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Free State Filing Income Tax

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Free State Filing Income Tax

Free state filing income tax 3. Free state filing income tax   Personal Exemptions and Dependents Table of Contents What's New Introduction Useful Items - You may want to see: ExemptionsPersonal Exemptions Exemptions for Dependents Qualifying Child Qualifying Relative Phaseout of Exemptions Social Security Numbers for DependentsBorn and died in 2013. Free state filing income tax Taxpayer identification numbers for aliens. Free state filing income tax Taxpayer identification numbers for adoptees. Free state filing income tax What's New Exemption amount. Free state filing income tax  The amount you can deduct for each exemption has increased. Free state filing income tax It was $3,800 for 2012. Free state filing income tax It is $3,900 for 2013. Free state filing income tax Exemption phaseout. Free state filing income tax  You lose at least part of the benefit of your exemptions if your adjusted gross income is more than a certain amount. Free state filing income tax For 2013, this amount is $150,000 for a married individual filing a separate return; $250,000 for a single individual; $275,000 for a head of household; and $300,000 for married individuals filing jointly or a qualifying widow(er). Free state filing income tax See Phaseout of Exemptions , later. Free state filing income tax Introduction This chapter discusses the following topics. Free state filing income tax Personal exemptions — You generally can take one for yourself and, if you are married, one for your spouse. Free state filing income tax Exemptions for dependents — You generally can take an exemption for each of your dependents. Free state filing income tax A dependent is your qualifying child or qualifying relative. Free state filing income tax If you are entitled to claim an exemption for a dependent, that dependent cannot claim a personal exemption on his or her own tax return. Free state filing income tax Phaseout of exemptions — Your deduction is reduced if your adjusted gross income is more than a certain amount. Free state filing income tax Social security number (SSN) requirement for dependents — You must list the SSN of any dependent for whom you claim an exemption. Free state filing income tax Deduction. Free state filing income tax   Exemptions reduce your taxable income. Free state filing income tax You can deduct $3,900 for each exemption you claim in 2013. Free state filing income tax But you may lose at least part of the dollar amount of your exemptions if your adjusted gross income is more than a certain amount. Free state filing income tax See Phaseout of Exemptions , later. Free state filing income tax How to claim exemptions. Free state filing income tax    How you claim an exemption on your tax return depends on which form you file. Free state filing income tax    If you file Form 1040EZ, the exemption amount is combined with the standard deduction amount and entered on line 5. Free state filing income tax    If you file Form 1040A, complete lines 6a through 6d. Free state filing income tax The total number of exemptions you can claim is the total in the box on line 6d. Free state filing income tax Also complete line 26. Free state filing income tax   If you file Form 1040, complete lines 6a through 6d. Free state filing income tax The total number of exemptions you can claim is the total in the box on line 6d. Free state filing income tax Also complete line 42. Free state filing income tax Useful Items - You may want to see: Publication 501 Exemptions, Standard Deduction, and Filing Information Form (and Instructions) 2120 Multiple Support Declaration 8332 Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent Exemptions There are two types of exemptions you may be able to take: Personal exemptions for yourself and your spouse, and Exemptions for dependents (dependency exemptions). Free state filing income tax While each is worth the same amount ($3,900 for 2013), different rules apply to each type. Free state filing income tax Personal Exemptions You are generally allowed one exemption for yourself. Free state filing income tax If you are married, you may be allowed one exemption for your spouse. Free state filing income tax These are called personal exemptions. Free state filing income tax Your Own Exemption You can take one exemption for yourself unless you can be claimed as a dependent by another taxpayer. Free state filing income tax If another taxpayer is entitled to claim you as a dependent, you cannot take an exemption for yourself even if the other taxpayer does not actually claim you as a dependent. Free state filing income tax Your Spouse's Exemption Your spouse is never considered your dependent. Free state filing income tax Joint return. Free state filing income tax   On a joint return you can claim one exemption for yourself and one for your spouse. Free state filing income tax Separate return. Free state filing income tax   If you file a separate return, you can claim an exemption for your spouse only if your spouse had no gross income, is not filing a return, and was not the dependent of another taxpayer. Free state filing income tax This is true even if the other taxpayer does not actually claim your spouse as a dependent. Free state filing income tax You can claim an exemption for your spouse even if he or she is a nonresident alien; in that case, your spouse must have no gross income for U. Free state filing income tax S. Free state filing income tax tax purposes, must not be filing a return, and must not be the dependent of another taxpayer. Free state filing income tax Death of spouse. Free state filing income tax   If your spouse died during the year and you file a joint return for yourself and your deceased spouse, you generally can claim your spouse's exemption under the rules just explained in Joint return . Free state filing income tax If you file a separate return for the year, you may be able to claim your spouse's exemption under the rules just described in Separate return . Free state filing income tax   If you remarried during the year, you cannot take an exemption for your deceased spouse. Free state filing income tax   If you are a surviving spouse without gross income and you remarry in the year your spouse died, you can be claimed as an exemption on both the final separate return of your deceased spouse and the separate return of your new spouse for that year. Free state filing income tax If you file a joint return with your new spouse, you can be claimed as an exemption only on that return. Free state filing income tax Divorced or separated spouse. Free state filing income tax   If you obtained a final decree of divorce or separate maintenance during the year, you cannot take your former spouse's exemption. Free state filing income tax This rule applies even if you provided all of your former spouse's support. Free state filing income tax Exemptions for Dependents You are allowed one exemption for each person you can claim as a dependent. Free state filing income tax You can claim an exemption for a dependent even if your dependent files a return. Free state filing income tax The term “dependent” means: A qualifying child, or A qualifying relative. Free state filing income tax The terms “ qualifying child ” and “ qualifying relative ” are defined later. Free state filing income tax You can claim an exemption for a qualifying child or qualifying relative only if these three tests are met. Free state filing income tax Dependent taxpayer test. Free state filing income tax Joint return test. Free state filing income tax Citizen or resident test. Free state filing income tax These three tests are explained in detail later. Free state filing income tax All the requirements for claiming an exemption for a dependent are summarized in Table 3-1. Free state filing income tax Table 3-1. Free state filing income tax Overview of the Rules for Claiming an Exemption for a Dependent Caution. Free state filing income tax This table is only an overview of the rules. Free state filing income tax For details, see the rest of this chapter. Free state filing income tax You cannot claim any dependents if you (or your spouse, if filing jointly) could be claimed as a dependent by another taxpayer. Free state filing income tax   You cannot claim a married person who files a joint return as a dependent unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid. Free state filing income tax   You cannot claim a person as a dependent unless that person is a U. Free state filing income tax S. Free state filing income tax citizen, U. Free state filing income tax S. Free state filing income tax resident alien, U. Free state filing income tax S. Free state filing income tax national, or a resident of Canada or Mexico. Free state filing income tax 1  You cannot claim a person as a dependent unless that person is your qualifying child or qualifying relative. Free state filing income tax   Tests To Be a Qualifying Child   Tests To Be a Qualifying Relative The child must be your son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them. Free state filing income tax   The child must be (a) under age 19 at the end of the year and younger than you (or your spouse, if filing jointly), (b) under age 24 at the end of the year, a student, and younger than you (or your spouse, if filing jointly), or (c) any age if permanently and totally disabled. Free state filing income tax   The child must have lived with you for more than half of the year. Free state filing income tax 2  The child must not have provided more than half of his or her own support for the year. Free state filing income tax   The child is not filing a joint return for the year (unless that return is filed only to get a refund of income tax withheld or estimated tax paid). Free state filing income tax  If the child meets the rules to be a qualifying child of more than one person, only one person can actually treat the child as a qualifying child. Free state filing income tax See the Special Rule for Qualifying Child of More Than One Person to find out which person is the person entitled to claim the child as a qualifying child. Free state filing income tax   The person cannot be your qualifying child or the qualifying child of any other taxpayer. Free state filing income tax   The person either (a) must be related to you in one of the ways listed under Relatives who do not have to live with you , or (b) must live with you all year as a member of your household2 (and your relationship must not violate local law). Free state filing income tax   The person's gross income for the year must be less than $3,900. Free state filing income tax 3  You must provide more than half of the person's total support for the year. Free state filing income tax 4  1There is an exception for certain adopted children. Free state filing income tax 2There are exceptions for temporary absences, children who were born or died during the year, children of divorced or separated parents (or parents who live apart), and kidnapped children. Free state filing income tax 3There is an exception if the person is disabled and has income from a sheltered workshop. Free state filing income tax 4There are exceptions for multiple support agreements, children of divorced or separated parents (or parents who live apart), and kidnapped children. Free state filing income tax Dependent not allowed a personal exemption. Free state filing income tax If you can claim an exemption for your dependent, the dependent cannot claim his or her own personal exemption on his or her own tax return. Free state filing income tax This is true even if you do not claim the dependent's exemption on your return. Free state filing income tax It is also true if the dependent's exemption on your return is reduced or eliminated under the phaseout rule described under Phaseout of Exemptions, later. Free state filing income tax Housekeepers, maids, or servants. Free state filing income tax   If these people work for you, you cannot claim exemptions for them. Free state filing income tax Child tax credit. Free state filing income tax   You may be entitled to a child tax credit for each qualifying child who was under age 17 at the end of the year if you claimed an exemption for that child. Free state filing income tax For more information, see chapter 34. Free state filing income tax Dependent Taxpayer Test If you can be claimed as a dependent by another person, you cannot claim anyone else as a dependent. Free state filing income tax Even if you have a qualifying child or qualifying relative, you cannot claim that person as a dependent. Free state filing income tax If you are filing a joint return and your spouse can be claimed as a dependent by someone else, you and your spouse cannot claim any dependents on your joint return. Free state filing income tax Joint Return Test You generally cannot claim a married person as a dependent if he or she files a joint return. Free state filing income tax Exception. Free state filing income tax   You can claim an exemption for a person who files a joint return if that person and his or her spouse file the joint return only to claim a refund of income tax withheld or estimated tax paid. Free state filing income tax Example 1—child files joint return. Free state filing income tax You supported your 18-year-old daughter, and she lived with you all year while her husband was in the Armed Forces. Free state filing income tax He earned $25,000 for the year. Free state filing income tax The couple files a joint return. Free state filing income tax You cannot take an exemption for your daughter. Free state filing income tax Example 2—child files joint return only as claim for refund of withheld tax. Free state filing income tax Your 18-year-old son and his 17-year-old wife had $800 of wages from part-time jobs and no other income. Free state filing income tax Neither is required to file a tax return. Free state filing income tax They do not have a child. Free state filing income tax Taxes were taken out of their pay so they filed a joint return only to get a refund of the withheld taxes. Free state filing income tax The exception to the joint return test applies, so you are not disqualified from claiming an exemption for each of them just because they file a joint return. Free state filing income tax You can claim exemptions for each of them if all the other tests to do so are met. Free state filing income tax Example 3—child files joint return to claim American opportunity credit. Free state filing income tax The facts are the same as in Example 2 except no taxes were taken out of your son's pay. Free state filing income tax He and his wife are not required to file a tax return. Free state filing income tax However, they file a joint return to claim an American opportunity credit of $124 and get a refund of that amount. Free state filing income tax Because claiming the American opportunity credit is their reason for filing the return, they are not filing it only to get a refund of income tax withheld or estimated tax paid. Free state filing income tax The exception to the joint return test does not apply, so you cannot claim an exemption for either of them. Free state filing income tax Citizen or Resident Test You cannot claim a person as a dependent unless that person is a U. Free state filing income tax S. Free state filing income tax citizen, U. Free state filing income tax S. Free state filing income tax resident alien, U. Free state filing income tax S. Free state filing income tax national, or a resident of Canada or Mexico. Free state filing income tax However, there is an exception for certain adopted children, as explained next. Free state filing income tax Exception for adopted child. Free state filing income tax   If you are a U. Free state filing income tax S. Free state filing income tax citizen or U. Free state filing income tax S. Free state filing income tax national who has legally adopted a child who is not a U. Free state filing income tax S. Free state filing income tax citizen, U. Free state filing income tax S. Free state filing income tax resident alien, or U. Free state filing income tax S. Free state filing income tax national, this test is met if the child lived with you as a member of your household all year. Free state filing income tax This exception also applies if the child was lawfully placed with you for legal adoption. Free state filing income tax Child's place of residence. Free state filing income tax   Children usually are citizens or residents of the country of their parents. Free state filing income tax   If you were a U. Free state filing income tax S. Free state filing income tax citizen when your child was born, the child may be a U. Free state filing income tax S. Free state filing income tax citizen and meet this test even if the other parent was a nonresident alien and the child was born in a foreign country. Free state filing income tax Foreign students' place of residence. Free state filing income tax   Foreign students brought to this country under a qualified international education exchange program and placed in American homes for a temporary period generally are not U. Free state filing income tax S. Free state filing income tax residents and do not meet this test. Free state filing income tax You cannot claim an exemption for them. Free state filing income tax However, if you provided a home for a foreign student, you may be able to take a charitable contribution deduction. Free state filing income tax See Expenses Paid for Student Living With You in chapter 24. Free state filing income tax U. Free state filing income tax S. Free state filing income tax national. Free state filing income tax   A U. Free state filing income tax S. Free state filing income tax national is an individual who, although not a U. Free state filing income tax S. Free state filing income tax citizen, owes his or her allegiance to the United States. Free state filing income tax U. Free state filing income tax S. Free state filing income tax nationals include American Samoans and Northern Mariana Islanders who chose to become U. Free state filing income tax S. Free state filing income tax nationals instead of U. Free state filing income tax S. Free state filing income tax citizens. Free state filing income tax Qualifying Child Five tests must be met for a child to be your qualifying child. Free state filing income tax The five tests are: Relationship, Age, Residency, Support, and Joint return. Free state filing income tax These tests are explained next. Free state filing income tax If a child meets the five tests to be the qualifying child of more than one person, a special rule applies to determine which person can actually treat the child as a qualifying child. Free state filing income tax See Special Rule for Qualifying Child of More