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Free irs efile 17. Free irs efile   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 irs efile  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 irs efile 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 irs efile For more information, see How Much Can Be Contributed? later. Free irs efile Roth IRA contribution limit. Free irs efile  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 irs efile 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 irs efile However, if your modified adjusted gross income (AGI) is above a certain amount, your contribution limit may be reduced. Free irs efile For more information, see How Much Can Be Contributed? under Can You Contribute to a Roth IRA? later. Free irs efile Modified AGI limit for traditional IRA contributions increased. Free irs efile  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 irs efile 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 irs efile If your modified AGI is $188,000 or more, you cannot take a deduction for contributions to a traditional IRA. Free irs efile See How Much Can You Deduct , later. Free irs efile Modified AGI limit for Roth IRA contributions increased. Free irs efile  For 2013, your Roth IRA contribution limit is reduced (phased out) in the following situations. Free irs efile Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $178,000. Free irs efile You cannot make a Roth IRA contribution if your modified AGI is $188,000 or more. Free irs efile 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 irs efile You cannot make a Roth IRA contribution if your modified AGI is $127,000 or more. Free irs efile 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 irs efile You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more. Free irs efile See Can You Contribute to a Roth IRA , later. Free irs efile Net Investment Income Tax. Free irs efile   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 irs efile However, these distributions are taken into account when determining the modified adjusted gross income threshold. Free irs efile Distributions from a nonqualified retirement plan are included in net investment income. Free irs efile See Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts, and its instructions for more information. Free irs efile Name change. Free irs efile  All spousal IRAs have been renamed Kay Bailey Hutchison Spousal IRAs. Free irs efile There are no changes to the rules regarding these IRAs. Free irs efile See Kay Bailey Hutchison Spousal IRA Limit , later, for more information. Free irs efile Reminders 2014 limits. Free irs efile   You can find information about the 2014 contribution and AGI limits in Publication 590. Free irs efile Contributions to both traditional and Roth IRAs. Free irs efile   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 irs efile Statement of required minimum distribution. Free irs efile  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 irs efile The report or offer must include the date by which the amount must be distributed. Free irs efile The report is due January 31 of the year in which the minimum distribution is required. Free irs efile It can be provided with the year-end fair market value statement that you normally get each year. Free irs efile No report is required for IRAs of owners who have died. Free irs efile IRA interest. Free irs efile  Although interest earned from your IRA is generally not taxed in the year earned, it is not tax-exempt interest. Free irs efile Tax on your traditional IRA is generally deferred until you take a distribution. Free irs efile Do not report this interest on your tax return as tax-exempt interest. Free irs efile Form 8606. Free irs efile   To designate contributions as nondeductible, you must file Form 8606, Nondeductible IRAs. Free irs efile The term “50 or older” is used several times in this chapter. Free irs efile It refers to an IRA owner who is age 50 or older by the end of the tax year. Free irs efile Introduction An individual retirement arrangement (IRA) is a personal savings plan that gives you tax advantages for setting aside money for your retirement. Free irs efile This chapter discusses the following topics. Free irs efile The rules for a traditional IRA (any IRA that is not a Roth or SIMPLE IRA). Free irs efile The Roth IRA, which features nondeductible contributions and tax-free distributions. Free irs efile Simplified Employee Pensions (SEPs) and Savings Incentive Match Plans for Employees (SIMPLEs) are not discussed in this chapter. Free irs efile 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 irs efile For information about contributions, deductions, withdrawals, transfers, rollovers, and other transactions, see Publication 590. Free irs efile 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 irs efile ” A traditional IRA is any IRA that is not a Roth IRA or a SIMPLE IRA. Free irs efile 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 irs efile 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 irs efile What is compensation?   Generally, compensation is what you earn from working. Free irs efile Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services. Free irs efile 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 irs efile   Scholarship and fellowship payments are compensation for this purpose only if shown in box 1 of Form W-2. Free irs efile   Compensation also includes commissions and taxable alimony and separate maintenance payments. Free irs efile Self-employment income. Free irs efile   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 irs efile   Compensation includes earnings from self-employment even if they are not subject to self-employment tax because of your religious beliefs. Free irs efile Nontaxable combat pay. Free irs efile   For IRA purposes, if you were a member of the U. Free irs efile S. Free irs efile Armed Forces, your compensation includes any nontaxable combat pay you receive. Free irs efile What is not compensation?   Compensation does not include any of the following items. Free irs efile Earnings and profits from property, such as rental income, interest income, and dividend income. Free irs efile Pension or annuity income. Free irs efile Deferred compensation received (compensation payments postponed from a past year). Free irs efile Income from a partnership for which you do not provide services that are a material income-producing factor. Free irs efile Conservation Reserve Program (CRP) payments reported on Schedule SE (Form 1040), line 1b. Free irs efile Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs. Free irs efile When and How Can a Traditional IRA Be Opened? You can open a traditional IRA at any time. Free irs efile However, the time for making contributions for any year is limited. Free irs efile See When Can Contributions Be Made , later. Free irs efile You can open different kinds of IRAs with a variety of organizations. Free irs efile You can open an IRA at a bank or other financial institution or with a mutual fund or life insurance company. Free irs efile You can also open an IRA through your stockbroker. Free irs efile Any IRA must meet Internal Revenue Code requirements. Free irs efile Kinds of traditional IRAs. Free irs efile   Your traditional IRA can be an individual retirement account or annuity. Free irs efile It can be part of either a simplified employee pension (SEP) or an employer or employee association trust account. Free irs efile How Much Can Be Contributed? There are limits and other rules that affect the amount that can be contributed to a traditional IRA. Free irs efile These limits and other rules are explained below. Free irs efile Community property laws. Free irs efile   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 irs efile This is the rule even in states with community property laws. Free irs efile Brokers' commissions. Free irs efile   Brokers' commissions paid in connection with your traditional IRA are subject to the contribution limit. Free irs efile Trustees' fees. Free irs efile   Trustees' administrative fees are not subject to the contribution limit. Free irs efile Qualified reservist repayments. Free irs efile   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 irs efile 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 irs efile 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 irs efile   For more information, see Qualified reservist repayments under How Much Can Be Contributed? in chapter 1 of Publication 590. Free irs efile Contributions on your behalf to a traditional IRA reduce your limit for contributions to a Roth IRA. Free irs efile (See Roth IRAs, later. Free irs efile ) General limit. Free irs efile   For 2013, the most that can be contributed to your traditional IRA generally is the smaller of the following amounts. Free irs efile $5,500 ($6,500 if you are 50 or older). Free irs efile Your taxable compensation (defined earlier) for the year. Free irs efile 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 irs efile (See Nondeductible Contributions , later. Free irs efile ) Qualified reservist repayments do not affect this limit. Free irs efile Example 1. Free irs efile Betty, who is 34 years old and single, earned $24,000 in 2013. Free irs efile Her IRA contributions for 2013 are limited to $5,500. Free irs efile Example 2. Free irs efile John, an unmarried college student working part time, earned $3,500 in 2013. Free irs efile His IRA contributions for 2013 are limited to $3,500, the amount of his compensation. Free irs efile Kay Bailey Hutchison Spousal IRA limit. Free irs efile   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 irs efile $5,500 ($6,500 if you are 50 or older). Free irs efile The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts. Free irs efile Your spouse's IRA contribution for the year to a traditional IRA. Free irs efile Any contribution for the year to a Roth IRA on behalf of your spouse. Free irs efile 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 irs efile 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 irs efile Contributions must be in the form of money (cash, check, or money order). Free irs efile Property cannot be contributed. Free irs efile Contributions must be made by due date. Free irs efile   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 irs efile Age 70½ rule. Free irs efile   Contributions cannot be made to your traditional IRA for the year in which you reach age 70½ or for any later year. Free irs efile   You attain age 70½ on the date that is 6 calendar months after the 70th anniversary of your birth. Free irs efile If you were born on or before June 30, 1943, you cannot contribute for 2013 or any later year. Free irs efile Designating year for which contribution is made. Free irs efile   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 irs efile 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 irs efile Filing before a contribution is made. Free irs efile   You can file your return claiming a traditional IRA contribution before the contribution is actually made. Free irs efile Generally, the contribution must be made by the due date of your return, not including extensions. Free irs efile Contributions not required. Free irs efile   You do not have to contribute to your traditional IRA for every tax year, even if you can. Free irs efile 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 irs efile However, if you or your spouse was covered by an employer retirement plan, you may not be able to deduct this amount. Free irs efile See Limit If Covered by Employer Plan , later. Free irs efile You may be able to claim a credit for contributions to your traditional IRA. Free irs efile For more information, see chapter 37. Free irs efile Trustees' fees. Free irs efile   Trustees' administrative fees that are billed separately and paid in connection with your traditional IRA are not deductible as IRA contributions. Free irs efile However, they may be deductible as a miscellaneous itemized deduction on Schedule A (Form 1040). Free irs efile See chapter 28. Free irs efile Brokers' commissions. Free irs efile   Brokers' commissions are part of your IRA contribution and, as such, are deductible subject to the limits. Free irs efile Full deduction. Free irs efile   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 irs efile 100% of your compensation. Free irs efile This limit is reduced by any contributions made to a 501(c)(18) plan on your behalf. Free irs efile Kay Bailey Hutchison Spousal IRA. Free irs efile   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 irs efile $5,500 ($6,500 if the spouse with the lower compensation is age 50 or older in 2013). Free irs efile The total compensation includible in the gross income of both spouses for the year reduced by the following three amounts. Free irs efile The IRA deduction for the year of the spouse with the greater compensation. Free irs efile Any designated nondeductible contribution for the year made on behalf of the spouse with the greater compensation. Free irs efile Any contributions for the year to a Roth IRA on behalf of the spouse with the greater compensation. Free irs efile This limit is reduced by any contributions to a 501(c)(18) plan on behalf of the spouse with the lesser compensation. Free irs efile Note. Free irs efile 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 irs efile After a divorce or legal separation, you can deduct only contributions to your own IRA. Free irs efile Your deductions are subject to the rules for single individuals. Free irs efile Covered by an employer retirement plan. Free irs efile   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 irs efile This is discussed later under Limit If Covered by Employer Plan . Free irs efile Limits on the amount you can deduct do not affect the amount that can be contributed. Free irs efile See Nondeductible Contributions , later. Free irs efile 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 irs efile The “Retirement plan” box should be checked if you were covered. Free irs efile Reservists and volunteer firefighters should also see Situations in Which You Are Not Covered by an Employer Plan , later. Free irs efile If you are not certain whether you were covered by your employer's retirement plan, you should ask your employer. Free irs efile Federal judges. Free irs efile   For purposes of the IRA deduction, federal judges are covered by an employer retirement plan. Free irs efile 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 irs efile These rules differ depending on whether the plan is a defined contribution plan or a defined benefit plan. Free irs efile Tax year. Free irs efile   Your tax year is the annual accounting period you use to keep records and report income and expenses on your income tax return. Free irs efile For almost all people, the tax year is the calendar year. Free irs efile Defined contribution plan. Free irs efile   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 irs efile   A defined contribution plan is a plan that provides for a separate account for each person covered by the plan. Free irs efile Types of defined