is transferred from your spouse or former spouse to you by a divorce or separate maintenance decree or a written document related to such a decree, the interest in the IRA, starting from the date of the transfer, is treated as your IRA. Free federal tax filing 2012 The transfer is tax free. Free federal tax filing 2012 For detailed information, see Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. Free federal tax filing 2012 Converting From Any Traditional IRA to a Roth IRA Allowable conversions. Free federal tax filing 2012   You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. Free federal tax filing 2012 The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a conversion contribution. Free federal tax filing 2012 If properly (and timely) rolled over, the 10% additional tax on early distributions will not apply. Free federal tax filing 2012 However, a part or all of the conversion contribution from your traditional IRA is included in your gross income. Free federal tax filing 2012 Required distributions. Free federal tax filing 2012   You cannot convert amounts that must be distributed from your traditional IRA for a particular year (including the calendar year in which you reach age 70½) under the required distribution rules (discussed later). Free federal tax filing 2012 Income. Free federal tax filing 2012   You must include in your gross income distributions from a traditional IRA that you would have had to include in income if you had not converted them into a Roth IRA. Free federal tax filing 2012 These amounts are normally included in income on your return for the year that you converted them from a traditional IRA to a Roth IRA. Free federal tax filing 2012   You do not include in gross income any part of a distribution from a traditional IRA that is a return of your basis, as discussed later. Free federal tax filing 2012   You must file Form 8606 to report 2013 conversions from traditional, SEP, or SIMPLE IRAs to a Roth IRA in 2013 (unless you recharacterized the entire amount) and to figure the amount to include in income. Free federal tax filing 2012   If you must include any amount in your gross income, you may have to increase your withholding or make estimated tax payments. Free federal tax filing 2012 See chapter 4. Free federal tax filing 2012 Recharacterizations You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. Free federal tax filing 2012 This is called recharacterizing the contribution. Free federal tax filing 2012 See Can You Move Retirement Plan Assets? in chapter 1 of Publication 590 for more detailed information. Free federal tax filing 2012 How to recharacterize a contribution. Free federal tax filing 2012   To recharacterize a contribution, you generally must have the contribution transferred from the first IRA (the one to which it was made) to the second IRA in a trustee-to-trustee transfer. Free federal tax filing 2012 If the transfer is made by the due date (including extensions) for your tax return for the year during which the contribution was made, you can elect to treat the contribution as having been originally made to the second IRA instead of to the first IRA. Free federal tax filing 2012 If you recharacterize your contribution, you must do all three of the following. Free federal tax filing 2012 Include in the transfer any net income allocable to the contribution. Free federal tax filing 2012 If there was a loss, the net income you must transfer may be a negative amount. Free federal tax filing 2012 Report the recharacterization on your tax return for the year during which the contribution was made. Free federal tax filing 2012 Treat the contribution as having been made to the second IRA on the date that it was actually made to the first IRA. Free federal tax filing 2012 No deduction allowed. Free federal tax filing 2012   You cannot deduct the contribution to the first IRA. Free federal tax filing 2012 Any net income you transfer with the recharacterized contribution is treated as earned in the second IRA. Free federal tax filing 2012 Required notifications. Free federal tax filing 2012   To recharacterize a contribution, you must notify both the trustee of the first IRA (the one to which the contribution was actually made) and the trustee of the second IRA (the one to which the contribution is being moved) that you have elected to treat the contribution as having been made to the second IRA rather than the first. Free federal tax filing 2012 You must make the notifications by the date of the transfer. Free federal tax filing 2012 Only one notification is required if both IRAs are maintained by the same trustee. Free federal tax filing 2012 The notification(s) must include all of the following information. Free federal tax filing 2012 The type and amount of the contribution to the first IRA that