Than One Person, later. Free state filing income tax Relationship Test To meet this test, a child must be: Your son, daughter, stepchild, foster child, or a descendant (for example, your grandchild) of any of them, or Your brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant (for example, your niece or nephew) of any of them. Free state filing income tax Adopted child. Free state filing income tax   An adopted child is always treated as your own child. Free state filing income tax The term “adopted child” includes a child who was lawfully placed with you for legal adoption. Free state filing income tax Foster child. Free state filing income tax   A foster child is an individual who is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction. Free state filing income tax Age Test To meet this test, a child must be: Under age 19 at the end of the year and younger than you (or your spouse, if filing jointly), A student under age 24 at the end of the year and younger than you (or your spouse, if filing jointly), or Permanently and totally disabled at any time during the year, regardless of age. Free state filing income tax Example. Free state filing income tax Your son turned 19 on December 10. Free state filing income tax Unless he was permanently and totally disabled or a student, he does not meet the age test because, at the end of the year, he was not under age 19. Free state filing income tax Child must be younger than you or spouse. Free state filing income tax   To be your qualifying child, a child who is not permanently and totally disabled must be younger than you. Free state filing income tax However, if you are married filing jointly, the child must be younger than you or your spouse but does not have to be younger than both of you. Free state filing income tax Example 1—child not younger than you or spouse. Free state filing income tax Your 23-year-old brother, who is a student and unmarried, lives with you and your spouse. Free state filing income tax He is not disabled. Free state filing income tax Both you and your spouse are 21 years old, and you file a joint return. Free state filing income tax Your brother is not your qualifying child because he is not younger than you or your spouse. Free state filing income tax Example 2—child younger than your spouse but not younger than you. Free state filing income tax The facts are the same as in Example 1 except your spouse is 25 years old. Free state filing income tax Because your brother is younger than your spouse, and you and your spouse are filing a joint return, your brother is your qualifying child, even though he is not younger than you. Free state filing income tax Student defined. Free state filing income tax   To qualify as a student, your child must be, during some part of each of any 5 calendar months of the year: A full-time student at a school that has a regular teaching staff, course of study, and a regularly enrolled student body at the school, or A student taking a full-time, on-farm training course given by a school described in (1), or by a state, county, or local government agency. Free state filing income tax The 5 calendar months do not have to be consecutive. Free state filing income tax Full-time student. Free state filing income tax   A full-time student is a student who is enrolled for the number of hours or courses the school considers to be full-time attendance. Free state filing income tax School defined. Free state filing income tax   A school can be an elementary school, junior or senior high school, college, university, or technical, trade, or mechanical school. Free state filing income tax However, an on-the-job training course, correspondence school, or school offering courses only through the Internet does not count as a school. Free state filing income tax Vocational high school students. Free state filing income tax   Students who work on “co-op” jobs in private industry as a part of a school's regular course of classroom and practical training are considered full-time students. Free state filing income tax Permanently and totally disabled. Free state filing income tax   Your child is permanently and totally disabled if both of the following apply. Free state filing income tax He or she cannot engage in any substantial gainful activity because of a physical or mental condition. Free state filing income tax A doctor determines the condition has lasted or can be expected to last continuously for at least a year or can lead to death. Free state filing income tax Residency Test To meet this test, your child must have lived with you for more than half the year. Free state filing income tax There are exceptions for temporary absences, children who were born or died during the year, kidnapped children, and children of divorced or separated parents. Free state filing income tax Temporary absences. Free state filing income tax   Your child is considered to have lived with you during periods of time when one of you, or both, are temporarily absent due to special circumstances such as: Illness, Education, Business, Vacation, or Military service. Free state filing income tax Your child is also considered to have lived with you during any required hospital stay following birth, as long as the child would have lived with you during that time but for the hospitalization. Free state filing income tax Death or birth of child. Free state filing income tax   A child who was born or died during the year is treated as having lived with you more than half of the year if your home was the child's home more than half of the time he or she was alive during the year. Free state filing income tax Child born alive. Free state filing income tax   You may be able to claim an exemption for a child born alive during the year, even if the child lived only for a moment. Free state filing income tax State or local law must treat the child as having been born alive. Free state filing income tax There must be proof of a live birth shown by an official document, such as a birth certificate. Free state filing income tax The child must be your qualifying child or qualifying relative, and all the other tests to claim an exemption for a dependent must be met. Free state filing income tax Stillborn child. Free state filing income tax   You cannot claim an exemption for a stillborn child. Free state filing income tax Kidnapped child. Free state filing income tax   You may be able to treat your child as meeting the residency test even if the child has been kidnapped. Free state filing income tax See Publication 501 for details. Free state filing income tax Children of divorced or separated parents (or parents who live apart). Free state filing income tax   In most cases, because of the residency test, a child of divorced or separated parents is the qualifying child of the custodial parent. Free state filing income tax However, the child will be treated as the qualifying child of the noncustodial parent if all four of the following statements are true. Free state filing income tax The parents: Are divorced or legally separated under a decree of divorce or separate maintenance, Are separated under a written separation agreement, or Lived apart at all times during the last 6 months of the year, whether or not they are or were married. Free state filing income tax The child received over half of his or her support for the year from the parents. Free state filing income tax The child is in the custody of one or both parents for more than half of the year. Free state filing income tax Either of the following statements is true. Free state filing income tax The custodial parent signs a written declaration, discussed later, that he or she will not claim the child as a dependent for the year, and the noncustodial parent attaches this written declaration to his or her return. Free state filing income tax (If the decree or agreement went into effect after 1984 and before 2009, see Post-1984 and pre-2009 divorce decree or separation agreement , later. Free state filing income tax If the decree or agreement went into effect after 2008, see Post-2008 divorce decree or separation agreement , later. Free state filing income tax ) A pre-1985 decree of divorce or separate maintenance or written separation agreement that applies to 2013 states that the noncustodial parent can claim the child as a dependent, the decree or agreement was not changed after 1984 to say the noncustodial parent cannot claim the child as a dependent, and the noncustodial parent provides at least $600 for the child's support during the year. Free state filing income tax Custodial parent and noncustodial parent. Free state filing income tax   The custodial parent is the parent with whom the child lived for the greater number of nights during the year. Free state filing income tax The other parent is the noncustodial parent. Free state filing income tax   If the parents divorced or separated during the year and the child lived with both parents before the separation, the custodial parent is the one with whom the child lived for the greater number of nights during the rest of the year. Free state filing income tax   A child is treated as living with a parent for a night if the child sleeps: At that parent's home, whether or not the parent is present, or In the company of the parent, when the child does not sleep at a parent's home (for example, the parent and child are on vacation together). Free state filing income tax Equal number of nights. Free state filing income tax   If the child lived with each parent for an equal number of nights during the year, the custodial parent is the parent with the higher adjusted gross income (AGI). Free state filing income tax December 31. Free state filing income tax   The night of December 31 is treated as part of the year in which it begins. Free state filing income tax For example, December 31, 2013, is treated as part of 2013. Free state filing income tax Emancipated child. Free state filing income tax   If a child is emancipated under state law, the child is treated as not living with either parent. Free state filing income tax See Examples 5 and 6. Free state filing income tax Absences. Free state filing income tax   If a child was not with either parent on a particular night (because, for example, the child was staying at a friend's house), the child is treated as living with the parent with whom the child normally would have lived for that night, except for the absence. Free state filing income tax But if it cannot be determined with which parent the child normally would have lived or if the child would not have lived with either parent that night, the child is treated as not living with either parent that night. Free state filing income tax Parent works at night. Free state filing income tax   If, due to a parent's nighttime work schedule, a child lives for a greater number of days, but not nights, with the parent who works at night, that parent is treated as the custodial parent. Free state filing income tax On a school day, the child is treated as living at the primary residence registered with the school. Free state filing income tax Example 1—child lived with one parent for a greater number of nights. Free state filing income tax You and your child’s other parent are divorced. Free state filing income tax In 2013, your child lived with you 210 nights and with the other parent 155 nights. Free state filing income tax You are the custodial parent. Free state filing income tax Example 2—child is away at camp. Free state filing income tax In 2013, your daughter lives with each parent for alternate weeks. Free state filing income tax In the summer, she spends 6 weeks at summer camp. Free state filing income tax During the time she is at camp, she is treated as living with you for 3 weeks and with her other parent, your ex-spouse, for 3 weeks because this is how long she would have lived with each parent if she had not attended summer camp. Free state filing income tax Example 3—child lived same number of nights with each parent. Free state filing income tax Your son lived with you 180 nights during the year and lived the same number of nights with his other parent, your ex-spouse. Free state filing income tax Your AGI is $40,000. Free state filing income tax Your ex-spouse's AGI is $25,000. Free state filing income tax You are treated as your son's custodial parent because you have the higher AGI. Free state filing income tax Example 4—child is at parent’s home but with other parent. Free state filing income tax Your son normally lives with you during the week and with his other parent, your ex-spouse, every other weekend. Free state filing income tax You become ill and are hospitalized. Free state filing income tax The other parent lives in your home with your son for 10 consecutive days while you are in the hospital. Free state filing income tax Your son is treated as living with you during this 10-day period because he was living in your home. Free state filing income tax Example 5—child emancipated in May. Free state filing income tax When your son turned age 18 in May 2013, he became emancipated under the law of the state where he lives. Free state filing income tax As a result, he is not considered in the custody of his parents for more than half of the year. Free state filing income tax The special rule for children of divorced or separated parents does not apply. Free state filing income tax Example 6—child emancipated in August. Free state filing income tax Your daughter lives with you from January 1, 2013, until May 31, 2013, and lives with her other parent, your ex-spouse, from June 1, 2013, through the end of the year. Free state filing income tax She turns 18 and is emancipated under state law on August 1, 2013. Free state filing income tax Because she is treated as not living with either parent beginning on August 1, she is treated as living with you the greater number of nights in 2013. Free state filing income tax You are the custodial parent. Free state filing income tax Written declaration. Free state filing income tax    The custodial parent may use either Form 8332 or a similar statement (containing the same information required by the form) to make the written declaration to release the exemption to the noncustodial parent. Free state filing income tax The noncustodial parent must attach a copy of the form or statement to his or her tax return. Free state filing income tax   The exemption can be released for 1 year, for a number of specified years (for example, alternate years), or for all future years, as specified in the declaration. Free state filing income tax Post-1984 and pre-2009 divorce decree or separation agreement. Free state filing income tax   If the divorce decree or separation agreement went into effect after 1984 and before 2009, the noncustodial parent may be able to attach certain pages from the decree or agreement instead of Form 8332. Free state filing income tax The decree or agreement must state all three of the following. Free state filing income tax The noncustodial parent can claim the child as a dependent without regard to any condition, such as payment of support. Free state filing income tax The custodial parent will not claim the child as a dependent for the year. Free state filing income tax The years for which the noncustodial parent, rather than the custodial parent, can claim the child as a dependent. Free state filing income tax   The noncustodial parent must attach all of the following pages of the decree or agreement to his or her tax return. Free state filing income tax The cover page (write the other parent's social security number on this page). Free state filing income tax The pages that include all of the information identified in items (1) through (3) above. Free state filing income tax The signature page with the other parent's signature and the date of the agreement. Free state filing income tax Post-2008 divorce decree or separation agreement. Free state filing income tax   The noncustodial parent cannot attach pages from the decree or agreement instead of Form 8332 if the decree or agreement went into effect after 2008. Free state filing income tax The custodial parent must sign either Form 8332 or a similar statement whose only purpose is to release the custodial parent's claim to an exemption for a child, and the noncustodial parent must attach a copy to his or her return. Free state filing income tax The form or statement must release the custodial parent's claim to the child without any conditions. Free state filing income tax For example, the release must not depend on the noncustodial parent paying support. Free state filing income tax    The noncustodial parent must attach the required information even if it was filed with a return in an earlier year. Free state filing income tax Revocation of release of claim to an exemption. Free state filing income tax   The custodial parent can revoke a release of claim to exemption that he or she previously released to the noncustodial parent on Form 8332 (or a similar statement). Free state filing income tax For the revocation to be effective for 2013, the custodial parent must have given (or made reasonable efforts to give) written notice of the revocation to the noncustodial parent in 2012 or earlier. Free state filing income tax The custodial parent can use Part III of Form 8332 for this purpose and must attach a copy of the revocation to his or her return for each tax year he or she claims the child as a dependent as a result of the revocation. Free state filing income tax Remarried parent. Free state filing income tax   If you remarry, the support provided by your new spouse is treated as provided by you. Free state filing income tax Parents who never married. Free state filing income tax   This special rule for divorced or separated parents also applies to parents who never married, and who lived apart at all times during the last 6 months of the year. Free state filing income tax Support Test (To Be a Qualifying Child) To meet this test, the child cannot have provided more than half of his or her own support for the year. Free state filing income tax This test is different from the support test to be a qualifying relative, which is described later. Free state filing income tax However, to see what is or is not support, see Support Test (To Be a Qualifying Relative) , later. Free state filing income tax If you are not sure whether a child provided more than half of his or her own support, you may find Worksheet 3-1 helpful. Free state filing income tax Worksheet 3-1. Free state filing income tax Worksheet for Determining Support Funds Belonging to the Person You Supported       1. Free state filing income tax Enter the total funds belonging to the person you supported, including income received (taxable and nontaxable) and amounts borrowed during the year, plus the amount in savings and other accounts at the beginning of the year. Free state filing income tax Do not