contribution plans include profit-sharing plans, stock bonus plans, and money purchase pension plans. Free irs efile Defined benefit plan. Free irs efile   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 irs efile 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 irs efile   A defined benefit plan is any plan that is not a defined contribution plan. Free irs efile Defined benefit plans include pension plans and annuity plans. Free irs efile No vested interest. Free irs efile   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 irs efile 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 irs efile Social security or railroad retirement. Free irs efile   Coverage under social security or railroad retirement is not coverage under an employer retirement plan. Free irs efile Benefits from a previous employer's plan. Free irs efile   If you receive retirement benefits from a previous employer's plan, you are not covered by that plan. Free irs efile Reservists. Free irs efile   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 irs efile You are not covered by the plan if both of the following conditions are met. Free irs efile 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 irs efile You did not serve more than 90 days on active duty during the year (not counting duty for training). Free irs efile Volunteer firefighters. Free irs efile   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 irs efile You are not covered by the plan if both of the following conditions are met. Free irs efile 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 irs efile Your accrued retirement benefits at the beginning of the year will not provide more than $1,800 per year at retirement. Free irs efile 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 irs efile 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 irs efile These amounts vary depending on your filing status. Free irs efile To determine if your deduction is subject to phaseout, you must determine your modified adjusted gross income (AGI) and your filing status. Free irs efile See Filing status and Modified adjusted gross income (AGI) , later. Free irs efile Then use Table 17-1 or 17-2 to determine if the phaseout applies. Free irs efile Social security recipients. Free irs efile   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 irs efile You received social security benefits. Free irs efile You received taxable compensation. Free irs efile Contributions were made to your traditional IRA. Free irs efile You or your spouse was covered by an employer retirement plan. Free irs efile Use those worksheets to figure your IRA deduction, your nondeductible contribution, and the taxable portion, if any, of your social security benefits. Free irs efile Deduction phaseout. Free irs efile   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 irs efile Table 17-1. Free irs efile 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 irs efile IF your filing status is. Free irs efile . Free irs efile . Free irs efile   AND your modified AGI is. Free irs efile . Free irs efile . Free irs efile   THEN you can take. Free irs efile . Free irs efile . Free irs efile single   or  head of household   $59,000 or less   a full deduction. Free irs efile   more than $59,000 but less than $69,000   a partial deduction. Free irs efile   $69,000 or more   no deduction. Free irs efile married filing jointly   or  qualifying widow(er)   $95,000 or less   a full deduction. Free irs efile   more than $95,000 but less than $115,000   a partial deduction. Free irs efile   $115,000 or more   no deduction. Free irs efile married filing separately2   less than $10,000   a partial deduction. Free irs efile   $10,000 or more   no deduction. Free irs efile 1Modified AGI (adjusted gross income). Free irs efile See Modified adjusted gross income (AGI) . Free irs efile 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 irs efile If your spouse is covered. Free irs efile   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 irs efile Filing status. Free irs efile   Your filing status depends primarily on your marital status. Free irs efile 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 irs efile If you need more information on filing status, see chapter 2. Free irs efile Lived apart from spouse. Free irs efile   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 irs efile Table 17-2. Free irs efile 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 irs efile IF your filing status is. Free irs efile . Free irs efile . Free irs efile   AND your modified AGI is. Free irs efile . Free irs efile . Free irs efile   THEN you can take. Free irs efile . Free irs efile . Free irs efile single, head of household, or qualifying widow(er)   any amount   a full deduction. Free irs efile married filing jointly or separately with a spouse who is not covered by a plan at work   any amount   a full deduction. Free irs efile married filing jointly with a spouse who is covered by a plan at work   $178,000 or less   a full deduction. Free irs efile   more than $178,000 but less than $188,000   a partial deduction. Free irs efile   $188,000 or more   no deduction. Free irs efile married filing separately with a spouse who is covered by a plan at work2   less than $10,000   a partial deduction. Free irs efile   $10,000 or more   no deduction. Free irs efile 1Modified AGI (adjusted gross income). Free irs efile See Modified adjusted gross income (AGI) . Free irs efile 2You are entitled to the full deduction if you did not live with your spouse at any time during the year. Free irs efile Modified adjusted gross income (AGI). Free irs efile   How you figure your modified AGI depends on whether you are filing Form 1040 or Form 1040A. Free irs efile If you made contributions to your IRA for 2013 and received a distribution from your IRA in 2013, see Publication 590. Free irs efile You may be able to use Worksheet 17-1 to figure your modified AGI. Free irs efile    Do not assume that your modified AGI is the same as your compensation. Free irs efile Your modified AGI may include income in addition to your compensation (discussed earlier), such as interest, dividends, and income from IRA distributions. Free irs efile Form 1040. Free irs efile   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 irs efile IRA deduction. Free irs efile Student loan interest deduction. Free irs efile Tuition and fees deduction. Free irs efile Domestic production activities deduction. Free irs efile Foreign earned income exclusion. Free irs efile Foreign housing exclusion or deduction. Free irs efile Exclusion of qualified savings bond interest shown on Form 8815, Exclusion of Interest From Series EE and I U. Free irs efile S. Free irs efile Savings Bonds Issued After 1989. Free irs efile Exclusion of employer-provided adoption benefits shown on Form 8839, Qualified Adoption Expenses. Free irs efile This is your modified AGI. Free irs efile Form 1040A. Free irs efile   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 irs efile IRA deduction. Free irs efile Student loan interest deduction. Free irs efile Tuition and fees deduction. Free irs efile Exclusion of qualified savings bond interest shown on Form 8815. Free irs efile This is your modified AGI. Free irs efile Both contributions for 2013 and distributions in 2013. Free irs efile   If all three of the following apply, any IRA distributions you received in 2013 may be partly tax free and partly taxable. Free irs efile You received distributions in 2013 from one or more traditional IRAs. Free irs efile You made contributions to a traditional IRA for 2013. Free irs efile Some of those contributions may be nondeductible contributions. Free irs efile If this is your situation, you must figure the taxable part of the traditional IRA distribution before you can figure your modified AGI. Free irs efile To do this, you can use Worksheet 1-5, Figuring the Taxable Part of Your IRA Distribution, in Publication 590. Free irs efile   If at least one of the above does not apply, figure your modified AGI using Worksheet 17-1, later. Free irs efile    How to figure your reduced IRA deduction. Free irs efile   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 irs efile Also, the instructions for Form 1040 and Form 1040A include similar worksheets that you may be able to use instead. Free irs efile Worksheet 17-1. Free irs efile Figuring Your Modified AGI Use this worksheet to figure your modified adjusted gross income for traditional IRA purposes. Free irs efile 1. Free irs efile 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 irs efile   2. Free irs efile Enter any student loan interest deduction from Form 1040, line 33, or Form 1040A, line 18 2. Free irs efile   3. Free irs efile Enter any tuition and fees deduction from Form 1040, line 34, or Form 1040A, line 19 3. Free irs efile   4. Free irs efile Enter any domestic production activities deduction from Form 1040, line 35 4. Free irs efile   5. Free irs efile Enter any foreign earned income and/or housing exclusion from Form 2555, line 45, or Form 2555-EZ, line 18 5. Free irs efile   6. Free irs efile Enter any foreign housing deduction from Form 2555, line 50 6. Free irs efile   7. Free irs efile Enter any excludable savings bond interest from Form 8815, line 14 7. Free irs efile   8. Free irs efile Enter any excluded employer-provided adoption benefits from Form 8839, line 28 8. Free irs efile   9. Free irs efile Add lines 1 through 8. Free irs efile This is your Modified AGI for traditional IRA purposes 9. Free irs efile   Reporting Deductible Contributions If you file Form 1040, enter your IRA deduction on line 32 of that form. Free irs efile If you file Form 1040A, enter your IRA deduction on line 17. Free irs efile You cannot deduct IRA contributions on Form 1040EZ. Free irs efile 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 irs efile The difference between your total permitted contributions and your IRA deduction, if any, is your nondeductible contribution. Free irs efile Example. Free irs efile Mike is 28 years old and single. Free irs efile In 2013, he was covered by a retirement plan at work. Free irs efile His salary was $57,312. Free irs efile His modified AGI was $70,000. Free irs efile Mike made a $5,500 IRA contribution for 2013. Free irs efile 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 irs efile He must designate this contribution as a nondeductible contribution by reporting it on Form 8606, as explained next. Free irs efile Form 8606. Free irs efile   To designate contributions as nondeductible, you must file Form 8606. Free irs efile   You do not have to designate a contribution as nondeductible until you file your tax return. Free irs efile When you file, you can even designate otherwise deductible contributions as nondeductible. Free irs efile   You must file Form 8606 to report nondeductible contributions even if you do not have to file a tax return for the year. Free irs efile 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 irs efile In those situations, a Form 8606 is completed for the year you take a distribution from that IRA. Free irs efile See Form 8606 under Distributions Fully or Partly Taxable, later. Free irs efile Failure to report nondeductible contributions. Free irs efile   If you do not report nondeductible contributions, all of the contributions to your traditional IRA will be treated as deductible contributions when withdrawn. Free irs efile All distributions from your IRA will be taxed unless you can show, with satisfactory evidence, that nondeductible contributions were made. Free irs efile Penalty for overstatement. Free irs efile   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 irs efile Penalty for failure to file Form 8606. Free irs efile   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 irs efile    Tax on earnings on nondeductible contributions. Free irs efile   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 irs efile See When Can You Withdraw or Use IRA Assets , later. Free irs efile Cost basis. Free irs efile   You will have a cost basis in your traditional IRA if you made any nondeductible contributions. Free irs efile Your cost basis is the sum of the nondeductible contributions to your IRA minus any withdrawals or distributions of nondeductible contributions. Free irs efile Inherited IRAs If you inherit a traditional IRA, you are called a beneficiary. Free irs efile A beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after he or she dies. Free irs efile Beneficiaries of a traditional IRA must include in their gross income any taxable distributions they receive. Free irs efile Inherited from spouse. Free irs efile   If you inherit a traditional IRA from your spouse, you generally have the following three choices. Free irs efile You can: Treat it as your own IRA by designating yourself as the account owner. Free irs efile 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 irs efile Treat yourself as the beneficiary rather than treating the IRA as your own. Free irs efile Treating it as your own. Free irs efile   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 irs efile 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 irs efile   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 irs efile Inherited from someone other than spouse. Free irs efile   If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. Free irs efile This means that you cannot make any contributions to the IRA. Free irs efile It also means you cannot roll over any amounts into or out of the inherited IRA. Free irs efile 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 irs efile For more information, see the discussion of inherited IRAs under Rollover From One IRA Into Another, later. Free irs efile 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 irs efile You can make the following kinds of transfers. Free irs efile Transfers from one trustee to another. Free irs efile Rollovers. Free irs efile Transfers incident to a divorce. Free irs efile Transfers to Roth IRAs. Free irs efile   Under certain conditions, you can move assets from a traditional IRA or from a designated Roth account to a Roth IRA. Free irs efile You can also move assets from a qualified retirement plan to a Roth IRA. Free irs efile See Can You Move Amounts Into a Roth IRA? under Roth IRAs, later. Free irs efile 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 irs efile Because there is no distribution to you, the transfer is tax free. Free irs efile 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 irs efile 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 irs efile 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 irs efile The contribution to the second retirement plan is called a “rollover contribution. Free irs efile ” Note. Free irs efile 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 irs efile Kinds of rollovers to a traditional IRA. Free irs efile   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 irs efile Treatment of rollovers. Free irs efile   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 irs efile Kinds of rollovers from a traditional IRA. Free irs efile   You may be able to roll over, tax