is to be recharacterized. Free federal tax filing 2012 The date on which the contribution was made to the first IRA and the year for which it was made. Free federal tax filing 2012 A direction to the trustee of the first IRA to transfer in a trustee-to-trustee transfer the amount of the contribution and any net income (or loss) allocable to the contribution to the trustee of the second IRA. Free federal tax filing 2012 The name of the trustee of the first IRA and the name of the trustee of the second IRA. Free federal tax filing 2012 Any additional information needed to make the transfer. Free federal tax filing 2012 Reporting a recharacterization. Free federal tax filing 2012   If you elect to recharacterize a contribution to one IRA as a contribution to another IRA, you must report the recharacterization on your tax return as directed by Form 8606 and its instructions. Free federal tax filing 2012 You must treat the contribution as having been made to the second IRA. Free federal tax filing 2012 When Can You Withdraw or Use IRA Assets? There are rules limiting use of your IRA assets and distributions from it. Free federal tax filing 2012 Violation of the rules generally results in additional taxes in the year of violation. Free federal tax filing 2012 See What Acts Result in Penalties or Additional Taxes , later. Free federal tax filing 2012 Contributions returned before the due date of return. Free federal tax filing 2012   If you made IRA contributions in 2013, you can withdraw them tax free by the due date of your return. Free federal tax filing 2012 If you have an extension of time to file your return, you can withdraw them tax free by the extended due date. Free federal tax filing 2012 You can do this if, for each contribution you withdraw, both of the following conditions apply. Free federal tax filing 2012 You did not take a deduction for the contribution. Free federal tax filing 2012 You withdraw any interest or other income earned on the contribution. Free federal tax filing 2012 You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn. Free federal tax filing 2012 If there was a loss, the net income earned on the contribution may be a negative amount. Free federal tax filing 2012 Note. Free federal tax filing 2012 To calculate the amount you must withdraw, see Worksheet 1-4 under When Can You Withdraw or Use Assets? in chapter 1 of Publication 590. Free federal tax filing 2012 Earnings includible in income. Free federal tax filing 2012   You must include in income any earnings on the contributions you withdraw. Free federal tax filing 2012 Include the earnings in income for the year in which you made the contributions, not in the year in which you withdraw them. Free federal tax filing 2012 Generally, except for any part of a withdrawal that is a return of nondeductible contributions (basis), any withdrawal of your contributions after the due date (or extended due date) of your return will be treated as a taxable distribution. Free federal tax filing 2012 Excess contributions can also be recovered tax free as discussed under What Acts Result in Penalties or Additional Taxes?, later. Free federal tax filing 2012    Early distributions tax. Free federal tax filing 2012   The 10% additional tax on distributions made before you reach age 59½ does not apply to these tax-free withdrawals of your contributions. Free federal tax filing 2012 However, the distribution of interest or other income must be reported on Form 5329 and, unless the distribution qualifies as an exception to the age 59½ rule, it will be subject to this tax. Free federal tax filing 2012 When Must You Withdraw IRA Assets? (Required Minimum Distributions) You cannot keep funds in a traditional IRA indefinitely. Free federal tax filing 2012 Eventually they must be distributed. Free federal tax filing 2012 If there are no distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required. Free federal tax filing 2012 See Excess Accumulations (Insufficient Distributions) , later. Free federal tax filing 2012 The requirements for distributing IRA funds differ depending on whether you are the IRA owner or the beneficiary of a decedent's IRA. Free federal tax filing 2012 Required minimum distribution. Free federal tax filing 2012   The amount that must be distributed each year is referred to as the required minimum distribution. Free federal tax filing 2012 Required distributions not eligible for rollover. Free federal tax filing 2012   Amounts that must be distributed (required minimum distributions) during a particular year are not eligible for rollover treatment. Free federal tax filing 2012 IRA owners. Free federal tax filing 2012   If you are the owner of a traditional IRA, you must generally start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70½. Free federal tax filing 2012 