include funds provided by the state; include those amounts on line 23 instead 1. Free state filing income tax     2. Free state filing income tax Enter the amount on line 1 that was used for the person's support 2. Free state filing income tax     3. Free state filing income tax Enter the amount on line 1 that was used for other purposes 3. Free state filing income tax     4. Free state filing income tax Enter the total amount in the person's savings and other accounts at the end of the year 4. Free state filing income tax     5. Free state filing income tax Add lines 2 through 4. Free state filing income tax (This amount should equal line 1. Free state filing income tax ) 5. Free state filing income tax     Expenses for Entire Household (where the person you supported lived)       6. Free state filing income tax Lodging (complete line 6a or 6b):         a. Free state filing income tax Enter the total rent paid 6a. Free state filing income tax       b. Free state filing income tax Enter the fair rental value of the home. Free state filing income tax If the person you supported owned the home,  also include this amount in line 21 6b. Free state filing income tax     7. Free state filing income tax Enter the total food expenses 7. Free state filing income tax     8. Free state filing income tax Enter the total amount of utilities (heat, light, water, etc. Free state filing income tax not included in line 6a or 6b) 8. Free state filing income tax     9. Free state filing income tax Enter the total amount of repairs (not included in line 6a or 6b) 9. Free state filing income tax     10. Free state filing income tax Enter the total of other expenses. Free state filing income tax Do not include expenses of maintaining the home, such as mortgage interest, real estate taxes, and insurance 10. Free state filing income tax     11. Free state filing income tax Add lines 6a through 10. Free state filing income tax These are the total household expenses 11. Free state filing income tax     12. Free state filing income tax Enter total number of persons who lived in the household 12. Free state filing income tax     Expenses for the Person You Supported       13. Free state filing income tax Divide line 11 by line 12. Free state filing income tax This is the person's share of the household expenses 13. Free state filing income tax     14. Free state filing income tax Enter the person's total clothing expenses 14. Free state filing income tax     15. Free state filing income tax Enter the person's total education expenses 15. Free state filing income tax     16. Free state filing income tax Enter the person's total medical and dental expenses not paid for or reimbursed by insurance 16. Free state filing income tax     17. Free state filing income tax Enter the person's total travel and recreation expenses 17. Free state filing income tax     18. Free state filing income tax Enter the total of the person's other expenses 18. Free state filing income tax     19. Free state filing income tax Add lines 13 through 18. Free state filing income tax This is the total cost of the person's support for the year 19. Free state filing income tax     Did the Person Provide More Than Half of His or Her Own Support?       20. Free state filing income tax Multiply line 19 by 50% (. Free state filing income tax 50) 20. Free state filing income tax     21. Free state filing income tax Enter the amount from line 2, plus the amount from line 6b if the person you supported owned  the home. Free state filing income tax This is the amount the person provided for his or her own support 21. Free state filing income tax     22. Free state filing income tax Is line 21 more than line 20?   No. Free state filing income tax You meet the support test for this person to be your qualifying child. Free state filing income tax If this person also meets the other tests to be a qualifying child, stop here; do not complete lines 23–26. Free state filing income tax Otherwise, go to line 23 and fill out the rest of the worksheet to determine if this person is your qualifying relative. Free state filing income tax    Yes. Free state filing income tax You do not meet the support test for this person to be either your qualifying child or your qualifying relative. Free state filing income tax Stop here. Free state filing income tax        Did You Provide More Than Half?       23. Free state filing income tax Enter the amount others provided for the person's support. Free state filing income tax Include amounts provided by state, local, and other welfare societies or agencies. Free state filing income tax Do not include any amounts included on line 1 23. Free state filing income tax     24. Free state filing income tax Add lines 21 and 23 24. Free state filing income tax     25. Free state filing income tax Subtract line 24 from line 19. Free state filing income tax This is the amount you provided for the person's support 25. Free state filing income tax     26. Free state filing income tax Is line 25 more than line 20?   Yes. Free state filing income tax You meet the support test for this person to be your qualifying relative. Free state filing income tax    No. Free state filing income tax You do not meet the support test for this person to be your qualifying relative. Free state filing income tax You cannot claim an exemption for this person unless you can do so under a multiple support agreement, the support test for children of divorced or separated parents, or the special rule for kidnapped children. Free state filing income tax See Multiple Support Agreement or Support Test for Children of Divorced or Separated Parents (or Parents Who Live Apart) , or Kidnapped child under Qualifying Relative. Free state filing income tax   Example. Free state filing income tax You provided $4,000 toward your 16-year-old son's support for the year. Free state filing income tax He has a part-time job and provided $6,000 to his own support. Free state filing income tax He provided more than half of his own support for the year. Free state filing income tax He is not your qualifying child. Free state filing income tax Foster care payments and expenses. Free state filing income tax   Payments you receive for the support of a foster child from a child placement agency are considered support provided by the agency. Free state filing income tax Similarly, payments you receive for the support of a foster child from a state or county are considered support provided by the state or county. Free state filing income tax   If you are not in the trade or business of providing foster care and your unreimbursed out-of-pocket expenses in caring for a foster child were mainly to benefit an organization qualified to receive deductible charitable contributions, the expenses are deductible as charitable contributions but are not considered support you provided. Free state filing income tax For more information about the deduction for charitable contributions, see chapter 24. Free state filing income tax If your unreimbursed expenses are not deductible as charitable contributions, they may qualify as support you provided. Free state filing income tax   If you are in the trade or business of providing foster care, your unreimbursed expenses are not considered support provided by you. Free state filing income tax Example 1. Free state filing income tax Lauren, a foster child, lived with Mr. Free state filing income tax and Mrs. Free state filing income tax Smith for the last 3 months of the year. Free state filing income tax The Smiths cared for Lauren because they wanted to adopt her (although she had not been placed with them for adoption). Free state filing income tax They did not care for her as a trade or business or to benefit the agency that placed her in their home. Free state filing income tax The Smiths' unreimbursed expenses are not deductible as charitable contributions but are considered support they provided for Lauren. Free state filing income tax Example 2. Free state filing income tax You provided $3,000 toward your 10-year-old foster child's support for the year. Free state filing income tax The state government provided $4,000, which is considered support provided by the state, not by the child. Free state filing income tax See Support provided by the state (welfare, food stamps, housing, etc. Free state filing income tax ) , later. Free state filing income tax Your foster child did not provide more than half of her own support for the year. Free state filing income tax Scholarships. Free state filing income tax   A scholarship received by a child who is a student is not taken into account in determining whether the child provided more than half of his or her own support. Free state filing income tax Joint Return Test (To Be a Qualifying Child) To meet this test, the child cannot file a joint return for the year. Free state filing income tax Exception. Free state filing income tax   An exception to the joint return test applies if your child and his or her spouse file a joint return only to claim a refund of income tax withheld or estimated tax paid. Free state filing income tax Example 1—child files joint return. Free state filing income tax You supported your 18-year-old daughter, and she lived with you all year while her husband was in the Armed Forces. Free state filing income tax He earned $25,000 for the year. Free state filing income tax The couple files a joint return. Free state filing income tax Because your daughter and her husband file a joint return, she is not your qualifying child. Free state filing income tax Example 2—child files joint return only as a claim for refund of withheld tax. Free state filing income tax Your 18-year-old son and his 17-year-old wife had $800 of wages from part-time jobs and no other income. Free state filing income tax Neither is required to file a tax return. Free state filing income tax They do not have a child. Free state filing income tax Taxes were taken out of their pay so they filed a joint return only to get a refund of the withheld taxes. Free state filing income tax The exception to the joint return test applies, so your son may be your qualifying child if all the other tests are met. Free state filing income tax Example 3—child files joint return to claim American opportunity credit. Free state filing income tax The facts are the same as in Example 2 except no taxes were taken out of your son's pay. Free state filing income tax He and his wife were not required to file a tax return. Free state filing income tax However, they file a joint return to claim an American opportunity credit of $124 and get a refund of that amount. Free state filing income tax Because claiming the American opportunity credit is their reason for filing the return, they are not filing it only to get a refund of income tax withheld or estimated tax paid. Free state filing income tax The exception to the joint return test does not apply, so your son is not your qualifying child. Free state filing income tax Special Rule for Qualifying Child of More Than One Person If your qualifying child is not a qualifying child of anyone else, this special rule does not apply to you and you do not need to read about it. Free state filing income tax This is also true if your qualifying child is not a qualifying child of anyone else except your spouse with whom you file a joint return. Free state filing income tax If a child is treated as the qualifying child of the noncustodial parent under the rules for children of divorced or separated parents (or parents who live apart) described earlier, see Applying this special rule to divorced or separated parents (or parents who live apart), later. Free state filing income tax Sometimes, a child meets the relationship, age, residency, support, and joint return tests to be a qualifying child of more than one person. Free state filing income tax Although the child is a qualifying child of each of these persons, only one person can actually treat the child as a qualifying child to take all of the following tax benefits (provided the person is eligible for each benefit). Free state filing income tax The exemption for the child. Free state filing income tax The child tax credit. Free state filing income tax Head of household filing status. Free state filing income tax The credit for child and dependent care expenses. Free state filing income tax The exclusion from income for dependent care benefits. Free state filing income tax The earned income credit. Free state filing income tax The other person cannot take any of these benefits based on this qualifying child. Free state filing income tax In other words, you and the other person cannot agree to divide these benefits between you. Free state filing income tax The other person cannot take any of these tax benefits for a child unless he or she has a different qualifying child. Free state filing income tax Tiebreaker rules. Free state filing income tax   To determine which person can treat the child as a qualifying child to claim these six tax benefits, the following tiebreaker rules apply. Free state filing income tax If only one of the persons is the child's parent, the child is treated as the qualifying child of the parent. Free state filing income tax If the parents file a joint return together and can claim the child as a qualifying child, the child is treated as the qualifying child of the parents. Free state filing income tax If the parents do not file a joint return together but both parents claim the child as a qualifying child, the IRS will treat the child as the qualifying child of the parent with whom the child lived for the longer period of time during the year. Free state filing income tax If the child lived with each parent for the same amount of time, the IRS will treat the child as the qualifying child of the parent who had the higher adjusted gross income (AGI) for the year. Free state filing income tax If no parent can claim the child as a qualifying child, the child is treated as the qualifying child of the person who had the highest AGI for the year. Free state filing income tax If a parent can claim the child as a qualifying child but no parent does so claim the child, the child is treated as the qualifying child of the person who had the highest AGI for the year, but only if that person's AGI is higher than the highest AGI of any of the child's parents who can claim the child. Free state filing income tax If the child's parents file a joint return with each other, this rule can be applied by dividing the parents' combined AGI equally between the parents. Free state filing income tax See Example 6 . Free state filing income tax   Subject to these tiebreaker rules, you and the other person may be able to choose which of you claims the child as a qualifying child. Free state filing income tax Example 1—child lived with parent and grandparent. Free state filing income tax You and your 3-year-old daughter Jane lived with your mother all year. Free state filing income tax You are 25 years old, unmarried, and your AGI is $9,000. Free state filing income tax Your mother's AGI is $15,000. Free state filing income tax Jane's father did not live with you or your daughter. Free state filing income tax You have not signed Form 8332 (or a similar statement) to release the child's exemption to the noncustodial parent. Free state filing income tax Jane is a qualifying child of both you and your mother because she meets the relationship, age, residency, support, and joint return tests for both you and your mother. Free state filing income tax However, only one of you can claim her. Free state filing income tax Jane is not a qualifying child of anyone else, including her father. Free state filing income tax You agree to let your mother claim Jane. Free state filing income tax This means your mother can claim Jane as a qualifying child for all of the six tax benefits listed earlier, if she qualifies (and if you do not claim Jane as a qualifying child for any of those tax benefits). Free state filing income tax Example 2—parent has higher AGI than grandparent. Free state filing income tax The facts are the same as in Example 1 except your AGI is $18,000. Free state filing income tax Because your mother's AGI is not higher than yours, she cannot claim Jane. Free state filing income tax Only you can claim Jane. Free state filing income tax Example 3—two persons claim same child. Free state filing income tax The facts are the same as in Example 1 except that you and your mother both claim Jane as a qualifying child. Free state filing income tax In this case, you, as the child's parent, will be the only one allowed to claim Jane as a qualifying child. Free state filing income tax The IRS will disallow your mother's claim to the six tax benefits listed earlier unless she has another qualifying child. Free state filing income tax Example 4—qualifying children split between two persons. Free state filing income tax The facts are the same as in Example 1 except you also have two other young children who are qualifying children of both you and your mother. Free state filing income tax Only one of you can claim each child. Free state filing income tax However, if your mother's AGI is higher than yours, you can allow your mother to claim one or more of the children. Free state filing income tax For example, if you claim one child, your mother can claim the other two. Free state filing income tax Example 5—taxpayer who is a qualifying child. Free state filing income tax The facts are the same as in Example 1 except you are only 18 years old and did not provide more than half of your own support for the year. Free state filing income tax This means you are your mother's qualifying child. Free state filing income tax If she can claim you as a dependent, then you cannot claim your daughter as a dependent because of the Dependent Taxpayer Test explained earlier. Free state filing income tax Example 6—child lived with both parents and grandparent. Free state filing income tax The facts are the same as in Example 1 except you are married to your daughter's father. Free state filing income tax The two of you live together with your daughter and your mother, and have an AGI of $20,000 on a joint return. Free state filing income tax If you and your husband do not claim your daughter as a qualifying child, your mother can claim her instead. Free state filing income tax Even though the AGI on your joint return, $20,000, is more than your mother's AGI of $15,000, for this purpose each parent's AGI can be treated as $10,000, so your mother's $15,000 AGI is treated as higher than the highest AGI of any of the child's parents who can claim the child. Free state filing income tax Example 7—separated parents. Free state filing income tax You, your husband, and your 10-year-old son lived together until August 1, 2013, when your husband moved out of the household. Free state filing income tax In August and September, your son lived with