free, a distribution from your traditional IRA into a qualified plan. Free irs efile 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 irs efile The part of the distribution that you can roll over is the part that would otherwise be taxable (includible in your income). Free irs efile Qualified plans may, but are not required to, accept such rollovers. Free irs efile Time limit for making a rollover contribution. Free irs efile   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 irs efile 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 irs efile For more information, see Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. Free irs efile Extension of rollover period. Free irs efile   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 irs efile For more information, see Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. Free irs efile More information. Free irs efile   For more information on rollovers, see Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. Free irs efile 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 irs efile Because this is a rollover, you cannot deduct the amount that you reinvest in an IRA. Free irs efile Waiting period between rollovers. Free irs efile   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 irs efile 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 irs efile   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 irs efile Example. Free irs efile You have two traditional IRAs, IRA-1 and IRA-2. Free irs efile You make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). Free irs efile 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 irs efile 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 irs efile 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 irs efile Exception. Free irs efile   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 irs efile Partial rollovers. Free irs efile   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 irs efile The amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions). Free irs efile 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 irs efile Required distributions. Free irs efile   Amounts that must be distributed during a particular year under the required distribution rules (discussed later) are not eligible for rollover treatment. Free irs efile Inherited IRAs. Free irs efile   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 irs efile See Treating it as your own , earlier. Free irs efile Not inherited from spouse. Free irs efile   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 irs efile You must withdraw the IRA assets within a certain period. Free irs efile For more information, see When Must You Withdraw Assets? in chapter 1 of Publication 590. Free irs efile Reporting rollovers from IRAs. Free irs efile   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 irs efile   Enter the total amount of the distribution on Form 1040, line 15a, or Form 1040A, line 11a. Free irs efile 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 irs efile 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 irs efile Put “Rollover” next to Form 1040, line 15b, or Form 1040A, line 11b. Free irs efile See your tax return instructions. Free irs efile   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 irs efile 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 irs efile A qualified plan is one that meets the requirements of the Internal Revenue Code. Free irs efile Eligible rollover distribution. Free irs efile   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 irs efile A required minimum distribution (explained later under When Must You Withdraw IRA Assets? (Required Minimum Distributions) ). Free irs efile A hardship distribution. Free irs efile 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 irs efile 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 irs efile 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 irs efile Dividends on employer securities. Free irs efile The cost of life insurance coverage. Free irs efile Any nontaxable amounts that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. Free irs efile To recover your basis when you take distributions from your IRA, you must complete Form 8606 for the year of the distribution. Free irs efile See Form 8606 under Distributions Fully or Partly Taxable, later. Free irs efile Rollover by nonspouse beneficiary. Free irs efile   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 irs efile The IRA is treated as an inherited IRA. Free irs efile For more information about inherited IRAs, see Inherited IRAs , earlier. Free irs efile Reporting rollovers from employer plans. Free irs efile    Enter the total distribution (before income tax or other deductions were withheld) on Form 1040, line 16a, or Form 1040A, line 12a. Free irs efile This amount should be shown in box 1 of Form 1099-R. Free irs efile From this amount, subtract any contributions (usually shown in box 5 of Form 1099-R) that were taxable to you when made. Free irs efile From that result, subtract the amount that was rolled over either directly or within 60 days of receiving the distribution. Free irs efile Enter the remaining amount, even if zero, on Form 1040, line 16b, or Form 1040A, line 12b. Free irs efile Also, enter "Rollover" next to Form 1040, line 16b, or Form 1040A, line 12b. Free irs efile 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 irs efile The transfer is tax free. Free irs efile For detailed information, see Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. Free irs efile Converting From Any Traditional IRA to a Roth IRA Allowable conversions. Free irs efile   You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. Free irs efile The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a conversion contribution. Free irs efile If properly (and timely) rolled over, the 10% additional tax on early distributions will not apply. Free irs efile However, a part or all of the conversion contribution from your traditional IRA is included in your gross income. Free irs efile Required distributions. Free irs efile   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 irs efile Income. Free irs efile   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 irs efile 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 irs efile   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 irs efile   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 irs efile   If you must include any amount in your gross income, you may have to increase your withholding or make estimated tax payments. Free irs efile See chapter 4. Free irs efile 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 irs efile This is called recharacterizing the contribution. Free irs efile See Can You Move Retirement Plan Assets? in chapter 1 of Publication 590 for more detailed information. Free irs efile How to recharacterize a contribution. Free irs efile   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 irs efile 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 irs efile If you recharacterize your contribution, you must do all three of the following. Free irs efile Include in the transfer any net income allocable to the contribution. Free irs efile If there was a loss, the net income you must transfer may be a negative amount. Free irs efile Report the recharacterization on your tax return for the year during which the contribution was made. Free irs efile Treat the contribution as having been made to the second IRA on the date that it was actually made to the first IRA. Free irs efile No deduction allowed. Free irs efile   You cannot deduct the contribution to the first IRA. Free irs efile Any net income you transfer with the recharacterized contribution is treated as earned in the second IRA. Free irs efile Required notifications. Free irs efile   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 irs efile You must make the notifications by the date of the transfer. Free irs efile Only one notification is required if both IRAs are maintained by the same trustee. Free irs efile The notification(s) must include all of the following information. Free irs efile The type and amount of the contribution to the first IRA that is to be recharacterized. Free irs efile The date on which the contribution was made to the first IRA and the year for which it was made. Free irs efile 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 irs efile The name of the trustee of the first IRA and the name of the trustee of the second IRA. Free irs efile Any additional information needed to make the transfer. Free irs efile Reporting a recharacterization. Free irs efile   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 irs efile You must treat the contribution as having been made to the second IRA. Free irs efile When Can You Withdraw or Use IRA Assets? There are rules limiting use of your IRA assets and distributions from it. Free irs efile Violation of the rules generally results in additional taxes in the year of violation. Free irs efile See What Acts Result in Penalties or Additional Taxes , later. Free irs efile Contributions returned before the due date of return. Free irs efile   If you made IRA contributions in 2013, you can withdraw them tax free by the due date of your return. Free irs efile If you have an extension of time to file your return, you can withdraw them tax free by the extended due date. Free irs efile You can do this if, for each contribution you withdraw, both of the following conditions apply. Free irs efile You did not take a deduction for the contribution. Free irs efile You withdraw any interest or other income earned on the contribution. Free irs efile 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 irs efile If there was a loss, the net income earned on the contribution may be a negative amount. Free irs efile Note. Free irs efile 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 irs efile Earnings includible in income. Free irs efile   You must include in income any earnings on the contributions you withdraw. Free irs efile Include the earnings in income for the year in which you made the contributions, not in the year in which you withdraw them. Free irs efile 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 irs efile Excess contributions can also be recovered tax free as discussed under What Acts Result in Penalties or Additional Taxes?, later. Free irs efile    Early distributions tax. Free irs efile   The 10% additional tax on distributions made before you reach age 59½ does not apply to these tax-free withdrawals of your contributions. Free irs efile 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 irs efile When Must You Withdraw IRA Assets? (Required Minimum Distributions) You cannot keep funds in a traditional IRA indefinitely. Free irs efile Eventually they must be distributed. Free irs efile 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 irs efile See Excess Accumulations (Insufficient Distributions) , later. Free irs efile The requirements for distributing IRA funds differ depending on whether you are the IRA owner or the beneficiary of a decedent's IRA. Free irs efile Required minimum distribution. Free irs efile   The amount that must be distributed each year is referred to as the required minimum distribution. Free irs efile Required distributions not eligible for rollover. Free irs efile   Amounts that must be distributed (required minimum distributions) during a particular year are not eligible for rollover treatment. Free irs efile IRA owners. Free irs efile   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 irs efile April 1 of the year following the year in which you reach age 70½ is referred to as the required beginning date. Free irs efile Distributions by the required beginning date. Free irs efile   You must receive at least a minimum amount for each year starting with the year you reach age 70½ (your 70½ year). Free irs efile 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 irs efile   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 irs efile 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 irs efile Distributions after the required beginning date. Free irs efile   The required minimum distribution for any year after the year you turn 70½ must be made by December 31 of that later year. Free irs efile    Beneficiaries. Free irs efile   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 irs efile More information. Free irs efile   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 irs efile Are Distributions Taxable? In general, distributions from a traditional IRA are taxable in the year you receive them. Free irs efile Exceptions. Free irs efile   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 irs efile    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 irs efile 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 irs efile Qualified charitable distributions (QCD). Free irs efile   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 irs efile Special rules apply if you made a qualified charitable distribution in January 2013 that you elected to treat as made in 2012. Free irs efile See Qualified Charitable Distributions in Publication 590 for more information. Free irs efile Ordinary income. Free irs efile   Distributions from traditional IRAs that you include in income are taxed as ordinary income. Free irs efile No special treatment. Free irs efile   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 irs efile 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 irs efile Fully taxable. Free irs efile   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 irs efile Because you have no basis in your IRA, any distributions are fully taxable when received. Free irs efile See Reporting taxable distributions on your return , later. Free irs efile Partly taxable. Free irs efile    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 irs efile These nondeductible contributions are not taxed when they are distributed to you. Free irs efile They are a return of your investment in your IRA. Free irs efile   Only the part of the distribution that represents nondeductible contributions and rolled over after-tax amounts (your cost basis) is tax free. Free irs efile 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 irs efile Until all of your basis has been distributed, each distribution is partly nontaxable and partly taxable. Free irs efile Form 8606. Free irs efile   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 irs efile Using the form, you will figure the nontaxable distributions for 2013 and your total IRA basis for 2013 and earlier years. Free irs efile Note. Free irs efile 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 irs efile Send it to the IRS at the time and place you would otherwise file an income tax return. Free irs efile Distributions reported on Form 1099-R. Free irs efile   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 irs efile , or a similar statement. Free irs efile IRA distributions are shown in boxes 1 and 2a of Form 1099-R. Free irs efile A number or letter code in box 7 tells you what type of distribution you received from your IRA. Free irs efile Withholding. Free