April 1 of the year following the year in which you reach age 70½ is referred to as the required beginning date. Free federal tax filing 2012 Distributions by the required beginning date. Free federal tax filing 2012   You must receive at least a minimum amount for each year starting with the year you reach age 70½ (your 70½ year). Free federal tax filing 2012 If you do not (or did not) receive that minimum amount in your 70½ year, then you must receive distributions for your 70½ year by April 1 of the next year. Free federal tax filing 2012   If an IRA owner dies after reaching age 70½, but before April 1 of the next year, no minimum distribution is required because death occurred before the required beginning date. Free federal tax filing 2012 Even if you begin receiving distributions before you attain age 70½, you must begin calculating and receiving required minimum distributions by your required beginning date. Free federal tax filing 2012 Distributions after the required beginning date. Free federal tax filing 2012   The required minimum distribution for any year after the year you turn 70½ must be made by December 31 of that later year. Free federal tax filing 2012    Beneficiaries. Free federal tax filing 2012   If you are the beneficiary of a decedent's traditional IRA, the requirements for distributions from that IRA generally depend on whether the IRA owner died before or after the required beginning date for distributions. Free federal tax filing 2012 More information. Free federal tax filing 2012   For more information, including how to figure your minimum required distribution each year and how to figure your required distribution if you are a beneficiary of a decedent's IRA, see When Must You Withdraw Assets? in chapter 1 of Publication 590. Free federal tax filing 2012 Are Distributions Taxable? In general, distributions from a traditional IRA are taxable in the year you receive them. Free federal tax filing 2012 Exceptions. Free federal tax filing 2012   Exceptions to distributions from traditional IRAs being taxable in the year you receive them are: Rollovers, Qualified charitable distributions (QCD), discussed later, Tax-free withdrawals of contributions, discussed earlier, and The return of nondeductible contributions, discussed later under Distributions Fully or Partly Taxable . Free federal tax filing 2012    Although a conversion of a traditional IRA is considered a rollover for Roth IRA purposes, it is not an exception to the rule that distributions from a traditional IRA are taxable in the year you receive them. Free federal tax filing 2012 Conversion distributions are includible in your gross income subject to this rule and the special rules for conversions explained in Converting From Any Traditional IRA Into a Roth IRA under Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. Free federal tax filing 2012 Qualified charitable distributions (QCD). Free federal tax filing 2012   A QCD is generally a nontaxable distribution made directly by the trustee of your IRA to an organization eligible to receive tax-deductible contributions. Free federal tax filing 2012 Special rules apply if you made a qualified charitable distribution in January 2013 that you elected to treat as made in 2012. Free federal tax filing 2012 See Qualified Charitable Distributions in Publication 590 for more information. Free federal tax filing 2012 Ordinary income. Free federal tax filing 2012   Distributions from traditional IRAs that you include in income are taxed as ordinary income. Free federal tax filing 2012 No special treatment. Free federal tax filing 2012   In figuring your tax, you cannot use the 10-year tax option or capital gain treatment that applies to lump-sum distributions from qualified retirement plans. Free federal tax filing 2012 Distributions Fully or Partly Taxable Distributions from your traditional IRA may be fully or partly taxable, depending on whether your IRA includes any nondeductible contributions. Free federal tax filing 2012 Fully taxable. Free federal tax filing 2012   If only deductible contributions were made to your traditional IRA (or IRAs, if you have more than one), you have no basis in your IRA. Free federal tax filing 2012 Because you have no basis in your IRA, any distributions are fully taxable when received. Free federal tax filing 2012 See Reporting taxable distributions on your return , later. Free federal tax filing 2012 Partly taxable. Free federal tax filing 2012    If you made nondeductible contributions or rolled over any after-tax amounts to any of your traditional IRAs, you have a cost basis (investment in the contract) equal to the amount of those contributions. Free federal tax filing 2012 These nondeductible contributions are not taxed when they are distributed to you. Free federal tax filing 2012 