you. Free state filing income tax For the rest of the year, your son lived with your husband, the boy's father. Free state filing income tax Your son is a qualifying child of both you and your husband because your son lived with each of you for more than half the year and because he met the relationship, age, support, and joint return tests for both of you. Free state filing income tax At the end of the year, you and your husband still were not divorced, legally separated, or separated under a written separation agreement, so the rule for children of divorced or separated parents (or parents who live apart) does not apply. Free state filing income tax You and your husband will file separate returns. Free state filing income tax Your husband agrees to let you treat your son as a qualifying child. Free state filing income tax This means, if your husband does not claim your son as a qualifying child, you can claim your son as a qualifying child for the dependency exemption, child tax credit, and exclusion for dependent care benefits (if you qualify for each of those tax benefits). Free state filing income tax However, you cannot claim head of household filing status because you and your husband did not live apart for the last 6 months of the year. Free state filing income tax As a result, your filing status is married filing separately, so you cannot claim the earned income credit or the credit for child and dependent care expenses. Free state filing income tax Example 8—separated parents claim same child. Free state filing income tax The facts are the same as in Example 7 except that you and your husband both claim your son as a qualifying child. Free state filing income tax In this case, only your husband will be allowed to treat your son as a qualifying child. Free state filing income tax This is because, during 2013, the boy lived with him longer than with you. Free state filing income tax If you claimed an exemption or the child tax credit for your son, the IRS will disallow your claim to both these tax benefits. Free state filing income tax If you do not have another qualifying child or dependent, the IRS will also disallow your claim to the exclusion for dependent care benefits. Free state filing income tax In addition, because you and your husband did not live apart for the last 6 months of the year, your husband cannot claim head of household filing status. Free state filing income tax As a result, his filing status is married filing separately, so he cannot claim the earned income credit or the credit for child and dependent care expenses. Free state filing income tax Example 9—unmarried parents. Free state filing income tax You, your 5-year-old son, and your son's father lived together all year. Free state filing income tax You and your son's father are not married. Free state filing income tax Your son is a qualifying child of both you and his father because he meets the relationship, age, residency, support, and joint return tests for both you and his father. Free state filing income tax Your AGI is $12,000 and your son's father's AGI is $14,000. Free state filing income tax Your son's father agrees to let you claim the child as a qualifying child. Free state filing income tax This means you can claim him as a qualifying child for the dependency exemption, child tax credit, head of household filing status, credit for child and dependent care expenses, exclusion for dependent care benefits, and the earned income credit, if you qualify for each of those tax benefits (and if your son's father does not, in fact, claim your son as a qualifying child for any of those tax benefits). Free state filing income tax Example 10—unmarried parents claim same child. Free state filing income tax The facts are the same as in Example 9 except that you and your son's father both claim your son as a qualifying child. Free state filing income tax In this case, only your son's father will be allowed to treat your son as a qualifying child. Free state filing income tax This is because his AGI, $14,000, is more than your AGI, $12,000. Free state filing income tax If you claimed an exemption or the child tax credit for your son, the IRS will disallow your claim to both these tax benefits. Free state filing income tax If you do not have another qualifying child or dependent, the IRS will also disallow your claim to the earned income credit, head of household filing status, the credit for child and dependent care expenses, and the exclusion for dependent care benefits. Free state filing income tax Example 11—child did not live with a parent. Free state filing income tax You and your 7-year-old niece, your sister's child, lived with your mother all year. Free state filing income tax You are 25 years old, and your AGI is $9,300. Free state filing income tax Your mother's AGI is $15,000. Free state filing income tax Your niece's parents file jointly, have an AGI of less than $9,000, and do not live with you or their child. Free state filing income tax Your niece is a qualifying child of both you and your mother because she meets the relationship, age, residency, support, and joint return tests for both you and your mother. Free state filing income tax However, only your mother can treat her as a qualifying child. Free state filing income tax This is because your mother's AGI, $15,000, is more than your AGI, $9,300. Free state filing income tax Applying this special rule to divorced or separated parents (or parents who live apart). Free state filing income tax   If a child is treated as the qualifying child of the noncustodial parent under the rules described earlier for children of divorced or separated parents (or parents who live apart), only the noncustodial parent can claim an exemption and the child tax credit for the child. Free state filing income tax However, the custodial parent, if eligible, or other eligible person can claim the child as a qualifying child for head of household filing status, the credit for child and dependent care expenses, the exclusion for dependent care benefits, and the earned income credit. Free state filing income tax If the child is the qualifying child of more than one person for these benefits, then the tiebreaker rules just explained determine which person can treat the child as a qualifying child. Free state filing income tax Example 1. Free state filing income tax You and your 5-year-old son lived all year with your mother, who paid the entire cost of keeping up the home. Free state filing income tax Your AGI is $10,000. Free state filing income tax Your mother's AGI is $25,000. Free state filing income tax Your son's father did not live with you or your son. Free state filing income tax Under the rules explained earlier for children of divorced or separated parents (or parents who live apart), your son is treated as the qualifying child of his father, who can claim an exemption and the child tax credit for him. Free state filing income tax Because of this, you cannot claim an exemption or the child tax credit for your son. Free state filing income tax However, your son's father cannot claim your son as a qualifying child for head of household filing status, the credit for child and dependent care expenses, the exclusion for dependent care benefits, or the earned income credit. Free state filing income tax You and your mother did not have any child care expenses or dependent care benefits, so neither of you can claim the credit for child and dependent care expenses or the exclusion for dependent care benefits. Free state filing income tax But the boy is a qualifying child of both you and your mother for head of household filing status and the earned income credit because he meets the relationship, age, residency, support, and joint return tests for both you and your mother. Free state filing income tax (Note: The support test does not apply for the earned income credit. Free state filing income tax ) However, you agree to let your mother claim your son. Free state filing income tax This means she can claim him for head of household filing status and the earned income credit if she qualifies for each and if you do not claim him as a qualifying child for the earned income credit. Free state filing income tax (You cannot claim head of household filing status because your mother paid the entire cost of keeping up the home. Free state filing income tax ) Example 2. Free state filing income tax The facts are the same as in Example 1 except your AGI is $25,000 and your mother's AGI is $21,000. Free state filing income tax Your mother cannot claim your son as a qualifying child for any purpose because her AGI is not higher than yours. Free state filing income tax Example 3. Free state filing income tax The facts are the same as in Example 1 except you and your mother both claim your son as a qualifying child for the earned income credit. Free state filing income tax Your mother also claims him as a qualifying child for head of household filing status. Free state filing income tax You, as the child's parent, will be the only one allowed to claim your son as a qualifying child for the earned income credit. Free state filing income tax The IRS will disallow your mother's claim to the earned income credit and head of household filing status unless she has another qualifying child. Free state filing income tax Qualifying Relative Four tests must be met for a person to be your qualifying relative. Free state filing income tax The four tests are: Not a qualifying child test, Member of household or relationship test, Gross income test, and Support test. Free state filing income tax Age. Free state filing income tax   Unlike a qualifying child, a qualifying relative can be any age. Free state filing income tax There is no age test for a qualifying relative. Free state filing income tax Kidnapped child. Free state filing income tax   You may be able to treat a child as your qualifying relative even if the child has been kidnapped. Free state filing income tax See Publication 501 for details. Free state filing income tax Not a Qualifying Child Test A child is not your qualifying relative if the child is your qualifying child or the qualifying child of any other taxpayer. Free state filing income tax Example 1. Free state filing income tax Your 22-year-old daughter, who is a student, lives with you and meets all the tests to be your qualifying child. Free state filing income tax She is not your qualifying relative. Free state filing income tax Example 2. Free state filing income tax Your 2-year-old son lives with your parents and meets all the tests to be their qualifying child. Free state filing income tax He is not your qualifying relative. Free state filing income tax Example 3. Free state filing income tax Your son lives with you but is not your qualifying child because he is 30 years old and does not meet the age test. Free state filing income tax He may be your qualifying relative if the gross income test and the support test are met. Free state filing income tax Example 4. Free state filing income tax Your 13-year-old grandson lived with his mother for 3 months, with his uncle for 4 months, and with you for 5 months during the year. Free state filing income tax He is not your qualifying child because he does not meet the residency test. Free state filing income tax He may be your qualifying relative if the gross income test and the support test are met. Free state filing income tax Child of person not required to file a return. Free state filing income tax   A child is not the qualifying child of any other taxpayer and so may qualify as your qualifying relative if the child's parent (or other person for whom the child is defined as a qualifying child) is not required to file an income tax return and either: Does not file an income tax return, or Files a return only to get a refund of income tax withheld or estimated tax paid. Free state filing income tax Example 1—return not required. Free state filing income tax You support an unrelated friend and her 3-year-old child, who lived with you all year in your home. Free state filing income tax Your friend has no gross income, is not required to file a 2013 tax return, and does not file a 2013 tax return. Free state filing income tax Both your friend and her child are your qualifying relatives if the support test is met. Free state filing income tax Example 2—return filed to claim refund. Free state filing income tax The facts are the same as in Example 1 except your friend had wages of $1,500 during the year and had income tax withheld from her wages. Free state filing income tax She files a return only to get a refund of the income tax withheld and does not claim the earned income credit or any other tax credits or deductions. Free state filing income tax Both your friend and her child are your qualifying relatives if the support test is met. Free state filing income tax Example 3—earned income credit claimed. Free state filing income tax The facts are the same as in Example 2 except your friend had wages of $8,000 during the year and claimed the earned income credit on her return. Free state filing income tax Your friend's child is the qualifying child of another taxpayer (your friend), so you cannot claim your friend's child as your qualifying relative. Free state filing income tax Child in Canada or Mexico. Free state filing income tax   You may be able to claim your child as a dependent even if the child lives in Canada or Mexico. Free state filing income tax If the child does not live with you, the child does not meet the residency test to be your qualifying child. Free state filing income tax However, the child may still be your qualifying relative. Free state filing income tax If the persons the child does live with are not U. Free state filing income tax S. Free state filing income tax citizens and have no U. Free state filing income tax S. Free state filing income tax gross income, those persons are not “taxpayers,” so the child is not the qualifying child of any other taxpayer. Free state filing income tax If the child is not the qualifying child of any other taxpayer, the child is your qualifying relative as long as the gross income test and the support test are met. Free state filing income tax   You cannot claim as a dependent a child who lives in a foreign country other than Canada or Mexico, unless the child is a U. Free state filing income tax S. Free state filing income tax citizen, U. Free state filing income tax S. Free state filing income tax resident alien, or U. Free state filing income tax S. Free state filing income tax national. Free state filing income tax There is an exception for certain adopted children who lived with you all year. Free state filing income tax See Citizen or Resident Test , earlier. Free state filing income tax Example. Free state filing income tax You provide all the support of your children, ages 6, 8, and 12, who live in Mexico with your mother and have no income. Free state filing income tax You are single and live in the United States. Free state filing income tax Your mother is not a U. Free state filing income tax S. Free state filing income tax citizen and has no U. Free state filing income tax S. Free state filing income tax income, so she is not a “taxpayer. Free state filing income tax ” Your children are not your qualifying children because they do not meet the residency test. Free state filing income tax But since they are not the qualifying children of any other taxpayer, they are your qualifying relatives and you can claim them as dependents. Free state filing income tax You may also be able to claim your mother as a dependent if the gross income and support tests are met. Free state filing income tax Member of Household or Relationship Test To meet this test, a person must either: Live with you all year as a member of your household, or Be related to you in one of the ways listed under Relatives who do not have to live with you . Free state filing income tax If at any time during the year the person was your spouse, that person cannot be your qualifying relative. Free state filing income tax However, see Personal Exemptions , earlier. Free state filing income tax Relatives who do not have to live with you. Free state filing income tax   A person related to you in any of the following ways does not have to live with you all year as a member of your household to meet this test. Free state filing income tax Your child, stepchild, foster child, or a descendant of any of them (for example, your grandchild). Free state filing income tax (A legally adopted child is considered your child. Free state filing income tax ) Your brother, sister, half brother, half sister, stepbrother, or stepsister. Free state filing income tax Your father, mother, grandparent, or other direct ancestor, but not foster parent. Free state filing income tax Your stepfather or stepmother. Free state filing income tax A son or daughter of your brother or sister. Free state filing income tax A son or daughter of your half brother or half sister. Free state filing income tax A brother or sister of your father or mother. Free state filing income tax Your son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Free state filing income tax Any of these relationships that were established by marriage are not ended by death or divorce. Free state filing income tax Example. Free state filing income tax You and your wife began supporting your wife's father, a widower, in 2006. Free state filing income tax Your wife died in 2012. Free state filing income tax Despite your wife's death, your father-in-law continues to meet this test, even if he does not live with you. Free state filing income tax You can claim him as a dependent if all other tests are met, including the gross income test and support test. Free state filing income tax Foster child. Free state filing income tax   A foster child is an individual who is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction. Free state filing income tax Joint return. Free state filing income tax   If you file a joint return, the person can be related to either you or your spouse. Free state filing income tax Also, the person does not need to be related to the spouse who provides support. Free state filing income tax   For example, your spouse's uncle who receives more than half of his support from you may be your qualifying relative, even though he does not live with you. Free state filing income tax However, if you and your spouse file separate returns, your spouse's uncle can be your qualifying relative only if he lives with you all year as a member of your household. Free state filing income tax Temporary absences. Free state filing income tax   A person is considered to live with you as a member of your household during periods of time when one of you, or both, are temporarily absent due to special circumstances such as: Illness, Education, Business, Vacation, or Military service. Free state filing income tax   If