irs efile   Federal income tax is withheld from distributions from traditional IRAs unless you choose not to have tax withheld. Free irs efile See chapter 4. Free irs efile IRA distributions delivered outside the United States. Free irs efile   In general, if you are a U. Free irs efile S. Free irs efile 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 irs efile Reporting taxable distributions on your return. Free irs efile    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 irs efile 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 irs efile You cannot report distributions on Form 1040EZ. Free irs efile 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 irs efile There are additions to the regular tax for using your IRA funds in prohibited transactions. Free irs efile There are also additional taxes for the following activities. Free irs efile Investing in collectibles. Free irs efile Making excess contributions. Free irs efile Taking early distributions. Free irs efile Allowing excess amounts to accumulate (failing to take required distributions). Free irs efile There are penalties for overstating the amount of nondeductible contributions and for failure to file a Form 8606, if required. Free irs efile Prohibited Transactions Generally, a prohibited transaction is any improper use of your traditional IRA by you, your beneficiary, or any disqualified person. Free irs efile Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendent, and any spouse of a lineal descendent). Free irs efile The following are examples of prohibited transactions with a traditional IRA. Free irs efile Borrowing money from it. Free irs efile Selling property to it. Free irs efile Receiving unreasonable compensation for managing it. Free irs efile Using it as security for a loan. Free irs efile Buying property for personal use (present or future) with IRA funds. Free irs efile Effect on an IRA account. Free irs efile   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 irs efile Effect on you or your beneficiary. Free irs efile   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 irs efile 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 irs efile For information on figuring your gain and reporting it in income, see Are Distributions Taxable , earlier. Free irs efile The distribution may be subject to additional taxes or penalties. Free irs efile Taxes on prohibited transactions. Free irs efile   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 irs efile 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 irs efile More information. Free irs efile   For more information on prohibited transactions, see What Acts Result in Penalties or Additional Taxes? in chapter 1 of Publication 590. Free irs efile Investment in Collectibles If your traditional IRA invests in collectibles, the amount invested is considered distributed to you in the year invested. Free irs efile You may have to pay the 10% additional tax on early distributions, discussed later. Free irs efile Collectibles. Free irs efile   These include: Artworks, Rugs, Antiques, Metals, Gems, Stamps, Coins, Alcoholic beverages, and Certain other tangible personal property. Free irs efile Exception. Free irs efile    Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U. Free irs efile S. Free irs efile gold coins, or one-ounce silver coins minted by the Treasury Department. Free irs efile It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion. Free irs efile 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 irs efile For 2013, this is $5,500 ($6,500 if you are 50 or older), or Your taxable compensation for the year. Free irs efile Tax on excess contributions. Free irs efile   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 irs efile 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 irs efile The tax cannot be more than 6% of the combined value of all your IRAs as of the end of your tax year. Free irs efile Excess contributions withdrawn by due date of return. Free irs efile   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 irs efile You must complete your withdrawal by the date your tax return for that year is due, including extensions. Free irs efile How to treat withdrawn contributions. Free irs efile   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 irs efile No deduction was allowed for the excess contribution. Free irs efile You withdraw the interest or other income earned on the excess contribution. Free irs efile 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 irs efile If there was a loss, the net income you must withdraw may be a negative amount. Free irs efile How to treat withdrawn interest or other income. Free irs efile   You must include in your gross income the interest or other income that was earned on the excess contribution. Free irs efile Report it on your return for the year in which the excess contribution was made. Free irs efile Your withdrawal of interest or other income may be subject to an additional 10% tax on early distributions, discus
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The Free Irs Efile

Free irs efile 4. Free irs efile   Sales and Trades of Investment Property Table of Contents IntroductionNominees. Free irs efile Topics - This chapter discusses: Useful Items - You may want to see: What Is a Sale or Trade?Dividend versus sale or trade. Free irs efile Worthless Securities Constructive Sales of Appreciated Financial Positions Section 1256 Contracts Marked to Market Basis of Investment PropertyCost Basis Basis Other Than Cost Adjusted Basis Stocks and Bonds How To Figure Gain or LossFair market value. Free irs efile Debt paid off. Free irs efile Payment of cash. Free irs efile Special Rules for Mutual Funds Nontaxable TradesLike-Kind Exchanges Corporate Stocks Exchange of Shares In One Mutual Fund For Shares In Another Mutual Fund Insurance Policies and Annuities U. Free irs efile S. Free irs efile Treasury Notes or Bonds Transfers Between Spouses Related Party TransactionsGain on Sale or Trade of Depreciable Property Capital Gains and LossesCapital or Ordinary Gain or Loss Holding Period Nonbusiness Bad Debts Short Sales Wash Sales Options Straddles Sales of Stock to ESOPs or Certain Cooperatives Rollover of Gain From Publicly Traded Securities Gains on Qualified Small Business Stock Exclusion of Gain From DC Zone Assets Reporting Capital Gains and LossesException 1. Free irs efile Exception 2. Free irs efile Section 1256 contracts and straddles. Free irs efile Market discount bonds. Free irs efile File Form 1099-B or Form 1099-S with the IRS. Free irs efile Capital Losses Capital Gain Tax Rates Special Rules for Traders in SecuritiesHow To Report Introduction This chapter explains the tax treatment of sales and trades of investment property. Free irs efile Investment property. Free irs efile   This is property that produces investment income. Free irs efile Examples include stocks, bonds, and Treasury bills and notes. Free irs efile Property used in a trade or business is not investment property. Free irs efile Form 1099-B. Free irs efile   If you sold property such as stocks, bonds, mutual funds, or certain commodities through a broker during the year, you should receive, for each sale, a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or substitute statement, from the broker. Free irs efile You should receive the statement by February 15 of the next year. Free irs efile It will show the gross proceeds from the sale. Free irs efile The IRS will also get a copy of Form 1099-B from the broker. Free irs efile   Use Form 1099-B (or substitute statement received from your broker) to complete Form 8949. Free irs efile If you sold a covered security in 2013, your broker will send you a Form 1099-B (or substitute statement) that shows your basis. Free irs efile This will help you complete Form 8949. Free irs efile Generally, a covered security is a security you acquired after 2010, with certain exceptions explained in the Instructions for Form 8949. Free irs efile    For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in this chapter. Free irs efile Also see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040). Free irs efile Nominees. Free irs efile   If someone receives gross proceeds as a nominee for you, that person will give you a Form 1099-B, which will show gross proceeds received on your behalf. Free irs efile   If you receive a Form 1099-B that includes gross proceeds belonging to another person, see Nominees , later under Reporting Capital Gains and Losses for more information. Free irs efile Other property transactions. Free irs efile   Certain transfers of property are discussed in other IRS publications. Free irs efile These include: Sale of your main home, discussed in Publication 523, Selling Your Home; Installment sales, covered in Publication 537; Various types of transactions involving business property, discussed in Publication 544, Sales and Other Dispositions of Assets; Transfers of property at death, covered in Publication 559; and Disposition of an interest in a passive activity, discussed in Publication 925. Free irs efile Topics - This chapter discusses: What Is a Sale or Trade? , Basis of Investment Property , Adjusted Basis , How To Figure Gain or Loss , Nontaxable trades , Transfers Between Spouses , Related Party Transactions , Capital Gains and Losses , Reporting Capital Gains and Losses , and Special Rules for Traders in Securities . Free irs efile Useful Items - You may want to see: Publication 551 Basis of Assets Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 6781 Gains and Losses From Section 1256 Contracts and Straddles 8582 Passive Activity Loss Limitations 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Free irs efile What Is a Sale or Trade? This section explains what is a sale or trade. Free irs efile It also explains certain transactions and events that are treated as sales or trades. Free irs efile A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money. Free irs efile A trade is a transfer of property for other property or services, and may be taxed in the same way as a sale. Free irs efile Sale and purchase. Free irs efile   Ordinarily, a transaction is not a trade when you voluntarily sell property for cash and immediately buy similar property to replace it. Free irs efile The sale and purchase are two separate transactions. Free irs efile But see Like-Kind Exchanges under Nontaxable Trades, later. Free irs efile Redemption of stock. Free irs efile   A redemption of stock is treated as a sale or trade and is subject to the capital gain or loss provisions unless the redemption is a dividend or other distribution on stock. Free irs efile Dividend versus sale or trade. Free irs efile   Whether a redemption is treated as a sale, trade, dividend, or other distribution depends on the circumstances in each case. Free irs efile Both direct and indirect ownership of stock will be considered. Free irs efile The redemption is treated as a sale or trade of stock if: The redemption is not essentially equivalent to a dividend — see Dividends and Other Distributions in chapter 1, There is a substantially disproportionate redemption of stock, There is a complete redemption of all the stock of the corporation owned by the shareholder, or The redemption is a distribution in partial liquidation of a corporation. Free irs efile Redemption or retirement of bonds. Free irs efile   A redemption or retirement of bonds or notes at their maturity generally is treated as a sale or trade. Free irs efile See Stocks, stock rights, and bonds and Discounted Debt Instruments under Capital or Ordinary Gain or Loss, later. Free irs efile   In addition, a significant modification of a bond is treated as a trade of the original bond for a new bond. Free irs efile For details, see Regulations section 1. Free irs efile 1001-3. Free irs efile Surrender of stock. Free irs efile   A surrender of stock by a dominant shareholder who retains ownership of more than half of the corporation's voting shares is treated as a contribution to capital rather than as an immediate loss deductible from taxable income. Free irs efile The surrendering shareholder must reallocate his or her basis in the surrendered shares to the shares he or she retains. Free irs efile Trade of investment property for an annuity. Free irs efile   The transfer of investment property to a corporation, trust, fund, foundation, or other organization, in exchange for a fixed annuity contract that will make guaranteed annual payments to you for life, is a taxable trade. Free irs efile If the present value of the annuity is more than your basis in the property traded, you have a taxable gain in the year of the trade. Free irs efile Figure the present value of the annuity according to factors used by commercial insurance companies issuing annuities. Free irs efile Transfer by inheritance. Free irs efile   The transfer of property of a decedent to the executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or other disposition. Free irs efile No taxable gain or deductible loss results from the transfer. Free irs efile Termination of certain rights and obligations. Free irs efile   The cancellation, lapse, expiration, or other termination of a right or obligation (other than a securities futures contract) with respect to property that is a capital asset (or that would be a capital asset if you acquired it) is treated as a sale. Free irs efile Any gain or loss is treated as a capital gain or loss. Free irs efile   This rule does not apply to the retirement of a debt instrument. Free irs efile See Redemption or retirement of bonds , earlier. Free irs efile Worthless Securities Stocks, stock rights, and bonds (other than those held for sale by a securities dealer) that became completely worthless during the tax year are treated as though they were sold on the last day of the tax year. Free irs efile This affects whether your capital loss is long term or short term. Free irs efile See Holding Period , later. Free irs efile Worthless securities also include securities that you abandon after March 12, 2008. Free irs efile To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. Free irs efile All the facts and circumstances determine whether the transaction is properly characterized as an abandonment or other type of transaction, such as an actual sale or exchange, contribution to capital, dividend, or gift. Free irs efile If you are a cash basis taxpayer and make payments on a negotiable promissory note that you issued for stock that became worthless, you can deduct these payments as losses in the years you actually make the payments. Free irs efile Do not deduct them in the year the stock became worthless. Free irs efile How to report loss. Free irs efile   Report worthless securities in Form 8949, Part I or Part II, whichever applies. Free irs efile    Report your worthless securities transactions on Form 8949 with the correct box checked for these transactions. Free irs efile See Form 8949 and the Instructions for Form 8949. Free irs efile Filing a claim for refund. Free irs efile   If you do not claim a loss for a worthless security on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the