They are a return of your investment in your IRA. Free federal tax filing 2012   Only the part of the distribution that represents nondeductible contributions and rolled over after-tax amounts (your cost basis) is tax free. Free federal tax filing 2012 If nondeductible contributions have been made or after-tax amounts have been rolled over to your IRA, distributions consist partly of nondeductible contributions (basis) and partly of deductible contributions, earnings, and gains (if there are any). Free federal tax filing 2012 Until all of your basis has been distributed, each distribution is partly nontaxable and partly taxable. Free federal tax filing 2012 Form 8606. Free federal tax filing 2012   You must complete Form 8606 and attach it to your return if you receive a distribution from a traditional IRA and have ever made nondeductible contributions or rolled over after-tax amounts to any of your traditional IRAs. Free federal tax filing 2012 Using the form, you will figure the nontaxable distributions for 2013 and your total IRA basis for 2013 and earlier years. Free federal tax filing 2012 Note. Free federal tax filing 2012 If you are required to file Form 8606, but you are not required to file an income tax return, you still must file Form 8606. Free federal tax filing 2012 Send it to the IRS at the time and place you would otherwise file an income tax return. Free federal tax filing 2012 Distributions reported on Form 1099-R. Free federal tax filing 2012   If you receive a distribution from your traditional IRA, you will receive Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Free federal tax filing 2012 , or a similar statement. Free federal tax filing 2012 IRA distributions are shown in boxes 1 and 2a of Form 1099-R. Free federal tax filing 2012 A number or letter code in box 7 tells you what type of distribution you received from your IRA. Free federal tax filing 2012 Withholding. Free federal tax filing 2012   Federal income tax is withheld from distributions from traditional IRAs unless you choose not to have tax withheld. Free federal tax filing 2012 See chapter 4. Free federal tax filing 2012 IRA distributions delivered outside the United States. Free federal tax filing 2012   In general, if you are a U. Free federal tax filing 2012 S. Free federal tax filing 2012 citizen or resident alien and your home address is outside the United States or its possessions, you cannot choose exemption from withholding on distributions from your traditional IRA. Free federal tax filing 2012 Reporting taxable distributions on your return. Free federal tax filing 2012    Report fully taxable distributions, including early distributions on Form 1040, line 15b, or Form 1040A, line 11b (no entry is required on Form 1040, line 15a, or Form 1040A, line 11a). Free federal tax filing 2012 If only part of the distribution is taxable, enter the total amount on Form 1040, line 15a, or Form 1040A, line 11a, and the taxable part on Form 1040, line 15b, or Form 1040A, line 11b. Free federal tax filing 2012 You cannot report distributions on Form 1040EZ. Free federal tax filing 2012 What Acts Result in Penalties or Additional Taxes? The tax advantages of using traditional IRAs for retirement savings can be offset by additional taxes and penalties if you do not follow the rules. Free federal tax filing 2012 There are additions to the regular tax for using your IRA funds in prohibited transactions. Free federal tax filing 2012 There are also additional taxes for the following activities. Free federal tax filing 2012 Investing in collectibles. Free federal tax filing 2012 Making excess contributions. Free federal tax filing 2012 Taking early distributions. Free federal tax filing 2012 Allowing excess amounts to accumulate (failing to take required distributions). Free federal tax filing 2012 There are penalties for overstating the amount of nondeductible contributions and for failure to file a Form 8606, if required. Free federal tax filing 2012 Prohibited Transactions Generally, a prohibited transaction is any improper use of your traditional IRA by you, your beneficiary, or any disqualified person. Free federal tax filing 2012 Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendent, and any spouse of a lineal descendent). Free federal tax filing 2012 The following are examples of prohibited transactions with a traditional IRA. Free federal tax filing 2012 Borrowing money from it. Free federal tax filing 2012 Selling property to it. Free federal tax filing 2012 Receiving unreasonable compensation for managing it. Free federal tax filing 2012 Using it as security for a loan. Free federal tax filing 2012 Buying property for personal use (present or future) with IRA funds. Free federal tax filing 2012 Effect on an IRA account. Free federal tax filing 2012   Generally, if