the person is placed in a nursing home for an indefinite period of time to receive constant medical care, the absence may be considered temporary. Free state filing income tax Death or birth. Free state filing income tax   A person who died during the year, but lived with you as a member of your household until death, will meet this test. Free state filing income tax The same is true for a child who was born during the year and lived with you as a member of your household for the rest of the year. Free state filing income tax The test is also met if a child lived with you as a member of your household except for any required hospital stay following birth. Free state filing income tax   If your dependent died during the year and you otherwise qualify to claim an exemption for the dependent, you can still claim the exemption. Free state filing income tax Example. Free state filing income tax Your dependent mother died on January 15. Free state filing income tax She met the tests to be your qualifying relative. Free state filing income tax The other tests to claim an exemption for a dependent were also met. Free state filing income tax You can claim an exemption for her on your return. Free state filing income tax Local law violated. Free state filing income tax   A person does not meet this test if at any time during the year the relationship between you and that person violates local law. Free state filing income tax Example. Free state filing income tax Your girlfriend lived with you as a member of your household all year. Free state filing income tax However, your relationship with her violated the laws of the state where you live, because she was married to someone else. Free state filing income tax Therefore, she does not meet this test and you cannot claim her as a dependent. Free state filing income tax Adopted child. Free state filing income tax   An adopted child is always treated as your own child. Free state filing income tax The term “adopted child” includes a child who was lawfully placed with you for legal adoption. Free state filing income tax Cousin. Free state filing income tax   Your cousin meets this test only if he or she lives with you all year as a member of your household. Free state filing income tax A cousin is a descendant of a brother or sister of your father or mother. Free state filing income tax Gross Income Test To meet this test, a person's gross income for the year must be less than $3,900. Free state filing income tax Gross income defined. Free state filing income tax   Gross income is all income in the form of money, property, and services that is not exempt from tax. Free state filing income tax   In a manufacturing, merchandising, or mining business, gross income is the total net sales minus the cost of goods sold, plus any miscellaneous income from the business. Free state filing income tax   Gross receipts from rental property are gross income. Free state filing income tax Do not deduct taxes, repairs, or other expenses, to determine the gross income from rental property. Free state filing income tax   Gross income includes a partner's share of the gross (not a share of the net) partnership income. Free state filing income tax    Gross income also includes all taxable unemployment compensation and certain scholarship and fellowship grants. Free state filing income tax Scholarships received by degree candidates and used for tuition, fees, supplies, books, and equipment required for particular courses generally are not included in gross income. Free state filing income tax For more information about scholarships, see chapter 12. Free state filing income tax   Tax-exempt income, such as certain social security benefits, is not included in gross income. Free state filing income tax Disabled dependent working at sheltered workshop. Free state filing income tax   For purposes of the gross income test, the gross income of an individual who is permanently and totally disabled at any time during the year does not include income for services the individual performs at a sheltered workshop. Free state filing income tax The availability of medical care at the workshop must be the main reason for the individual's presence there. Free state filing income tax Also, the income must come solely from activities at the workshop that are incident to this medical care. Free state filing income tax   A “sheltered workshop” is a school that: Provides special instruction or training designed to alleviate the disability of the individual, and Is operated by certain tax-exempt organizations, or by a state, a U. Free state filing income tax S. Free state filing income tax possession, a political subdivision of a state or possession, the United States, or the District of Columbia. Free state filing income tax “Permanently and totally disabled” has the same meaning here as under Qualifying Child, earlier. Free state filing income tax Support Test (To Be a Qualifying Relative) To meet this test, you generally must provide more than half of a person's total support during the calendar year. Free state filing income tax However, if two or more persons provide support, but no one person provides more than half of a person's total support, see Multiple Support Agreement , later. Free state filing income tax How to determine if support test is met. Free state filing income tax   You figure whether you have provided more than half of a person's total support by comparing the amount you contributed to that person's support with the entire amount of support that person received from all sources. Free state filing income tax This includes support the person provided from his or her own funds. Free state filing income tax   You may find Worksheet 3-1 helpful in figuring whether you provided more than half of a person's support. Free state filing income tax Person's own funds not used for support. Free state filing income tax   A person's own funds are not support unless they are actually spent for support. Free state filing income tax Example. Free state filing income tax Your mother received $2,400 in social security benefits and $300 in interest. Free state filing income tax She paid $2,000 for lodging and $400 for recreation. Free state filing income tax She put $300 in a savings account. Free state filing income tax Even though your mother received a total of $2,700 ($2,400 + $300), she spent only $2,400 ($2,000 + $400) for her own support. Free state filing income tax If you spent more than $2,400 for her support and no other support was received, you have provided more than half of her support. Free state filing income tax Child's wages used for own support. Free state filing income tax   You cannot include in your contribution to your child's support any support paid for by the child with the child's own wages, even if you paid the wages. Free state filing income tax Year support is provided. Free state filing income tax   The year you provide the support is the year you pay for it, even if you do so with borrowed money that you repay in a later year. Free state filing income tax   If you use a fiscal year to report your income, you must provide more than half of the dependent's support for the calendar year in which your fiscal year begins. Free state filing income tax Armed Forces dependency allotments. Free state filing income tax   The part of the allotment contributed by the government and the part taken out of your military pay are both considered provided by you in figuring whether you provide more than half of the support. Free state filing income tax If your allotment is used to support persons other than those you name, you can take the exemptions for them if they otherwise qualify. Free state filing income tax Example. Free state filing income tax You are in the Armed Forces. Free state filing income tax You authorize an allotment for your widowed mother that she uses to support herself and her sister. Free state filing income tax If the allotment provides more than half of each person's support, you can take an exemption for each of them, if they otherwise qualify, even though you authorize the allotment only for your mother. Free state filing income tax Tax-exempt military quarters allowances. Free state filing income tax   These allowances are treated the same way as dependency allotments in figuring support. Free state filing income tax The allotment of pay and the tax-exempt basic allowance for quarters are both considered as provided by you for support. Free state filing income tax Tax-exempt income. Free state filing income tax   In figuring a person's total support, include tax-exempt income, savings, and borrowed amounts used to support that person. Free state filing income tax Tax-exempt income includes certain social security benefits, welfare benefits, nontaxable life insurance proceeds, Armed Forces family allotments, nontaxable pensions, and tax-exempt interest. Free state filing income tax Example 1. Free state filing income tax You provide $4,000 toward your mother's support during the year. Free state filing income tax She has earned income of $600, nontaxable social security benefits of $4,800, and tax-exempt interest of $200. Free state filing income tax She uses all these for her support. Free state filing income tax You cannot claim an exemption for your mother because the $4,000 you provide is not more than half of her total support of $9,600 ($4,000 + $600 + $4,800 + $200). Free state filing income tax Example 2. Free state filing income tax Your niece takes out a student loan of $2,500 a
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The Free State Filing Income Tax

Free state filing income tax 1. Free state filing income tax   Gain or Loss Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesGain or Loss From Sales and Exchanges Abandonments Foreclosures and RepossessionsAmount realized on a nonrecourse debt. Free state filing income tax Amount realized on a recourse debt. Free state filing income tax Involuntary ConversionsCondemnations Nontaxable ExchangesLike-Kind Exchanges Other Nontaxable Exchanges Transfers to Spouse Rollover of Gain From Publicly Traded Securities Gains on Sales of Qualified Small Business Stock Exclusion of Gain From Sale of DC Zone Assets Topics - This chapter discusses: Sales and exchanges Abandonments Foreclosures and repossessions Involuntary conversions Nontaxable exchanges Transfers to spouse Rollovers and exclusions for certain capital gains Useful Items - You may want to see: Publication 523 Selling Your Home 537 Installment Sales 547 Casualties, Disasters, and Thefts 550 Investment Income and Expenses 551 Basis of Assets 908 Bankruptcy Tax Guide 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 1040 U. Free state filing income tax S. Free state filing income tax Individual Income Tax Return 1040X Amended U. Free state filing income tax S. Free state filing income tax Individual Income Tax Return 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets Although the discussions in this chapter may at times refer mainly to individuals, many of the rules discussed also apply to taxpayers other than individuals. Free state filing income tax However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. Free state filing income tax See chapter 5 for information about getting publications and forms. Free state filing income tax Sales and Exchanges A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Free state filing income tax An exchange is a transfer of property for other property or services. Free state filing income tax The following discussions describe the kinds of transactions that are treated as sales or exchanges and explain how to figure gain or loss. Free state filing income tax Sale or lease. Free state filing income tax    Some agreements that seem to be leases may really be conditional sales contracts. Free state filing income tax The intention of the parties to the agreement can help you distinguish between a sale and a lease. Free state filing income tax   There is no test or group of tests to prove what the parties intended when they made the agreement. Free state filing income tax You should consider each agreement based on its own facts and circumstances. Free state filing income tax For more information, see chapter 3 in Publication 535, Business Expenses. Free state filing income tax Cancellation of a lease. Free state filing income tax    Payments received by a tenant for the cancellation of a lease are treated as an amount realized from the sale of property. Free state filing income tax Payments received by a landlord (lessor) for the cancellation of a lease are essentially a substitute for rental payments and are taxed as ordinary income in the year in which they are received. Free state filing income tax Copyright. Free state filing income tax    Payments you receive for granting the exclusive use of (or right to exploit) a copyright throughout its life in a particular medium are treated as received from the sale of property. Free state filing income tax It does not matter if the payments are a fixed amount or a percentage of receipts from the sale, performance, exhibition, or publication of the copyrighted work, or an amount based on the number of copies sold, performances given, or exhibitions made. Free state filing income tax Nor does it matter if the payments are made over the same period as that covering the grantee's use of the copyrighted work. Free state filing income tax   If the copyright was used in your trade or business and you held it longer than a year, the gain or loss may be a section 1231 gain or loss. Free state filing income tax For more information, see Section 1231 Gains and Losses in chapter 3. Free state filing income tax Easement. Free state filing income tax   The amount received for granting an easement is subtracted from the basis of the property. Free state filing income tax If only a specific part of the entire tract of property is affected by the easement, only the basis of that part is reduced by the amount received. Free state filing income tax If it is impossible or impractical to separate the basis of the part of the property on which the easement is granted, the basis of the whole property is reduced by the amount received. Free state filing income tax   Any amount received that is more than the basis to be reduced is a taxable gain. Free state filing income tax The transaction is reported as a sale of property. Free state filing income tax   If you transfer a perpetual easement for consideration and do not keep any beneficial interest in the part of the property affected by the easement, the transaction will be treated as a sale of property. Free state filing income tax However, if you make a qualified conservation contribution of a restriction or easement granted in perpetuity, it is treated as a charitable contribution and not a sale or exchange, even though you keep a beneficial interest in the property affected by the easement. Free state filing income tax   If you grant an easement on your property (for example, a right-of-way over it) under condemnation or threat of condemnation, you are considered to have made a forced sale, even though you keep the legal title. Free state filing income tax Although you figure gain or loss on the easement in the same way as a sale of property, the gain or loss is treated as a gain or loss from a condemnation. Free state filing income tax See Gain or Loss From Condemnations, later. Free state filing income tax Property transferred to satisfy debt. Free state filing income tax   A transfer of property to satisfy a debt is an exchange. Free state filing income tax Note's maturity date extended. Free state filing income tax   The extension of a note's maturity date is not treated as an exchange of an outstanding note for a new and different note. Free state filing income tax Also, it is not considered a closed and completed transaction that would result in a gain or loss. Free state filing income tax However, an extension will be treated as a taxable exchange of the outstanding note for a new and materially different note if the changes in the terms of the note are significant. Free state filing income tax Each case must be determined by its own facts. Free state filing income tax For more information, see Regulations section 1. Free state filing income tax 1001-3. Free state filing income tax Transfer on death. Free state filing income tax   The transfer of property of a decedent to an executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or exchange or other disposition. Free state filing income tax No taxable gain or deductible loss results from the transfer. Free state filing income tax Bankruptcy. Free state filing income tax   Generally, a transfer (other than by sale or exchange) of property from a debtor to a bankruptcy estate is not treated as a disposition. Free state filing income tax Consequently, the transfer generally does not result in gain or loss. Free state filing income tax For more information, see Publication 908, Bankruptcy Tax Guide. Free state filing income tax Gain or Loss From Sales and Exchanges You usually realize gain or loss when property is sold or exchanged. Free state filing income tax A gain is the amount you realize from a sale or exchange of property that is more than its adjusted basis. Free state filing income tax A loss is the adjusted basis of the property that is more than the amount you realize. Free state filing income tax   Table 1-1. Free state filing income tax How To Figure Whether You Have a Gain or Loss IF your. Free state filing income tax . Free state filing income tax . Free state filing income tax THEN you have a. Free state filing income tax . Free state filing income tax . Free state filing income tax Adjusted basis is more than the amount realized, Loss. Free state filing income tax Amount realized is more than the adjusted basis, Gain. Free state filing income tax Basis. Free state filing income tax   You must know the basis of your property to determine whether you have a gain or loss from its sale or other disposition. Free state filing income tax The basis of property you buy is usually its cost. Free state filing income tax However, if you acquired the property by gift, inheritance, or in some way other than buying it, you must use a basis other than its cost. Free state filing income tax See Basis Other Than Cost in Publication 551, Basis of Assets. Free state filing income tax Special rules apply to property acquired from a decedent who died in 2010 and the executor made the election to file Form 8939, Allocation of Increase in Basis for Property Received From a Decedent. Free state filing income tax See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. Free state filing income tax Adjusted basis. Free state filing income tax   The adjusted basis of property is your original cost or other basis plus (increased by) certain additions and minus (decreased by) certain deductions. Free state