loss. Free irs efile You must use Form 1040X, Amended U. Free irs efile S. Free irs efile Individual Income Tax Return, to amend your return for the year the security became worthless. Free irs efile You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. Free irs efile (Claims not due to worthless securities or bad debts generally must be filed within 3 years from the date a return is filed, or 2 years from the date the tax is paid, whichever is later. Free irs efile ) For more information about filing a claim, see Publication 556. Free irs efile Constructive Sales of Appreciated Financial Positions You are treated as having made a constructive sale when you enter into certain transactions involving an appreciated financial position (defined later) in stock, a partnership interest, or certain debt instruments. Free irs efile You must recognize gain as if the position were disposed of at its fair market value on the date of the constructive sale. Free irs efile This gives you a new holding period for the position that begins on the date of the constructive sale. Free irs efile Then, when you close the transaction, you reduce your gain (or increase your loss) by the gain recognized on the constructive sale. Free irs efile Constructive sale. Free irs efile   You are treated as having made a constructive sale of an appreciated financial position if you: Enter into a short sale of the same or substantially identical property, Enter into an offsetting notional principal contract relating to the same or substantially identical property, Enter into a futures or forward contract to deliver the same or substantially identical property (including a forward contract that provides for cash settlement), or Acquire the same or substantially identical property (if the appreciated financial position is a short sale, an offsetting notional principal contract, or a futures or forward contract). Free irs efile   You are also treated as having made a constructive sale of an appreciated financial position if a person related to you enters into a transaction described above with a view toward avoiding the constructive sale treatment. Free irs efile For this purpose, a related person is any related party described under Related Party Transactions , later in this chapter. Free irs efile Exception for nonmarketable securities. Free irs efile   You are not treated as having made a constructive sale solely because you entered into a contract for sale of any stock, debt instrument, or partnership interest that is not a marketable security if it settles within 1 year of the date you enter into it. Free irs efile Exception for certain closed transactions. Free irs efile   Do not treat a transaction as a constructive sale if all of the following are true. Free irs efile You closed the transaction on or before the 30th day after the end of your tax year. Free irs efile You held the appreciated financial position throughout the 60-day period beginning on the date you closed the transaction. Free irs efile Your risk of loss was not reduced at any time during that 60-day period by holding certain other positions. Free irs efile   If a closed transaction is reestablished in a substantially similar position during the 60-day period beginning on the date the first transaction was closed, this exception still applies if the reestablished position is closed before the 30th day after the end of your tax year in which the first transaction was closed and, after that closing, (2) and (3) above are true. Free irs efile   This exception also applies to successive short sales of an entire appreciated financial position. Free irs efile For more information, see Revenue Ruling 2003-1 in Internal Revenue Bulletin 2003-3. Free irs efile This bulletin is available at www. Free irs efile irs. Free irs efile gov/pub/irs-irbs/irb03-03. Free irs efile pdf. Free irs efile Appreciated financial position. Free irs efile   This is any interest in stock, a partnership interest, or a debt instrument (including a futures or forward contract, a short sale, or an option) if disposing of the interest would result in a gain. Free irs efile Exceptions. Free irs efile   An appreciated financial position does not include the following. Free irs efile Any position from which all of the appreciation is accounted for under marked-to-market rules, including section 1256 contracts (described later under Section 1256 Contracts Marked to Market ). Free irs efile Any position in a debt instrument if: The position unconditionally entitles the holder to receive a specified principal amount, The interest payments (or other similar amounts) with respect to the position are payable at a fixed rate or a variable rate described in Regulations section 1. Free irs efile 860G-1(a)(3), and The position is not convertible, either directly or indirectly, into stock of the issuer (or any related person). Free irs efile Any hedge with respect to a position described in (2). Free irs efile Certain trust instruments treated as stock. Free irs efile   For the constructive sale rules, an interest in an actively traded trust is treated as stock unless substantially all of the value of the property held by the trust is debt that qualifies for the exception to the definition of an appreciated financial position (explained in (2) above). Free irs efile Sale of appreciated financial position. Free irs efile   A transaction treated as a constructive sale of an appreciated financial position is not treated as a constructive sale of any other appreciated financial position, as long as you continue to hold the original position. Free irs efile However, if you hold another appreciated financial position and dispose of the original position before closing the transaction that resulted in the constructive sale, you are treated as if, at the same time, you constructively sold the other appreciated financial position. Free irs efile Section 1256 Contracts Marked to Market If you hold a section 1256 contract at the end of the tax year, you generally must treat it as sold at its fair market value on the last business day of the tax year. Free irs efile Section 1256 Contract A section 1256 contract is any: Regulated futures contract, Foreign currency contract, Nonequity option, Dealer equity option, or Dealer securities futures contract. Free irs efile Exceptions. Free irs efile   A section 1256 contract does not include: Interest rate swaps, Currency swaps, Basis swaps, Interest rate caps, Interest rate floors, Commodity swaps, Equity swaps, Equity index swaps, Credit default swaps, or Similar agreements. Free irs efile For more details, including definitions of these terms, see section 1256. Free irs efile Regulated futures contract. Free irs efile   This is a contract that: Provides that amounts which must be deposited to, or can be withdrawn from, your margin account depend on daily market conditions (a system of marking to market), and Is traded on, or subject to the rules of, a qualified board of exchange. Free irs efile A qualified board of exchange is a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, any board of trade or exchange approved by the Secretary of the Treasury, or a national securities exchange registered with the Securities and Exchange Commission. Free irs efile Foreign currency contract. Free irs efile   This is a contract that: Requires delivery of a foreign currency that has positions traded through regulated futures contracts (or settlement of which depends on the value of that type of foreign currency), Is traded in the interbank market, and Is entered into at arm's length at a price determined by reference to the price in the interbank market. Free irs efile   Bank forward contracts with maturity dates longer than the maturities ordinarily available for regulated futures contracts are considered to meet the definition of a foreign currency contract if the above three conditions are satisfied. Free irs efile   Special rules apply to certain foreign currency transactions. Free irs efile These transactions may result in ordinary gain or loss treatment. Free irs efile For details, see Internal Revenue Code section 988 and Regulations sections 1. Free irs efile 988-1(a)(7) and 1. Free irs efile 988-3. Free irs efile Nonequity option. Free irs efile   This is any listed option (defined later) that is not an equity option. Free irs efile Nonequity options include debt options, commodity futures options, currency options, and broad-based stock index options. Free irs efile A broad-based stock index is based on the value of a group of diversified stocks or securities (such as the Standard and Poor's 500 index). Free irs efile Warrants based on a stock index that are economically, substantially identical in all material respects to options based on a stock index are treated as options based on a stock index. Free irs efile Cash-settled options. Free irs efile   Cash-settled options based on a stock index and either traded on or subject to the rules of a qualified board of exchange are nonequity options if the Securities and Exchange Commission (SEC) determines that the stock index is broad based. Free irs efile   This rule does not apply to options established before the SEC determines that the stock index is broad based. Free irs efile Listed option. Free irs efile   This is any option traded on, or subject to the rules of, a qualified board or exchange (as discussed earlier under Regulated futures contract). Free irs efile A listed option, however, does not include an option that is a right to acquire stock from the issuer. Free irs efile Dealer equity option. Free irs efile   This is any listed option that, for an options dealer: Is an equity option, Is bought or granted by that dealer in the normal course of the dealer's business activity of dealing in options, and Is listed on the qualified board of exchange where that dealer is registered. Free irs efile   An “options dealer” is any person registered with an appropriate national securities exchange as a market maker or specialist in listed options. Free irs efile Equity option. Free irs efile   This is any option: To buy or sell stock, or That is valued directly or indirectly by reference to any stock or narrow-based security index. Free irs efile  Equity options include options on a group of stocks only if the group is a narrow-based stock index. Free irs efile Dealer securities futures contract. Free irs efile   For any dealer in securities futures contracts or options on those contracts, this is a securities futures contract (or option on such a contract) that: Is entered into by the dealer (or, in the case of an option, is purchased or granted by the dealer) in the normal course of the dealer's activity of dealing in this type of contract (or option), and Is traded on a qualified board or exchange (as defined under Regulated futures contract , earlier). Free irs efile A securities futures contract that is not a dealer securities futures contract is treated as described later under Securities Futures Contracts . Free irs efile Marked-to-Market Rules A section 1256 contract that you hold at the end of the tax year will generally be treated as sold at its fair market value on the last business day of the tax year, and you must recognize any gain or loss that results. Free irs efile That gain or loss is taken into account in figuring your gain or loss when you later dispose of the contract, as shown in the example under 60/40 rule, below. Free irs efile Hedging exception. Free irs efile   The marked-to-market rules do not apply to hedging transactions. Free irs efile See Hedging Transactions , later. Free irs efile 60/40 rule. Free irs efile   Under the marked-to-market system, 60% of your capital gain or loss will be treated as a long-term capital gain or loss, and 40% will be treated as a short-term capital gain or loss. Free irs efile This is true regardless of how long you actually held the property. Free irs efile Example. Free irs efile On June 22, 2012, you bought a regulated futures contract for $50,000. Free irs efile On December 31, 2012 (the last business day of your tax year), the fair market value of the contract was $57,000. Free irs efile You recognized a $7,000 gain on your 2012 tax return, treated as 60% long-term and 40% short-term capital gain. Free irs efile On February 1, 2013, you sold the contract for $56,000. Free irs efile Because you recognized a $7,000 gain on your 2012 return, you recognize a $1,000 loss ($57,000 − $56,000) on your 2013 tax return, treated as 60% long-term and 40% short-term capital loss. Free irs efile Limited partners or entrepreneurs. Free irs efile   The 60/40 rule does not apply to dealer equity options or dealer securities futures contracts that result in capital gain or loss allocable to limited partners or limited entrepreneurs (defined later under Hedging Transactions ). Free irs efile Instead, these gains or losses are treated as short term. Free irs efile Terminations and transfers. Free irs efile   The marked-to-market rules also apply if your obligation or rights under section 1256 contracts are terminated or transferred during the tax year. Free irs efile In this case, use the fair market value of each section 1256 contract at the time of termination or transfer to determine the gain or loss. Free irs efile Terminations or transfers may result from any offsetting, delivery, exercise, assignment, or lapse of your obligation or rights under section 1256 contracts. Free irs efile Loss carryback election. Free irs efile   An individual having a net section 1256 contracts loss (defined later), generally can elect to carry this loss back 3 years instead of carrying it over to the next year. Free irs efile See How To Report , later, for information about reporting this election on your return. Free irs efile   The loss carried back to any year under this election cannot be more than the net section 1256 contracts gain in that year. Free irs efile In addition, the amount of loss carried back to an earlier tax year cannot increase or produce a net operating loss for that year. Free irs efile   The loss is carried to the earliest carryback year first, and any unabsorbed loss amount can then be carried to each of the next 2 tax years. Free irs efile In each carryback year, treat 60% of the carryback amount as a long-term capital loss and 40% as a short-term capital loss from section 1256 contracts. Free irs efile   If only a portion of the net section 1256 contracts loss is absorbed by carrying the loss back, the unabsorbed portion can be carried forward, under the capital loss carryover rules, to the year following the loss. Free irs efile (See Capital Losses under Reporting Capital Gains and Losses, later. Free irs efile ) Figure your capital loss carryover as if, for the loss year, you had an additional short-term capital gain of 40% of the amount of net section 1256 contracts loss absorbed in the carryback years and an additional long-term capital gain of 60% of the absorbed loss. Free irs efile In the carryover year, treat any capital loss carryover from losses on section 1256 contracts as if it were a loss from section 1256 contracts for that year. Free irs efile Net section 