you or your beneficiary engages in a prohibited transaction in connection with your traditional IRA account at any time during the year, the account stops being an IRA as of the first day of that year. Free federal tax filing 2012 Effect on you or your beneficiary. Free federal tax filing 2012   If your account stops being an IRA because you or your beneficiary engaged in a prohibited transaction, the account is treated as distributing all its assets to you at their fair market values on the first day of the year. Free federal tax filing 2012 If the total of those values is more than your basis in the IRA, you will have a taxable gain that is includible in your income. Free federal tax filing 2012 For information on figuring your gain and reporting it in income, see Are Distributions Taxable , earlier. Free federal tax filing 2012 The distribution may be subject to additional taxes or penalties. Free federal tax filing 2012 Taxes on prohibited transactions. Free federal tax filing 2012   If someone other than the owner or beneficiary of a traditional IRA engages in a prohibited transaction, that person may be liable for certain taxes. Free federal tax filing 2012 In general, there is a 15% tax on the amount of the prohibited transaction and a 100% additional tax if the transaction is not corrected. Free federal tax filing 2012 More information. Free federal tax filing 2012   For more information on prohibited transactions, see What Acts Result in Penalties or Additional Taxes? in chapter 1 of Publication 590. Free federal tax filing 2012 Investment in Collectibles If your traditional IRA invests in collectibles, the amount invested is considered distributed to you in the year invested. Free federal tax filing 2012 You may have to pay the 10% additional tax on early distributions, discussed later. Free federal tax filing 2012 Collectibles. Free federal tax filing 2012   These include: Artworks, Rugs, Antiques, Metals, Gems, Stamps, Coins, Alcoholic beverages, and Certain other tangible personal property. Free federal tax filing 2012 Exception. Free federal tax filing 2012    Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U. Free federal tax filing 2012 S. Free federal tax filing 2012 gold coins, or one-ounce silver coins minted by the Treasury Department. Free federal tax filing 2012 It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion. Free federal tax filing 2012 Excess Contributions Generally, an excess contribution is the amount contributed to your traditional IRA(s) for the year that is more than the smaller of: The maximum deductible amount for the year. Free federal tax filing 2012 For 2013, this is $5,500 ($6,500 if you are 50 or older), or Your taxable compensation for the year. Free federal tax filing 2012 Tax on excess contributions. Free federal tax filing 2012   In general, if the excess contributions for a year are not withdrawn by the date your return for the year is due (including extensions), you are subject to a 6% tax. Free federal tax filing 2012 You must pay the 6% tax each year on excess amounts that remain in your traditional IRA at the end of your tax year. Free federal tax filing 2012 The tax cannot be more than 6% of the combined value of all your IRAs as of the end of your tax year. Free federal tax filing 2012 Excess contributions withdrawn by due date of return. Free federal tax filing 2012   You will not have to pay the 6% tax if you withdraw an excess contribution made during a tax year and you also withdraw interest or other income earned on the excess contribution. Free federal tax filing 2012 You must complete your withdrawal by the date your tax return for that year is due, including extensions. Free federal tax filing 2012 How to treat withdrawn contributions. Free federal tax filing 2012   Do not include in your gross income an excess contribution that you withdraw from your traditional IRA before your tax return is due if both the following conditions are met. Free federal tax filing 2012 No deduction was allowed for the excess contribution. Free federal tax filing 2012 You withdraw the interest or other income earned on the excess contribution. Free federal tax filing 2012 You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn. Free federal tax filing 2012 If there was a loss, the net income you must withdraw may be a negative amount. Free federal tax filing 2012 How to treat withdrawn interest or other income. Free federal tax filing 2012   You must include in your gross income the interest or other income that was earned on the excess contribution. Free federal tax filing 2012 Report it on your return for the year in which the excess contribution was made. Free federal tax filing 2012 Your withdrawal of interest or other income may be subject to an additional 10% tax on early distributions, discus