filing income tax Increases include costs of any improvements having a useful life of more than 1 year. Free state filing income tax Decreases include depreciation and casualty losses. Free state filing income tax For more details and additional examples, see Adjusted Basis in Publication 551. Free state filing income tax Amount realized. Free state filing income tax   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (defined below) of all property or services you receive. Free state filing income tax The amount you realize also includes any of your liabilities that were assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Free state filing income tax Fair market value. Free state filing income tax   Fair market value (FMV) is the price at which the property would change hands between a buyer and a seller when both have reasonable knowledge of all the necessary facts and neither is being forced to buy or sell. Free state filing income tax If parties with adverse interests place a value on property in an arm's-length transaction, that is strong evidence of FMV. Free state filing income tax If there is a stated price for services, this price is treated as the FMV unless there is evidence to the contrary. Free state filing income tax Example. Free state filing income tax You used a building in your business that cost you $70,000. Free state filing income tax You made certain permanent improvements at a cost of $20,000 and deducted depreciation totaling $10,000. Free state filing income tax You sold the building for $100,000 plus property having an FMV of $20,000. Free state filing income tax The buyer assumed your real estate taxes of $3,000 and a mortgage of $17,000 on the building. Free state filing income tax The selling expenses were $4,000. Free state filing income tax Your gain on the sale is figured as follows. Free state filing income tax Amount realized:     Cash $100,000   FMV of property received 20,000   Real estate taxes assumed by buyer 3,000   Mortgage assumed by  buyer 17,000   Total 140,000   Minus: Selling expenses 4,000 $136,000 Adjusted basis:     Cost of building $70,000   Improvements 20,000   Total $90,000   Minus: Depreciation 10,000   Adjusted basis   $80,000 Gain on sale $56,000 Amount recognized. Free state filing income tax   Your gain or loss realized from a sale or exchange of property is usually a recognized gain or loss for tax purposes. Free state filing income tax Recognized gains must be included in gross income. Free state filing income tax Recognized losses are deductible from gross income. Free state filing income tax However, your gain or loss realized from certain exchanges of property is not recognized for tax purposes. Free state filing income tax See Nontaxable Exchanges, later. Free state filing income tax Also, a loss from the sale or other disposition of property held for personal use is not deductible, except in the case of a casualty or theft. Free state filing income tax Interest in property. Free state filing income tax   The amount you realize from the disposition of a life interest in property, an interest in property for a set number of years, or an income interest in a trust is a recognized gain under certain circumstances. Free state filing income tax If you received the interest as a gift, inheritance, or in a transfer from a spouse or former spouse incident to a divorce, the amount realized is a recognized gain. Free state filing income tax Your basis in the property is disregarded. Free state filing income tax This rule does not apply if all interests in the property are disposed of at the same time. Free state filing income tax Example 1. Free state filing income tax Your father dies and leaves his farm to you for life with a remainder interest to your younger brother. Free state filing income tax You decide to sell your life interest in the farm. Free state filing income tax The entire amount you receive is a recognized gain. Free state filing income tax Your basis in the farm is disregarded. Free state filing income tax Example 2. Free state filing income tax The facts are the same as in Example 1, except that your brother joins you in selling the farm. Free state filing income tax The entire interest in the property is sold, so your basis in the farm is not disregarded. Free state filing income tax Your gain or loss is the difference between your share of the sales price and your adjusted basis in the farm. Free state filing income tax Canceling a sale of real property. Free state filing income tax   If you sell real property under a sales contract that allows the buyer to return the property for a full refund and the buyer does so, you may not have to recognize gain or loss on the sale. Free state filing income tax If the buyer returns the property in the year of sale, no gain or loss is recognized. Free state filing income tax This cancellation of the sale in the same year it occurred places both you and the buyer in the same positions you were in before the sale. Free state filing income tax If the buyer returns the property in a later tax year, you must recognize gain (or loss, if allowed) in the year of the sale. Free state filing income tax When the property is returned in a later year, you acquire a new basis in the property. Free state filing income tax That basis is equal to the amount you pay to the buyer. Free state filing income tax Bargain Sale If you sell or exchange property for less than fair market value with the intent of making a gift, the transaction is partly a sale or exchange and partly a gift. Free state filing income tax You have a gain if the amount realized is more than your adjusted basis in the property. Free state filing income tax However, you do not have a loss if the amount realized is less than the adjusted basis of the property. Free state filing income tax Bargain sales to charity. Free state filing income tax   A bargain sale of property to a charitable organization is partly a sale or exchange and partly a charitable contribution. Free state filing income tax If a charitable deduction for the contribution is allowable, you must allocate your adjusted basis in the property between the part sold and the part contributed based on the fair market value of each. Free state filing income tax The adjusted basis of the part sold is figured as follows. Free state filing income tax Adjusted basis of entire property × Amount realized (fair market value of part sold)   Fair market value of entire property   Based on this allocation rule, you will have a gain even if the amount realized is not more than your adjusted basis in the property. Free state filing income tax This allocation rule does not apply if a charitable contribution deduction is not allowable. Free state filing income tax   See Publication 526, Charitable Contributions, for information on figuring your charitable contribution. Free state filing income tax Example. Free state filing income tax You sold property with a fair market value of $10,000 to a charitable organization for $2,000 and are allowed a deduction for your contribution. Free state filing income tax Your adjusted basis in the property is $4,000. Free state filing income tax Your gain on the sale is $1,200, figured as follows. Free state filing income tax Sales price $2,000 Minus: Adjusted basis of part sold ($4,000 × ($2,000 ÷ $10,000)) 800 Gain on the sale $1,200 Property Used Partly for Business or Rental Generally, if you sell or exchange property you used partly for business or rental purposes and partly for personal purposes, you must figure the gain or loss on the sale or exchange as though you had sold two separate pieces of property. Free state filing income tax You must subtract depreciation you took or could have taken from the basis of the business or rental part. Free state filing income tax However, see the special rule below for a home used partly for business or rental. Free state filing income tax You must allocate the selling price, selling expenses, and the basis of the property between the business or rental part and the personal part. Free state filing income tax Gain or loss on the business or rental part of the property may be a capital gain or loss or an ordinary gain or loss, as discussed in chapter 3 under Section 1231 Gains and Losses. Free state filing income tax Any gain on the personal part of the property is a capital gain. Free state filing income tax You cannot deduct a loss on the personal part. Free state filing income tax Home used partly for business or rental. Free state filing income tax    If you use property partly as a home and partly for business or to produce rental income, the computation and treatment of any gain on the sale depends partly on whether the business or rental part of the property is part of your home or separate from it. Free state filing income tax See Property Used Partly for Business or Rental, in Publication 523. Free state filing income tax Property Changed to Business or Rental Use You cannot deduct a loss on the sale of property you purchased or constructed for use as your home and used as your home until the time of sale. Free state filing income tax You can deduct a loss on the sale of property you acquired for use as your home but changed to business or rental property and used as business or rental property at the time of sale. Free state filing income tax However, if the adjusted basis of the property at the time of the change was more than its fair market value, the loss you can deduct is limited. Free state filing income tax Figure the loss you can deduct as follows. Free state filing income tax Use the lesser of the property's adjusted basis or fair market value at the time of the change. Free state filing income tax Add to (1) the cost of any improvements and other increases to basis since the change. Free state filing income tax Subtract from (2) depreciation and any other decreases to basis since the change. Free state filing income tax Subtract the amount you realized on the sale from the result in (3). Free state filing income tax If the amount you realized is more than the result in (3), treat this result as zero. Free state filing income tax The result in (4) is the loss you can deduct. Free state filing income tax Example. Free state filing income tax You changed your main home to rental property 5 years ago. Free state filing income tax At the time of the change, the adjusted basis of your home was $75,000 and the fair market value was $70,000. Free state filing income tax This year, you sold the property for $55,000. Free state filing income tax You made no improvements to the property but you have depreciation expense of $12,620 over the 5 prior years. Free state filing income tax Although your loss on the sale is $7,380 [($75,000 − $12,620) − $55,000], the amount you can deduct as a loss is limited to $2,380, figured as follows. Free state filing income tax Lesser of adjusted basis or fair market value at time of the change $70,000 Plus: Cost of any improvements and any other additions to basis after the change -0-   70,000 Minus: Depreciation and any other decreases to basis after the change 12,620   57,380 Minus: Amount you realized from the sale 55,000 Deductible loss $2,380 Gain. Free state filing income tax   If you have a gain on the sale, you generally must recognize the full amount of the gain. Free state filing income tax You figure the gain by subtracting your adjusted basis from your amount realized, as described earlier. Free state filing income tax   You may be able to exclude all or part of the gain if you owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Free state filing income tax However, you may not be able to exclude the part of the gain allocated to any period of nonqualified use. Free state filing income tax   For more information, see Business Use or Rental of Home in Publication 523. Free state filing income tax In addition, special rules apply if the home sold was acquired in a like-kind exchange. Free state filing income tax See Special Situations in Publication 523. Free state filing income tax Also see Like-Kind Exchanges, later. Free state filing income tax Abandonments The abandonment of property is a disposition of property. Free state filing income tax You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership but without passing it on to anyone else. Free state filing income tax Generally, abandonment is not treated as a sale or exchange of the property. Free state filing income tax If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Free state filing income tax If your adjusted basis is more than the amount you realize (if any), then you have a loss. Free state filing income tax Loss from abandonment of business or investment property is deductible as a loss. Free state filing income tax A loss from an abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Free state filing income tax This rule also applies to leasehold improvements the lessor made for the lessee that were abandoned. Free state filing income tax If the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed later under Foreclosure and Repossessions. Free state filing income tax The abandonment loss is deducted in the tax year in which the loss is sustained. Free state filing income tax If the abandoned property is secured by debt, special rules apply. Free state filing income tax The tax consequences of abandonment of property that is secured by debt depend on whether you are personally liable for the debt (recourse debt) or you are not personally liable for the debt (nonrecourse debt). Free state filing income tax For more information, including examples, see chapter 3 of Publication 4681. Free state filing income tax You cannot deduct any loss from abandonment of your home or other property held for personal use only. Free state filing income tax Cancellation of debt. Free state filing income tax   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you may realize ordinary income equal to the canceled debt. Free state filing income tax This income is separate from any loss realized from abandonment of the property. Free state filing income tax   You must report this income on your tax return unless one of the following applies. Free state filing income tax The cancellation is intended as a gift. Free state filing income tax The debt is qualified farm debt. Free state filing income tax The debt is qualified real property business debt. Free state filing income tax You are insolvent or bankrupt. Free state filing income tax The debt is qualified principal residence indebtedness. Free state filing income tax File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the income exclusion. Free state filing income tax For more information, including other exceptions and exclusion, see Publication 4681. Free state filing income tax Forms 1099-A and 1099-C. Free state filing income tax   If you abandon property that secures a loan and the lender knows the property has been abandoned, the lender should send you Form 1099-A showing information you need to figure your loss from the abandonment. Free state filing income tax However, if your debt is canceled and the lender must file Form 1099-C, the lender may include the information about the abandonment on that form instead of on Form 1099-A, and send you Form 1099-C only. Free state filing income tax The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Free state filing income tax For abandonments of property and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Free state filing income tax Foreclosures and Repossessions If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. Free state filing income tax The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Free state filing income tax This is true even if you voluntarily return the property to the lender. Free state filing income tax You also may realize ordinary income from cancellation of debt if the loan balance is more than the fair market value of the property. Free state filing income tax Buyer's (borrower's) gain or loss. Free state filing income tax   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. Free state filing income tax The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Free state filing income tax See Gain or Loss From Sales and Exchanges, earlier. Free state filing income tax You can use Table 1-2 to figure your gain or loss from a foreclosure or repossession. Free state filing income tax Amount realized on a nonrecourse debt. Free state filing income tax   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full debt canceled by the transfer. Free state filing income tax The full canceled debt is included even if the fair market value of the property is less than the canceled debt. Free state filing income tax Example 1. Free state filing income tax Chris bought a new car for $15,000. Free state filing income tax He paid $2,000 down and borrowed the remaining $13,000 from the dealer's credit company. Free state filing income tax Chris is not personally liable for the loan (nonrecourse debt), but pledges the new car as security. Free state filing income tax The credit company repossessed the car because he stopped making loan payments. Free state filing income tax The balance due after taking into account the payments Chris made was $10,000. Free state filing income tax The fair market value of the car when repossessed was $9,000. Free state filing income tax The amount Chris realized on the repossession is $10,000. Free state filing income tax That is the outstanding amount of the debt canceled by the repossession, even though the car's fair market value is less than $10,000. Free state filing income tax Chris figures his gain or loss on the repossession by comparing the amount realized ($10,000) with his adjusted basis ($15,000). Free state filing income tax He has a $5,000 nondeductible loss. Free state filing income tax Example 2. Free state filing income tax Abena paid $200,000 for her home. Free state filing income tax She paid $15,000 down and borrowed the remaining $185,000 from a bank. Free state filing income tax Abena is not personally liable for the loan (nonrecourse debt), but pledges the house as security. Free state filing income tax The bank foreclosed on the loan because Abena stopped making payments. Free state filing income tax When the bank foreclosed on the loan, the balance due was $180,000, the fair market value of the house was $170,000, and Abena's adjusted basis was $175,000 due to a casualty loss she had deducted. Free state filing income tax The amount Abena realized on the foreclosure is $180,000, the balance due and debt canceled by the foreclosure. Free state filing income tax She figures her gain or loss by comparing the amount realized ($180,000) with her adjusted basis ($175,000). Free state filing income tax She has a $5,000 realized gain. Free state filing income tax Amount realized on a recourse debt. Free state filing income tax   