1256 contracts loss. Free irs efile   This loss is the lesser of: The net capital loss for your tax year determined by taking into account only the gains and losses from section 1256 contracts, or The capital loss carryover to the next tax year determined without this election. Free irs efile Net section 1256 contracts gain. Free irs efile   This gain is the lesser of: The capital gain net income for the carryback year determined by taking into account only gains and losses from section 1256 contracts, or The capital gain net income for that year. Free irs efile  Figure your net section 1256 contracts gain for any carryback year without regard to the net section 1256 contracts loss for the loss year or any later tax year. Free irs efile Traders in section 1256 contracts. Free irs efile   Gain or loss from the trading of section 1256 contracts is capital gain or loss subject to the marked-to-market rules. Free irs efile However, this does not apply to contracts held for purposes of hedging property if any loss from the property would be an ordinary loss. Free irs efile Treatment of underlying property. Free irs efile   The determination of whether an individual's gain or loss from any property is ordinary or capital gain or loss is made without regard to the fact that the individual is actively engaged in dealing in or trading section 1256 contracts related to that property. Free irs efile How To Report If you disposed of regulated futures or foreign currency contracts in 2013 (or had unrealized profit or loss on these contracts that were open at the end of 2012 or 2013), you should receive Form 1099-B, or substitute statement, from your broker. Free irs efile Form 6781. Free irs efile   Use Part I of Form 6781 to report your gains and losses from all section 1256 contracts that are open at the end of the year or that were closed out during the year. Free irs efile This includes the amount shown in box 10 of Form 1099-B. Free irs efile Then enter the net amount of these gains and losses on Schedule D (Form 1040), line 4 or line 11, as appropriate. Free irs efile Include a copy of Form 6781 with your income tax return. Free irs efile   If the Form 1099-B you receive includes a straddle or hedging transaction, defined later, it may be necessary to show certain adjustments on Form 6781. Free irs efile Follow the Form 6781 instructions for completing Part I. Free irs efile Loss carryback election. Free irs efile   To carry back your loss under the election procedures described earlier, file Form 1040X or Form 1045, Application for Tentative Refund, for the year to which you are carrying the loss with an amended Form 6781 and an amended Schedule D (Form 1040) attached. Free irs efile Follow the instructions for completing Form 6781 for the loss year to make this election. Free irs efile Hedging Transactions The marked-to-market rules, described earlier, do not apply to hedging transactions. Free irs efile A transaction is a hedging transaction if both of the following conditions are met. Free irs efile You entered into the transaction in the normal course of your trade or business primarily to manage the risk of: Price changes or currency fluctuations on ordinary property you hold (or will hold), or Interest rate or price changes, or currency fluctuations, on your current or future borrowings or ordinary obligations. Free irs efile You clearly identified the transaction as being a hedging transaction before the close of the day on which you entered into it. Free irs efile This hedging transaction exception does not apply to transactions entered into by or for any syndicate. Free irs efile A syndicate is a partnership, S corporation, or other entity (other than a regular corporation) that allocates more than 35% of its losses to limited partners or limited entrepreneurs. Free irs efile A limited entrepreneur is a person who has an interest in an enterprise (but not as a limited partner) and who does not actively participate in its management. Free irs efile However, an interest is not considered held by a limited partner or entrepreneur if the interest holder actively participates (or did so for at least 5 full years) in the management of the entity, or is the spouse, child (including a legally adopted child), grandchild, or parent of an individual who actively participates in the management of the entity. Free irs efile Hedging loss limit. Free irs efile   If you are a limited partner or entrepreneur in a syndicate, the amount of a hedging loss you can claim is limited. Free irs efile A “hedging loss” is the amount by which the allowable deductions in a tax year that resulted from a hedging transaction (determined without regard to the limit) are more than the income received or accrued during the tax year from this transaction. Free irs efile   Any hedging loss allocated to you for the tax year is limited to your taxable income for that year from the trade or business in which the hedging transaction occurred. Free irs efile Ignore any hedging transaction items in determining this taxable income. Free irs efile If you have a hedging loss that is disallowed because of this limit, you can carry it over to the next tax year as a deduction resulting from a hedging transaction. Free irs efile   If the hedging transaction relates to property other than stock or securities, the limit on hedging losses applies if the limited partner or entrepreneur is an individual. Free irs efile   The limit on hedging losses does not apply to any hedging loss to the extent that it is more than all your unrecognized gains from hedging transactions at the end of the tax year that are from the trade or business in which the hedging transaction occurred. Free irs efile The term “unrecognized gain” has the same meaning as defined under Loss Deferral Rules in Straddles, later. Free irs efile Sale of property used in a hedge. Free irs efile   Once you identify personal property as being part of a hedging transaction, you must treat gain from its sale or exchange as ordinary income, not capital gain. Free irs efile Self-Employment Income Gains and losses derived in the ordinary course of a commodity or option dealer's trading in section 1256 contracts and property related to these contracts are included in net earnings from self-employment. Free irs efile See the Instructions for Schedule SE (Form 1040). Free irs efile In addition, the rules relating to contributions to self-employment retirement plans apply. Free irs efile For information on retirement plan contributions, see Publication 560 and Publication 590. Free irs efile Basis of Investment Property Basis is a way of measuring your investment in property for tax purposes. Free irs efile You must know the basis of your property to determine whether you have a gain or loss on its sale or other disposition. Free irs efile Investment property you buy normally has an original basis equal to its cost. Free irs efile If you get property in some way other than buying it, such as by gift or inheritance, its fair market value may be important in figuring the basis. Free irs efile Cost Basis The basis of property you buy is usually its cost. Free irs efile The cost is the amount you pay in cash, debt obligations, or other property or services. Free irs efile Unstated interest. Free irs efile   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, minus the amount considered to be unstated interest. Free irs efile You generally have unstated interest if your interest rate is less than the applicable federal rate. Free irs efile For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Free irs efile Basis Other Than Cost There are times when you must use a basis other than cost. Free irs efile In these cases, you may need to know the property's fair market value or the adjusted basis of the previous owner. Free irs efile Fair market value. Free irs efile   This is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. Free irs efile Sales of similar property, around the same date, may be helpful in figuring fair market value. Free irs efile Property Received for Services If you receive investment property for services, you must include the property's fair market value in income. Free irs efile The amount you include in income then becomes your basis in the property. Free irs efile If the services were performed for a price that was agreed to beforehand, this price will be accepted as the fair market value of the property if there is no evidence to the contrary. Free irs efile Restricted property. Free irs efile   If you receive, as payment for services, property that is subject to certain restrictions, your basis in the property generally is its fair market value when it becomes substantially vested. Free irs efile Property becomes substantially vested when it is transferable or is no longer subject to substantial risk of forfeiture, whichever happens first. Free irs efile See Restricted Property in Publication 525 for more information. Free irs efile Bargain purchases. Free irs efile   If you buy investment property at less than fair market value, as payment for services, you must include the difference in income. Free irs efile Your basis in the property is the price you pay plus the amount you include in income. Free irs efile Property Received in Taxable Trades If you received investment property in trade for other property, the basis of the new property is its fair market value at the time of the trade unless you received the property in a nontaxable trade. Free irs efile Example. Free irs efile You trade A Company stock for B Company stock having a fair market value of $1,200. Free irs efile If the adjusted basis of the A Company stock is less than $1,200, you have a taxable gain on the trade. Free irs efile If the adjusted basis of the A Company stock is more than $1,200, you have a deductible loss on the trade. Free irs efile The basis of your B Company stock is $1,200. Free irs efile If you later sell the B Company stock for $1,300, you will have a gain of $100. Free irs efile Property Received in Nontaxable Trades If you have a nontaxable trade, you do not recognize gain or loss until you dispose of the property you received in the trade. Free irs efile See Nontaxable Trades , later. Free irs efile The basis of property you received in a nontaxable or partly nontaxable trade is generally the same as the adjusted basis of the property you gave up. Free irs efile Increase this amount by any cash you paid, additional costs you had, and any gain recognized. Free irs efile Reduce this amount by any cash or unlike property you received, any loss recognized, and any liability of yours that was assumed or treated as assumed. Free irs efile Property Received From Your Spouse If property is transferred to you from your spouse (or former spouse, if the transfer is incident to your divorce), your basis is the same as your spouse's or former spouse's adjusted basis just before the transfer. Free irs efile See Transfers Between Spouses , later. Free irs efile Recordkeeping. Free irs efile The transferor must give you the records necessary to determine the adjusted basis and holding period of the property as of the date of the transfer. Free irs efile Property Received as a Gift To figure your basis in property that you received as a gift, you must know its adjusted basis to the donor just before it was given to you, its fair market value at the time it was given to you, the amount of any gift tax paid on it, and the date it was given to you. Free irs efile Fair market value less than donor's adjusted basis. Free irs efile   If the fair market value of the property at the time of the gift was less than the donor's adjusted basis just before the gift, your basis for gain on its sale or other disposition is the same as the donor's adjusted basis plus or minus any required adjustments to basis during the period you hold the property. Free irs efile Your basis for loss is its fair market value at the time of the gift plus or minus any required adjustments to basis during the period you hold the property. Free irs efile No gain or loss. Free irs efile   If you use the basis for figuring a gain and the result is a loss, and then use the basis for figuring a loss and the result is a gain, you will have neither a gain nor a loss. Free irs efile Example. Free irs efile You receive a gift of investment property having an adjusted basis of $10,000 at the time of the gift. Free irs efile The fair market value at the time of the gift is $9,000. Free irs efile You later sell the property for $9,500. Free irs efile You have neither gain nor loss. Free irs efile Your basis for figuring gain is $10,000, and $9,500 minus $10,000 results in a $500 loss. Free irs efile Your basis for figuring loss is $9,000, and $9,500 minus $9,000 results in a $500 gain. Free irs efile Fair market value equal to or more than donor's adjusted basis. Free irs efile   If the fair market value of the property at the time of the gift was equal to or more than the donor's adjusted basis just before the gift, your basis for gain or loss on its sale or other disposition is the donor's adjusted basis plus or minus any required adjustments to basis during the period you hold the property. Free irs efile Also, you may be allowed to add to the donor's adjusted basis all or part of any gift tax paid, depending on the date of the gift. Free irs efile Gift received before 1977. Free irs efile   If you received property as a gift before 1977, your basis in the property is the donor's adjusted basis increased by the total gift tax paid on the gift. Free irs efile However, your basis cannot be more than the fair market value of the gift at the time it was given to you. Free irs efile Example 1. Free irs efile You were given XYZ Company stock in 1976. Free irs efile At the time of the gift, the stock had a fair market value of $21,000. Free irs efile The donor's adjusted basis was $20,000. Free irs efile The donor paid a gift tax of $500 on the gift. Free irs efile Your basis for gain or loss is $20,500, the donor's adjusted basis plus the amount of gift tax paid. Free irs efile Example 2. Free irs efile The facts are the same as in Example 1 except that the gift tax paid was $1,500. Free irs efile Your basis is $21,000, the donor's adjusted basis plus the gift tax paid, but limited to the fair market value of the stock at the time of the gift. Free irs efile Gift received after 1976. Free irs efile   If you received property as a gift after 1976, your basis is the donor's adjusted basis increased by the part of the gift tax paid that was for the net increase in value of the gift. Free irs efile You figure this part by multiplying the gift tax paid on the gift by a fraction. Free irs efile The numerator (top part) is the net increase in value of the gift and the denominator (bottom part) is the amount of the gift. Free irs efile   The net increase in value of the gift is the fair market value of the gift minus the donor's adjusted basis. Free irs efile The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Free irs efile Example. Free irs efile In 2013, you received a gift of property from your mother. Free irs efile At the time of the gift, the property had a fair market value of $101,000 and an adjusted basis to her of $40,000. Free irs efile The amount of the gift for gift tax purposes was $87,000 ($101,000 minus the $14,000 annual exclusion), and your mother paid a gift tax of $21,000. Free irs efile You figure your basis in the following way: Fair market value $101,000 Minus: Adjusted basis 40,000 Net increase in value of gift $61,000 Gift tax paid $21,000 Multiplied by . Free irs efile 701 ($61,000 ÷ $87,000) . Free irs efile 701 Gift tax due to net increase in value $14,721 Plus: Adjusted basis of property to  your mother 40,000 Your basis in the property $54,721 Part sale, part gift. Free irs efile   If you get property in a transfer that is partly a sale and partly a gift, your basis is the larger of the amount you paid for the property or the transferor's adjusted basis in the property at the time of the transfer. Free irs efile Add to that amount the amount of any gift tax paid on the gift, as described in the preceding discussion. Free irs efile For figuring loss, your basis is limited to the property's fair market value at the time of the transfer. Free irs efile Gift tax information. Free irs efile   For information on gift tax, see Publication 950, Introduction to Estate and Gift Taxes. Free irs efile For information on figuring the amount of gift tax to add to your basis, see Property Received as a Gift in Publication 551. Free irs efile Property Received as Inheritance Before or after 2010. Free irs efile   If you inherited property from a decedent who died before or after 2010, or who died in 2010 and the executor of the decedent's estate elected not to file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, your basis in that property generally is its fair market value (its appraised value on Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return) on: The date of the decedent's death, or The later alternate valuation date if the estate qualifies for, and elects to use, alternate valuation. Free irs efile If no Form 706 was filed, use the appraised value on the date of death for state inheritance or transmission taxes. Free irs efile For stocks and bonds, if no Form 706 was filed and there are no state inheritance or transmission taxes, see the Form 706 instructions for figuring the fair market value of the stocks and bonds on the date of the decedent's death. Free irs efile Appreciated property you gave the decedent. Free irs efile   Your basis in certain appreciated property that you inherited is the decedent's adjusted basis in the property immediately before death rather than its fair market value. Free irs efile This applies to appreciated property that you or your spouse gave the decedent as a gift during the 1-year period ending on the date of death. Free irs efile Appreciated property is any property whose fair market value on the day you gave it to the decedent was more than its adjusted basis. Free irs efile More information. Free irs efile   See Publication 551 for more information on the basis of inherited property, including community property, property held by a surviving tenant in a joint tenancy or tenancy by the entirety, a qualified joint interest, and a farm or closely held business. Free irs efile Inherited in 2010 and executor elected to file Form 8939. Free irs efile   If you inherited property from a decedent who died in 2010 and the executor made the election to file Form 8939, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to figure your basis. Free irs efile Adjusted Basis Before you can figure any gain or loss on a sale, exchange, or other disposition of property or figure allowable depreciation, depletion, or amortization, you usually must make certain adjustments (increases and decreases) to the basis of the property. Free irs efile The result of these adjustments to the basis is the adjusted basis. Free irs efile Adjustments to the basis of stocks and bonds are explained in the following discussion. Free irs efile For information about other adjustments to basis, see Publication 551. Free irs efile Stocks and Bonds The basis of stocks or bonds you own generally is the purchase price plus the costs of purchase, such as commissions and recording or transfer fees. Free irs efile If you acquired stock or bonds other than by purchase, your basis is usually determined by fair market value or the previous owner's adjusted basis as discussed earlier under Basis Other Than Cost . Free irs efile The basis of stock must be adjusted for certain events that occur after purchase. Free irs efile For example, if you receive more stock from nontaxable stock dividends or stock splits, you must reduce the basis of your original stock. Free irs efile You must also reduce your basis when you receive nondividend distributions (discussed in chapter 1). Free irs efile These distributions, up to the amount of your basis, are a nontaxable return of capital. Free irs efile The IRS partners with companies that offer Form 8949 and Schedule D (Form 1040) software that can import trades from many brokerage firms and accounting software to help you keep track of your adjusted basis in securities. Free irs efile To find out more, go to www. Free irs efile irs. Free irs efile gov/Filing/Filing-Options. Free irs efile Identifying stock or bonds sold. Free irs efile   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock or bonds. Free irs efile Adequate identification. Free irs efile   You will make an adequate identification if you show that certificates representing shares of stock from a lot that you bought on a certain date or for a certain price were delivered to your broker or other agent. Free irs efile Broker holds stock. Free irs efile   If you have left the stock certificates with your broker or other agent, you will make an adequate identification if you: Tell your broker or other agent the particular stock to be sold or transferred at the time of the sale or transfer, and Receive a written confirmation of this from your broker or other agent within a reasonable time. Free irs efile  Stock identified this way is the stock sold or transferred even if stock certificates from a different lot are delivered to the broker or other agent. Free irs efile Single stock certificate. Free irs efile   If you bought stock in different lots at different times and you hold a single stock certificate for this stock, you will make an adequate identification if you: Tell your broker or other agent the particular stock to be sold or transferred when you deliver the certificate to your broker or other agent, and Receive a written confirmation of this from your broker or other agent within a reasonable time. Free irs efile   If you sell part of the stock represented by a single certificate directly to the buyer instead of through a broker, you will make an adequate identification if you keep a written record of the particular stock that you intend to sell. Free irs efile Bonds. Free irs efile   These methods of identification also apply to bonds sold or transferred. Free irs efile Identification not possible. Free irs efile   If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. Free irs efile Except for certain mutual fund shares, discussed later, you cannot use the average price per share to figure gain or loss on the sale of the shares. Free irs efile Example. Free irs efile You bought 100 shares of stock of XYZ Corporation in 1998 for $10 a share. Free irs efile In January 1999 you bought another 200 shares for $11 a share. Free irs efile In July 1999 you gave your son 50 shares. Free irs efile In December 2001 you bought 100 shares for $9 a share. Free irs efile In April 2013 you sold 130 shares. Free irs efile You cannot identify the shares you disposed of, so you must use the stock you acquired first to figure the basis. Free irs efile The shares of stock you gave your son had a basis of $500 (50 × $10). Free irs efile You figure the basis of the 130 shares of stock you sold in 2013 as follows: 50 shares (50 × $10) balance of stock bought in 1998 $ 500 80 shares (80 × $11) stock bought in January 1999 880 Total basis of stock sold in 2013 $1,380 Shares in a mutual fund or REIT. Free irs efile    The basis of shares in a mutual fund (or other regulated investment company) or a real estate investment trust (REIT) is generally figured in the same way as the basis of other stock and usually includes any commissions or load charges paid for the purchase. Free irs efile Example. Free irs efile You bought 100 shares of Fund A for $10 a share. Free irs efile You paid a $50 commission to the broker for the purchase. Free irs efile Your cost basis for each share is $10. Free irs efile 50 ($1,050 ÷ 100). Free irs efile Commissions and load charges. Free irs efile   The fees and charges you pay to acquire or redeem shares of a mutual fund are not deductible. Free irs efile You can usually add acquisition fees and charges to your cost of the shares and thereby increase your basis. Free irs efile A fee paid to redeem the shares is usually a reduction in the redemption price (sales price). Free irs efile   You cannot add your entire acquisition fee or load charge to the cost of the mutual fund shares acquired if all of the following conditions apply. Free irs efile You get a reinvestment right because of the purchase of the shares or the payment of the fee or charge. Free irs efile You dispose of the shares within 90 days of the purchase date. Free irs efile You acquire new shares in the same mutual fund or another mutual fund, for which the fee or charge is reduced or waived because of the reinvestment right you got when you acquired the original shares. Free irs efile   The amount of the original fee or charge in excess of the reduction in (3) is added to the cost of the original shares. Free irs efile The rest of the original fee or charge is added to the cost basis of the new shares (unless all three conditions above also apply to the purchase of the new shares). Free irs efile Choosing average basis for mutual fund shares. Free irs efile   You can choose to use the average basis of mutual fund shares if you acquired the identical shares at various times and prices, or you acquired the shares after 2010 in connection with a dividend reinvestment plan, and left them on deposit in an account kept by a custodian or agent. Free irs efile The methods you can use to figure average basis are explained later. Free irs efile Undistributed capital gains. Free irs efile   If you had to include in your income any undistributed capital gains of the mutual fund or REIT, increase your basis in the stock by the difference between the amount you included and the amount of tax paid for you by the fund or REIT. Free irs efile See Undistributed capital gains of mutual funds and REITs under Capital Gain Distributions in chapter 1. Free irs efile Reinvestment right. Free irs efile   This is the right to acquire mutual fund shares in the same or another mutual fund without paying a fee or load charge, or by paying a reduced fee or load charge. Free irs efile      The original cost basis of mutual fund shares you acquire by reinvesting your distributions is the amount of the distributions used to purchase each full or fractional share. Free irs efile This rule applies even if the distribution is an exempt-interest dividend that you do not report as income. Free irs efile Table 4-1. Free irs efile This is a worksheet you can use to keep track of the adjusted basis of your mutual fund shares. Free irs efile Enter the cost per share when you acquire new shares and any adjustments to their basis when the adjustment occurs. Free irs efile This worksheet will help you figure the adjusted basis when you sell or redeem shares. Free irs efile Table 4-1. Free irs efile Mutual Fund Record Mutual Fund Acquired1 Adjustment to Basis Per Share Adjusted2 Basis Per Share Sold or redeemed Date Number of Shares Cost Per Share Date Number of Shares                                                                                                                                                                                                                                                                         1 Include share received from reinvestment of distributions. Free irs efile 2 Cost plus or minus adjustments. Free irs efile Automatic investment service. Free irs efile   If you participate in an automatic investment service, your basis for each share of stock, including fractional shares, bought by the bank or other agent is the purchase price plus a share of the broker's commission. Free irs efile Dividend reinvestment plans. Free irs efile   If you participate in a dividend reinvestment plan and receive stock from the corporation at a discount, your basis is the full fair market value of the stock on the dividend payment date. Free irs efile You must include the amount of the discount in your income. Free irs efile Public utilities. Free irs efile   If, before 1986, you excluded from income the value of stock you had received under a qualified public utility reinvestment plan, your basis in that stock is zero. Free irs efile Stock dividends. Free irs efile   Stock dividends are distributions made by a corporation of its own stock. Free irs efile Generally, stock dividends are not taxable to you. Free irs efile However, see Distributions of Stock and Stock Rights under Dividends and Other Distributions in chapter 1 for some exceptions. Free irs efile If the stock dividends are not taxable, you must divide your basis for the old stock between the old and new stock. Free irs efile New and old stock identical. Free irs efile   If the new stock you received as a nontaxable dividend is identical to the old stock on which the dividend was declared, divide the adjusted basis of the old stock by the number of shares of old and new stock. Free irs efile The result is your basis for each share of stock. Free irs efile Example 1. Free irs efile You owned one share of common stock that you bought for $45. Free irs efile The corporation distributed two new shares of common stock for each share held. Free irs efile You then had three shares of common stock. Free irs efile Your basis in each share is $15 ($45 ÷ 3). Free irs efile Example 2. Free irs efile You owned two shares of common stock. Free irs efile You bought one for $30 and the other for $45. Free irs efile The corporation distributed two new shares of common stock for each share held. Free irs efile You had six shares after the distribution—three with a basis of $10 each ($30 ÷ 3) and three with a basis of $15 each ($45 ÷ 3). Free irs efile New and old stock not identical. Free irs efile   If the new stock you received as a nontaxable dividend is not identical to the old stock on which it was declared, the basis of the new stock is calculated differently. Free irs efile Divide the adjusted basis of the old stock between the old and the new stock in the ratio of the fair market value of each lot of stock to the total fair market value of both lots on the date of distribution of the new stock. Free irs efile Example. Free irs efile You bought a share of common stock for $100. Free irs efile Later, the corporation distributed a share of