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. Free state filing income tax You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. Free state filing income tax The amount realized does not include the canceled debt that is your income from cancellation of debt. Free state filing income tax See Cancellation of debt, below. Free state filing income tax Seller's (lender's) gain or loss on repossession. Free state filing income tax   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. Free state filing income tax For more information, see Repossession in Publication 537. Free state filing income tax    Table 1-2. Free state filing income tax Worksheet for Foreclosures and Repossessions Part 1. Free state filing income tax Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Free state filing income tax Complete this part only  if you were personally liable for the debt. Free state filing income tax Otherwise,  go to Part 2. Free state filing income tax   1. Free state filing income tax Enter the amount of outstanding debt immediately before the transfer of   property reduced by any amount for which you remain personally liable after   the transfer of property   2. Free state filing income tax Enter the fair market value of the transferred property   3. Free state filing income tax Ordinary income from cancellation of debt upon foreclosure or    repossession. Free state filing income tax * Subtract line 2 from line 1. Free state filing income tax   If less than zero, enter zero   Part 2. Free state filing income tax Figure your gain or loss from foreclosure or repossession. Free state filing income tax   4. Free state filing income tax If you completed Part 1, enter the smaller of line 1 or line 2. Free state filing income tax   If you did not complete Part 1, enter the outstanding debt immediately before   the transfer of property   5. Free state filing income tax Enter any proceeds you received from the foreclosure sale   6. Free state filing income tax Add lines 4 and 5   7. Free state filing income tax Enter the adjusted basis of the transferred property   8. Free state filing income tax Gain or loss from foreclosure or repossession. Free state filing income tax Subtract line 7  from line 6   * The income may not be taxable. Free state filing income tax See Cancellation of debt. Free state filing income tax Cancellation of debt. Free state filing income tax   If property that is repossessed or foreclosed on secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the fair market value of the property. Free state filing income tax This income is separate from any gain or loss realized from the foreclosure or repossession. Free state filing income tax Report the income from cancellation of a debt related to a business or rental activity as business or rental income. Free state filing income tax    You can use Table 1-2 to figure your income from cancellation of debt. Free state filing income tax   You must report this income on your tax return unless one of the following applies. Free state filing income tax The cancellation is intended as a gift. Free state filing income tax The debt is qualified farm debt. Free state filing income tax The debt is qualified real property business debt. Free state filing income tax You are insolvent or bankrupt. Free state filing income tax The debt is qualified principal residence indebtedness. Free state filing income tax File Form 982 to report the income exclusion. Free state filing income tax Example 1. Free state filing income tax Assume the same facts as in Example 1 under Amount realized on a nonrecourse debt, earlier, except Chris is personally liable for the car loan (recourse debt). Free state filing income tax In this case, the amount he realizes is $9,000. Free state filing income tax This is the lesser of the canceled debt ($10,000) or the car's fair market value ($9,000). Free state filing income tax Chris figures his gain or loss on the repossession by comparing the amount realized ($9,000) with his adjusted basis ($15,000). Free state filing income tax He has a $6,000 nondeductible loss. Free state filing income tax He also is treated as receiving ordinary income from cancellation of debt. Free state filing income tax That income is $1,000 ($10,000 − $9,000). Free state filing income tax This is the part of the canceled debt not included in the amount realized. Free state filing income tax Example 2. Free state filing income tax Assume the same facts as in Example 2 under Amount realized on a nonrecourse debt, earlier, except Abena is personally liable for the loan (recourse debt). Free state filing income tax In this case, the amount she realizes is $170,000. Free state filing income tax This is the lesser of the canceled debt ($180,000) or the fair market value of the house ($170,000). Free state filing income tax Abena figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($175,000). Free state filing income tax She has a $5,000 nondeductible loss. Free state filing income tax She also is treated as receiving ordinary income from cancellation of debt. Free state filing income tax (The debt is not exempt from tax as discussed under Cancellation of debt, above. Free state filing income tax ) That income is $10,000 ($180,000 − $170,000). Free state filing income tax This is the part of the canceled debt not included in the amount realized. Free state filing income tax Forms 1099-A and 1099-C. Free state filing income tax   A lender who acquires an interest in your property in a foreclosure or repossession should send you Form 1099-A showing the information you need to figure your gain or loss. Free state filing income tax However, if the lender also cancels part of your debt and must file Form 1099-C, the lender may include the information about the foreclosure or repossession on that form instead of on Form 1099-A and send you Form 1099-C only. Free state filing income tax The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Free state filing income tax For foreclosures or repossessions occurring in 2013, these forms should be sent to you by January 31, 2014. Free state filing income tax Involuntary Conversions An involuntary conversion occurs when your property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and you receive other property or money in payment, such as insurance or a condemnation award. Free state filing income tax Involuntary conversions are also called involuntary exchanges. Free state filing income tax Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes unless the property is your main home. Free state filing income tax You report the gain or deduct the loss on your tax return for the year you realize it. Free state filing income tax You cannot deduct a loss from an involuntary conversion of property you held for personal use unless the loss resulted from a casualty or theft. Free state filing income tax However, depending on the type of property you receive, you may not have to report a gain on an involuntary conversion. Free state filing income tax Generally, you do not report the gain if you receive property that is similar or related in service or use to the converted property. Free state filing income tax Your basis for the new property is the same as your basis for the converted property. Free state filing income tax This means that the gain is deferred until a taxable sale or exchange occurs. Free state filing income tax If you receive money or property that is not similar or related in service or use to the involuntarily converted property and you buy qualifying replacement property within a certain period of time, you can elect to postpone reporting the gain on the property purchased. Free state filing income tax This publication explains the treatment of a gain or loss from a condemnation or disposition under the threat of condemnation. Free state filing income tax If you have a gain or loss from the destruction or theft of property, see Publication 547. Free state filing income tax Condemnations A condemnation is the process by which private property is legally taken for public use without the owner's consent. Free state filing income tax The property may be taken by the federal government, a state government, a political subdivision, or a private organization that has the power to legally take it. Free state filing income tax The owner receives a condemnation award (money or property) in exchange for the property taken. Free state filing income tax A condemnation is like a forced sale, the owner being the seller and the condemning authority being the buyer. Free state filing income tax Example. Free state filing income tax A local government authorized to acquire land for public parks informed you that it wished to acquire your property. Free state filing income tax After the local government took action to condemn your property, you went to court to keep it. Free state filing income tax But, the court decided in favor of the local government, which took your property and paid you an amount fixed by the court. Free state filing income tax This is a condemnation of private property for public use. Free state filing income tax Threat of condemnation. Free state filing income tax   A threat of condemnation exists if a representative of a government body or a public official authorized to acquire property for public use informs you that the government body or official has decided to acquire your property. Free state filing income tax You must have reasonable grounds to believe that, if you do not sell voluntarily, your property will be condemned. Free state filing income tax   The sale of your property to someone other than the condemning authority will also qualify as an involuntary conversion, provided you have reasonable grounds to believe that your property will be condemned. Free state filing income tax If the buyer of this property knows at the time of purchase that it will be condemned and sells it to the condemning authority, this sale also qualifies as an involuntary conversion. Free state filing income tax Reports of condemnation. Free state filing income tax   A threat of condemnation exists if you learn of a decision to acquire your property for public use through a report in a newspaper or other news medium, and this report is confirmed by a representative of the government body or public official involved. Free state filing income tax You must have reasonable grounds to believe that they will take necessary steps to condemn your property if you do not sell voluntarily. Free state filing income tax If you relied on oral statements made by a government representative or public official, the Internal Revenue Service (IRS) may ask you to get written confirmation of the statements. Free state filing income tax Example. Free state filing income tax Your property lies along public utility lines. Free state filing income tax The utility company has the authority to condemn your property. Free state filing income tax The company informs you that it intends to acquire your property by negotiation or condemnation. Free state filing income tax A threat of condemnation exists when you receive the notice. Free state filing income tax Related property voluntarily sold. Free state filing income tax   A voluntary sale of your property may be treated as a forced sale that qualifies as an involuntary conversion if the property had a substantial economic relationship to property of yours that was condemned. Free state filing income tax A substantial economic relationship exists if together the properties were one economic unit. Free state filing income tax You also must show that the condemned property could not reasonably or adequately be replaced. Free state filing income tax You can elect to postpone reporting the gain by buying replacement property. Free state filing income tax See Postponement of Gain, later. Free state filing income tax Gain or Loss From Condemnations If your property was condemned or disposed of under the threat of condemnation, figure your gain or loss by comparing the adjusted basis of your condemned property with your net condemnation award. Free state filing income tax If your net condemnation award is more than the adjusted basis of the condemned property, you have a gain. Free state filing income tax You can postpone reporting gain from a condemnation if you buy replacement property. Free state filing income tax If only part of your property is condemned, you can treat the cost of restoring the remaining part to its former usefulness as the cost of replacement property. Free state filing income tax See Postponement of Gain, later. Free state filing income tax If your net condemnation award is less than your adjusted basis, you have a loss. Free state filing income tax If your loss is from property you held for personal use, you cannot deduct it. Free state filing income tax You must report any deductible loss in the tax year it happened. Free state filing income tax You can use Part 2 of Table 1-3 to figure your gain or loss from a condemnation award. Free state filing income tax Main home condemned. Free state filing income tax   If you have a gain because your main home is condemned, you generally can exclude the gain from your income as if you had sold or exchanged your home. Free state filing income tax You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). Free state filing income tax For information on this exclusion, see Publication 523. Free state filing income tax If your gain is more than you can exclude but you buy replacement property, you may be able to postpone reporting the rest of the gain. Free state filing income tax See Postponement of Gain, later. Free state filing income tax Table 1-3. Free state filing income tax Worksheet for Condemnations Part 1. Free state filing income tax Gain from severance damages. Free state filing income tax  If you did not receive severance damages, skip Part 1 and go to Part 2. Free state filing income tax   1. Free state filing income tax Enter gross severance damages received   2. Free state filing income tax Enter your expenses in getting severance damages   3. Free state filing income tax Subtract line 2 from line 1. Free state filing income tax If less than zero, enter -0-   4. Free state filing income tax Enter any special assessment on remaining property taken out of your award   5. Free state filing income tax Net severance damages. Free state filing income tax Subtract line 4 from line 3. Free state filing income tax If less than zero, enter -0-   6. Free state filing income tax Enter the adjusted basis of the remaining property   7. Free state filing income tax Gain from severance damages. Free state filing income tax Subtract line 6 from line 5. Free state filing income tax If less than zero, enter -0-   8. Free state filing income tax Refigured adjusted basis of the remaining property. Free state filing income tax Subtract line 5 from line 6. Free state filing income tax If less than zero, enter -0-   Part 2. Free state filing income tax Gain or loss from condemnation award. Free state filing income tax   9. Free state filing income tax Enter the gross condemnation award received   10. Free state filing income tax Enter your expenses in getting the condemnation award   11. Free state filing income tax If you completed Part 1, and line 4 is more than line 3, subtract line 3 from line 4. Free state filing income tax If you did not complete Part 1, but a special assessment was taken out of your award, enter that amount. Free state filing income tax Otherwise, enter -0-   12. Free state filing income tax Add lines 10 and 11   13. Free state filing income tax Net condemnation award. Free state filing income tax Subtract line 12 from line 9   14. Free state filing income tax Enter the adjusted basis of the condemned property   15. Free state filing income tax Gain from condemnation award. Free state filing income tax If line 14 is more than line 13, enter -0-. Free state filing income tax Otherwise, subtract line 14 from  line 13 and skip line 16   16. Free state filing income tax Loss from condemnation award. Free state filing income tax Subtract line 13 from line 14     (Note: You cannot deduct the amount on line 16 if the condemned property was held for personal use. Free state filing income tax )   Part 3. Free state filing income tax Postponed gain from condemnation. Free state filing income tax  (Complete only if line 7 or line 15 is more than zero and you bought qualifying replacement property or made expenditures to restore the usefulness of your remaining property. Free state filing income tax )   17. Free state filing income tax If you completed Part 1, and line 7 is more than zero, enter the amount from line 5. Free state filing income tax Otherwise, enter -0-   18. Free state filing income tax If line 15 is more than zero, enter the amount from line 13. Free state filing income tax Otherwise, enter -0-   19. Free state filing income tax Add lines 17 and 18. Free state filing income tax If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   20. Free state filing income tax Enter the total cost of replacement property and any expenses to restore the usefulness of your remaining property   21. Free state filing income tax Subtract line 20 from line 19. Free state filing income tax If less than zero, enter -0-   22. Free state filing income tax If you completed Part 1, add lines 7 and 15. Free state filing income tax Otherwise, enter the amount from line 15. Free state filing income tax If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   23. Free state filing income tax Recognized gain. Free state filing income tax Enter the smaller of line 21 or line 22. Free state filing income tax   24. Free state filing income tax Postponed gain. Free state filing income tax Subtract line 23 from line 22. Free state filing income tax If less than zero, enter -0-   Condemnation award. Free state filing income tax   A condemnation award is the money you are paid or the value of other property you receive for your condemned property. Free state filing income tax The award is also the amount you are paid for the sale of your property under threat of condemnation. Free state filing income tax Payment of your debts. Free state filing income tax   Amounts taken out of the award to pay your debts are considered paid to you. Free state filing income tax Amounts the government pays directly to the holder of a mortgage or lien against your property are part of your award, even if the debt attaches to the property and is not your personal liability. Free state filing income tax Example. Free state filing income tax The state condemned your property for public use. Free state filing income tax The award was set at $200,000. Free state filing income tax The state paid you only $148,000 because it paid $50,000 to your mortgage holder and $2,000 accrued real estate taxes. Free state filing income tax You are considered to have received the entire $200,000 as a condemnation award. Free