preferred stock for each share of common stock held. Free irs efile At the date of distribution, your common stock had a fair market value of $150 and the preferred stock had a fair market value of $50. Free irs efile You figure the basis of the old and new stock by dividing your $100 basis between them. Free irs efile The basis of your common stock is $75 (($150 ÷ $200) × $100), and the basis of the new preferred stock is $25 (($50 ÷ $200) × $100). Free irs efile Stock bought at various times. Free irs efile   Figure the basis of stock dividends received on stock you bought at various times and at different prices by allocating to each lot of stock the share of the stock dividends due to it. Free irs efile Taxable stock dividends. Free irs efile   If your stock dividend is taxable when you receive it, the basis of your new stock is its fair market value on the date of distribution. Free irs efile The basis of your old stock does not change. Free irs efile Stock splits. Free irs efile   Figure the basis of stock splits in the same way as stock dividends if identical stock is distributed on the stock held. Free irs efile Stock rights. Free irs efile   A stock right is a right to acquire a corporation's stock. Free irs efile It may be exercised, it may be sold if it has a market value, or it may expire. Free irs efile Stock rights are rarely taxable when you receive them. Free irs efile See Distributions of Stock and Stock Rights under Dividends and Other Distributions in chapter 1. Free irs efile Taxable stock rights. Free irs efile   If you receive stock rights that are taxable, the basis of the rights is their fair market value at the time of distribution. Free irs efile The basis of the old stock does not change. Free irs efile Nontaxable stock rights. Free irs efile   If you receive nontaxable stock rights and allow them to expire, they have no basis. Free irs efile   If you exercise or sell the nontaxable stock rights and if, at the time of distribution, the stock rights had a fair market value of 15% or more of the fair market value of the old stock, you must divide the adjusted basis of the old stock between the old stock and the stock rights. Free irs efile Use a ratio of the fair market value of each to the total fair market value of both at the time of distribution. Free irs efile   If the fair market value of the stock rights was less than 15%, their basis is zero. Free irs efile However, you can choose to divide the basis of the old stock between the old stock and the stock rights. Free irs efile To make the choice, attach a statement to your return for the year in which you received the rights, stating that you choose to divide the basis of the stock. Free irs efile Basis of new stock. Free irs efile   If you exercise the stock rights, the basis of the new stock is its cost plus the basis of the stock rights exercised. Free irs efile Example. Free irs efile You own 100 shares of ABC Company stock, which cost you $22 per share. Free irs efile The ABC Company gave you 10 nontaxable stock rights that would allow you to buy 10 more shares at $26 per share. Free irs efile At the time the stock rights were distributed, the stock had a market value of $30, not including the stock rights. Free irs efile Each stock right had a market value of $3. Free irs efile The market value of the stock rights was less than 15% of the market value of the stock, but you chose to divide the basis of your stock between the stock and the rights. Free irs efile You figure the basis of the rights and the basis of the old stock as follows: 100 shares × $22 = $2,200, basis of old stock   100 shares × $30 = $3,000, market value of old stock   10 rights × $3 = $30, market value of rights   ($3,000 ÷ $3,030) × $2,200 = $2,178. Free irs efile 22, new basis of old stock   ($30 ÷ $3,030) × $2,200 = $21. Free irs efile 78, basis of rights   If you sell the rights, the basis for figuring gain or loss is $2. Free irs efile 18 ($21. Free irs efile 78 ÷ 10) per right. Free irs efile If you exercise the rights, the basis of the stock you acquire is the price you pay ($26) plus the basis of the right exercised ($2. Free irs efile 18), or $28. Free irs efile 18 per share. Free irs efile The remaining basis of the old stock is $21. Free irs efile 78 per share. Free irs efile Investment property received in liquidation. Free irs efile   In general, if you receive investment property as a distribution in partial or complete liquidation of a corporation and if you recognize gain or loss when you acquire the property, your basis in the property is its fair market value at the time of the distribution. Free irs efile S corporation stock. Free irs efile   You must increase your basis in stock of an S corporation by your pro rata share of the following items. Free irs efile All income items of the S corporation, including tax-exempt income, that are separately stated and passed through to you as a shareholder. Free irs efile The nonseparately stated income of the S corporation. Free irs efile The amount of the deduction for depletion (other than oil and gas depletion) that is more than the basis of the property being depleted. Free irs efile   You must decrease your basis in stock of an S corporation by your pro rata share of the following items. Free irs efile Distributions by the S corporation that were not included in your income. Free irs efile All loss and deduction items of the S corporation that are separately stated and passed through to you. Free irs efile Any nonseparately stated loss of the S corporation. Free irs efile Any expense of the S corporation that is not deductible in figuring its taxable income and not properly chargeable to a capital account. Free irs efile The amount of your deduction for depletion of oil and gas wells to the extent the deduction is not more than your share of the adjusted basis of the wells. Free irs efile However, your basis in the stock cannot be reduced below zero. Free irs efile Specialized small business investment company stock or partnership interest. Free irs efile   If you bought this stock or interest as replacement property for publicly traded securities you sold at a gain, you must reduce the basis of the stock or interest by the amount of any postponed gain on that sale. Free irs efile See Rollover of Gain From Publicly Traded Securities , later. Free irs efile Qualified small business stock. Free irs efile   If you bought this stock as replacement property for other qualified small business stock you sold at a gain, you must reduce the basis of this replacement stock by the amount of any postponed gain on the earlier sale. Free irs efile See Gains on Qualified Small Business Stock , later. Free irs efile Short sales. Free irs efile   If you cannot deduct payments you make to a lender in lieu of dividends on stock used in a short sale, the amount you pay to the lender is a capital expense, and you must add it to the basis of the stock used to close the short sale. Free irs efile   See Payments in lieu of dividends , later, for information about deducting payments in lieu of dividends. Free irs efile Premiums on bonds. Free irs efile   If you buy a bond at a premium, the premium is treated as part of your basis in the bond. Free irs efile If you choose to amortize the premium paid on a taxable bond, you must reduce the basis of the bond by the amortized part of the premium each year over the life of the bond. Free irs efile   Although you cannot deduct the premium on a tax-exempt bond, you must amortize it to determine your adjusted basis in the bond. Free irs efile You must reduce the basis of the bond by the premium you amortized for the period you held the bond. Free irs efile   See Bond Premium Amortization in chapter 3 for more information. Free irs efile Market discount on bonds. Free irs efile   If you include market discount on a bond in income currently, increase the basis of your bond by the amount of market discount you include in your income. Free irs efile See Market Discount Bonds in chapter 1 for more information. Free irs efile Bonds purchased at par value. Free irs efile   A bond purchased at par value (face amount) has no premium or discount. Free irs efile When you sell or otherwise dispose of the bond, you figure the gain or loss by comparing the bond proceeds to the purchase price of the bond. Free irs efile Example. Free irs efile You purchased a bond several years ago for its par value of $10,000. Free irs efile You sold the bond this year for $10,100. Free irs efile You have a gain of $100. Free irs efile However, if you had sold the bond for $9,900, you would have a loss of $100. Free irs efile Acquisition discount on short-term obligations. Free irs efile   If you include acquisition discount on a short-term obligation in your income currently, increase the basis of the obligation by the amount of acquisition discount you include in your income. Free irs efile See Discount on Short-Term Obligations in chapter 1 for more information. Free irs efile Original issue discount (OID) on debt instruments. Free irs efile   Increase the basis of a debt instrument by the OID you include in your income. Free irs efile See Original Issue Discount (OID) in chapter 1. Free irs efile Discounted tax-exempt obligations. Free irs efile   OID on tax-exempt obligations is generally not taxable. Free irs efile However, when you dispose of a tax-exempt obligation issued after September 3, 1982, that you acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. Free irs efile The accrued OID is added to the basis of the obligation to determine your gain or loss. Free irs efile   For information on determining OID on a long-term obligation, see Debt Instruments Issued After July 1, 1982, and Before 1985 or Debt Instruments Issued After 1984, whichever applies, in Publication 1212 under Figuring OID on Long-Term Debt Instruments. Free irs efile   If the tax-exempt obligation has a maturity of 1 year or less, accrue OID under the rules for acquisition discount on short-term obligations. Free irs efile See Discount on Short-Term Obligations in chapter 1. Free irs efile Stripped tax-exempt obligation. Free irs efile   If you acquired a stripped tax-exempt bond or coupon after October 22, 1986, you must accrue OID on it to determine its adjusted basis when you dispose of it. Free irs efile For stripped tax-exempt bonds or coupons acquired after June 10, 1987, part of this OID may be taxable. Free irs efile You accrue the OID on these obligations in the manner described in chapter 1 under Stripped Bonds and Coupons . Free irs efile   Increase your basis in the stripped tax-exempt bond or coupon by the taxable and nontaxable accrued OID. Free irs efile Also increase your basis by the interest that accrued (but was not paid and was not previously reflected in your basis) before the date you sold the bond or coupon. Free irs efile In addition, for bonds acquired after June 10, 1987, add to your basis any accrued market discount not previously reflected in basis. Free irs efile How To Figure Gain or Loss You figure gain or loss on a sale or trade of property by comparing the amount you realize with the adjusted basis of the property. Free irs efile Gain. Free irs efile   If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain. Free irs efile Loss. Free irs efile   If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss. Free irs efile Amount realized. Free irs efile   The amount you realize from a sale or trade of property is everything you receive for the property minus your expenses of sale (such as redemption fees, sales commissions, sales charges, or exit fees). Free irs efile Amount realized includes the money you receive plus the fair market value of any property or services you receive. Free irs efile   If you finance the buyer's purchase of your property and the debt instrument does not provide for adequate stated interest, the unstated interest that you must report as ordinary income will reduce the amount realized from the sale. Free irs efile For more information, see Publication 537. Free irs efile   If a buyer of property issues a debt instrument to the seller of the property, the amount realized is determined by reference to the issue price of the debt instrument, which may or may not be the fair market value of the debt instrument. Free irs efile See Regulations section 1. Free irs efile 1001-1(g). Free irs efile However, if the debt instrument was previously issued by a third party (one not part of the sale transaction), the fair market value of the debt instrument is used to determine the amount realized. Free irs efile Fair market value. Free irs efile   Fair market value is the price at which property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. Free irs efile Example. Free irs efile You trade A Company stock with an adjusted basis of $7,000 for B Company stock with a fair market value of $10,000, which is your amount realized. Free irs efile Your gain is $3,000 ($10,000 – $7,000). Free irs efile If you also receive a note for $6,000 that has an issue price of $6,000, your gain is $9,000 ($10,000 + $6,000 – $7,000). Free irs efile Debt paid off. Free irs efile   A debt against the property, or against you, that is paid off as a part of the transaction or that is assumed by the buyer must be included in the amount realized. Free irs efile This is true even if neither you nor the buyer is personally liable for the debt. Free irs efile For example, if you sell or trade property that is subject to a nonrecourse loan, the amount you realize generally includes the full amount of the note assumed by the buyer even if the amount of the note is more than the fair market value of the property. Free irs efile Example. Free irs efile You sell stock that you had pledged as security for a bank loan of $8,000. Free irs efile Your basis in the stock is $6,000. Free irs efile The buyer pays off your bank loan and pays you $20,000 in cash. Free irs efile The amount realized is $28,000 ($20,000 + $8,000). Free irs efile Your gain is $22,000 ($28,000 – $6,000). Free irs efile Payment of cash. Free irs efile   If you trade property and cash for other property, the amount you realize is the fair market value of the property you receive. Free irs efile Determine your gain or loss by subtracting the cash you pay and the adjusted basis of the property you trade in from the amount you realize. Free irs efile If the result is a positive number, it is a gain. Free irs efile If the result is a negative number, it is a loss. Free irs efile No gain or loss. Free irs efile   You may have to use a basis for figuring gain that is different from the basis used for figuring loss. Free irs efile In this case, you may have neither a gain nor a loss. Free irs efile See No gain or loss in the discussion on the basis of property you received as a gift under Basis Other Than Cost, earlier. Free irs efile Special Rules for Mutual Funds To figure your gain or loss when you dispose of mutual fund shares, you need to determine which shares were sold and the basis of those shares. Free irs efile If your shares in a mutual fund were acquired all on the same day and for the same price, figuring their basis is not difficu