state filing income tax Interest on award. Free state filing income tax   If the condemning authority pays you interest for its delay in paying your award, it is not part of the condemnation award. Free state filing income tax You must report the interest separately as ordinary income. Free state filing income tax Payments to relocate. Free state filing income tax   Payments you receive to relocate and replace housing because you have been displaced from your home, business, or farm as a result of federal or federally assisted programs are not part of the condemnation award. Free state filing income tax Do not include them in your income. Free state filing income tax Replacement housing payments used to buy new property are included in the property's basis as part of your cost. Free state filing income tax Net condemnation award. Free state filing income tax   A net condemnation award is the total award you received, or are considered to have received, for the condemned property minus your expenses of obtaining the award. Free state filing income tax If only a part of your property was condemned, you also must reduce the award by any special assessment levied against the part of the property you retain. Free state filing income tax This is discussed later under Special assessment taken out of award. Free state filing income tax Severance damages. Free state filing income tax    Severance damages are not part of the award paid for the property condemned. Free state filing income tax They are paid to you if part of your property is condemned and the value of the part you keep is decreased because of the condemnation. Free state filing income tax   For example, you may receive severance damages if your property is subject to flooding because you sell flowage easement rights (the condemned property) under threat of condemnation. Free state filing income tax Severance damages also may be given to you if, because part of your property is condemned for a highway, you must replace fences, dig new wells or ditches, or plant trees to restore your remaining property to the same usefulness it had before the condemnation. Free state filing income tax   The contracting parties should agree on the specific amount of severance damages in writing. Free state filing income tax If this is not done, all proceeds from the condemning authority are considered awarded for your condemned property. Free state filing income tax   You cannot make a completely new allocation of the total award after the transaction is completed. Free state filing income tax However, you can show how much of the award both parties intended for severance damages. Free state filing income tax The severance damages part of the award is determined from all the facts and circumstances. Free state filing income tax Example. Free state filing income tax You sold part of your property to the state under threat of condemnation. Free state filing income tax The contract you and the condemning authority signed showed only the total purchase price. Free state filing income tax It did not specify a fixed sum for severance damages. Free state filing income tax However, at settlement, the condemning authority gave you closing papers showing clearly the part of the purchase price that was for severance damages. Free state filing income tax You may treat this part as severance damages. Free state filing income tax Treatment of severance damages. Free state filing income tax   Your net severance damages are treated as the amount realized from an involuntary conversion of the remaining part of your property. Free state filing income tax Use them to reduce the basis of the remaining property. Free state filing income tax If the amount of severance damages is based on damage to a specific part of the property you kept, reduce the basis of only that part by the net severance damages. Free state filing income tax   If your net severance damages are more than the basis of your retained property, you have a gain. Free state filing income tax You may be able to postpone reporting the gain. Free state filing income tax See Postponement of Gain, later. Free state filing income tax    You can use Part 1 of Table 1-3 to figure any gain from severance damages and to refigure the adjusted basis of the remaining part of your property. Free state filing income tax Net severance damages. Free state filing income tax   To figure your net severance damages, you first must reduce your severance damages by your expenses in obtaining the damages. Free state filing income tax You then reduce them by any special assessment (described later) levied against the remaining part of the property and retained out of the award by the condemning authority. Free state filing income tax The balance is your net severance damages. Free state filing income tax Expenses of obtaining a condemnation award and severance damages. Free state filing income tax   Subtract the expenses of obtaining a condemnation award, such as legal, engineering, and appraisal fees, from the total award. Free state filing income tax Also, subtract the expenses of obtaining severance damages, which may include similar expenses, from the severance damages paid to you. Free state filing income tax If you cannot determine which part of your expenses is for each part of the condemnation proceeds, you must make a proportionate allocation. Free state filing income tax Example. Free state filing income tax You receive a condemnation award and severance damages. Free state filing income tax One-fourth of the total was designated as severance damages in your agreement with the condemning authority. Free state filing income tax You had legal expenses for the entire condemnation proceeding. Free state filing income tax You cannot determine how much of your legal expenses is for each part of the condemnation proceeds. Free state filing income tax You must allocate one-fourth of your legal expenses to the severance damages and the other three-fourths to the condemnation award. Free state filing income tax Special assessment retained out of award. Free state filing income tax   When only part of your property is condemned, a special assessment levied against the remaining property may be retained by the governing body out of your condemnation award. Free state filing income tax An assessment may be levied if the remaining part of your property benefited by the improvement resulting from the condemnation. Free state filing income tax Examples of improvements that may cause a special assessment are widening a street and installing a sewer. Free state filing income tax   To figure your net condemnation award, you must reduce the amount of the award by the assessment retained out of the award. Free state filing income tax Example. Free state filing income tax To widen the street in front of your home, the city condemned a 25-foot deep strip of your land. Free state filing income tax You were awarded $5,000 for this and spent $300 to get the award. Free state filing income tax Before paying the award, the city levied a special assessment of $700 for the street improvement against your remaining property. Free state filing income tax The city then paid you only $4,300. Free state filing income tax Your net award is $4,000 ($5,000 total award minus $300 expenses in obtaining the award and $700 for the special assessment retained). Free state filing income tax If the $700 special assessment was not retained out of the award and you were paid $5,000, your net award would be $4,700 ($5,000 − $300). Free state filing income tax The net award would not change, even if you later paid the assessment from the amount you received. Free state filing income tax Severance damages received. Free state filing income tax   If severance damages are included in the condemnation proceeds, the special assessment retained out of the severance damages is first used to reduce the severance damages. Free state filing income tax Any balance of the special assessment is used to reduce the condemnation award. Free state filing income tax Example. Free state filing income tax You were awarded $4,000 for the condemnation of your property and $1,000 for severance damages. Free state filing income tax You spent $300 to obtain the severance damages. Free state filing income tax A special assessment of $800 was retained out of the award. Free state filing income tax The $1,000 severance damages are reduced to zero by first subtracting the $300 expenses and then $700 of the special assessment. Free state filing income tax Your $4,000 condemnation award is reduced by the $100 balance of the special assessment, leaving a $3,900 net condemnation award. Free state filing income tax Part business or rental. Free state filing income tax   If you used part of your condemned property as your home and part as business or rental property, treat each part as a separate property. Free state filing income tax Figure your gain or loss separately because gain or loss on each part may be treated differently. Free state filing income tax   Some examples of this type of property are a building in which you live and operate a grocery, and a building in which you live on the first floor and rent out the second floor. Free state filing income tax Example. Free state filing income tax You sold your building for $24,000 under threat of condemnation to a public utility company that had the authority to condemn. Free state filing income tax You rented half the building and lived in the other half. Free state filing income tax You paid $25,000 for the building and spent an additional $1,000 for a new roof. Free state filing income tax You claimed allowable depreciation of $4,600 on the rental half. Free state filing income tax You spent $200 in legal expenses to obtain the condemnation award. Free state filing income tax Figure your gain or loss as follows. Free state filing income tax     Resi- dential Part Busi- ness Part 1) Condemnation award received $12,000 $12,000 2) Minus: Legal expenses, $200 100 100 3) Net condemnation award $11,900 $11,900 4) Adjusted basis:       ½ of original cost, $25,000 $12,500 $12,500   Plus: ½ of cost of roof, $1,000 500 500   Total $13,000 $13,000 5) Minus: Depreciation   4,600 6) Adjusted basis, business part   $8,400 7) (Loss) on residential property ($1,100)   8) Gain on business property $3,500 The loss on the residential part of the property is not deductible. Free state filing income tax Postponement of Gain Do not report the gain on condemned property if you receive only property that is similar or related in service or use to the condemned property. Free state filing income tax Your basis for the new property is the same as your basis for the old. Free state filing income tax Money or unlike property received. Free state filing income tax   You ordinarily must report the gain if you receive money or unlike property. Free state filing income tax You can elect to postpone reporting the gain if you buy property that is similar or related in service or use to the condemned property within the replacement period, discussed later. Free state filing income tax You also can elect to postpone reporting the gain if you buy a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the condemned property. Free state filing income tax See Controlling interest in a corporation, later. Free state filing income tax   To postpone reporting all the gain, you must buy replacement property costing at least as much as the amount realized for the condemned property. Free state filing income tax If the cost of the replacement property is less than the amount realized, you must report the gain up to the unspent part of the amount realized. Free state filing income tax   The basis of the replacement property is its cost, reduced by the postponed gain. Free state filing income tax Also, if your replacement property is stock in a corporation that owns property similar or related in service or use, the corporation generally will reduce its basis in its assets by the amount by which you reduce your basis in the stock. Free state filing income tax See Controlling interest in a corporation, later. Free state filing income tax You can use Part 3 of Table 1-3 to figure the gain you must report and your postponed gain. Free state filing income tax Postponing gain on severance damages. Free state filing income tax   If you received severance damages for part of your property because another part was condemned and you buy replacement property, you can elect to postpone reporting gain. Free state filing income tax See Treatment of severance damages, earlier. Free state filing income tax You can postpone reporting all your gain if the replacement property costs at least as much as your net severance damages plus your net condemnation award (if resulting in gain). Free state filing income tax   You also can make this election if you spend the severance damages, together with other money you received for the condemned property (if resulting in gain), to acquire nearby property that will allow you to continue your business. Free state filing income tax If suitable nearby property is not available and you are forced to sell the remaining property and relocate in order to continue your business, see Postponing gain on the sale of related property, next. Free state filing income tax   If you restore the remaining property to its former usefulness, you can treat the cost of restoring it as the cost of replacement property. Free state filing income tax Postponing gain on the sale of related property. Free state filing income tax   If you sell property that is related to the condemned property and then buy replacement property, you can elect to postpone reporting gain on the sale. Free state filing income tax You must meet the requirements explained earlier under Related property voluntarily sold. Free state filing income tax You can postpone reporting all your gain if the replacement property costs at least as much as the amount realized from the sale plus your net condemnation award (if resulting in gain) plus your net severance damages, if any (if resulting in gain). Free state filing income tax Buying replacement property from a related person. Free state filing income tax   Certain taxpayers cannot postpone reporting gain from a condemnation if they buy the replacement property from a related person. Free state filing income tax For information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2. Free state filing income tax   This rule applies to the following taxpayers. Free state filing income tax C corporations. Free state filing income tax Partnerships in which more than 50% of the capital or profits interest is owned by  C corporations. Free state filing income tax All others (including individuals, partnerships (other than those in (2)), and S corporations) if the total realized gain for the tax year on all involuntarily converted properties on which there is realized gain of more than $100,000. Free state filing income tax   For taxpayers described in (3) above, gains cannot be offset with any losses when determining whether the total gain is more than $100,000. Free state filing income tax If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. Free state filing income tax If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. Free state filing income tax Exception. Free state filing income tax   This rule does not apply if the related person acquired the property from an unrelated person within the replacement period. Free state filing income tax Advance payment. Free state filing income tax   If you pay a contractor in advance to build your replacement property, you have not bought replacement property unless it is finished before the end of the replacement period (discussed later). Free state filing income tax Replacement property. Free state filing income tax   To postpone reporting gain, you must buy replacement property for the specific purpose of replacing your condemned property. Free state filing income tax You do not have to use the actual funds from the condemnation award to acquire the replacement property. Free state filing income tax Property you acquire by gift or inheritance does not qualify as replacement property. Free state filing income tax Similar or related in service or use. Free state filing income tax   Your replacement property must be similar or related in service or use to the property it replaces. Free state filing income tax   If the condemned property is real property you held for productive use in your trade or business or for investment (other than property held mainly for sale), like-kind property to be held either for productive use in trade or business or for investment will be treated as property similar or related in service or use. Free state filing income tax For a discussion of like-kind property, see Like-Kind Property under Like-Kind Exchanges, later. Free state filing income tax Owner-user. Free state filing income tax   If you are an owner-user, similar or related in service or use means that replacement property must function in the same way as the property it replaces. Free state filing income tax Example. Free state filing income tax Your home was condemned and you invested the proceeds from the condemnation in a grocery store. Free state filing income tax Your replacement property is not similar or related in service or use to the condemned property. Free state filing income tax To be similar or related in service or use, your replacement property must also be used by you as your home. Free state filing income tax Owner-investor. Free state filing income tax   If you are an owner-investor, similar or related in service or use means that any replacement property must have the same relationship of services or uses to you as the property it replaces. Free state filing income tax You decide this by determining all the following information. Free state filing income tax Whether the properties are of similar service to you. Free state filing income tax The nature of the business risks connected with the properties. Free state filing income tax What the properties demand of you in the way of management, service, and relations to your tenants. Free state filing income tax Example. Free state filing income tax You owned land and a building you rented to a manufacturing company. Free state filing income tax The building was condemned. Free state filing income tax During the replacement period, you had a new building built on other land you already owned. Free state filing income tax You rented out the new building for use as a wholesale grocery warehouse. Free state filing income tax The replacement property is also rental property, so the two properties are considered similar or related in service or use if there is a similarity in all the following areas. Free state filing income tax Your management activities. Free state filing income tax The amount and kind of services you provide to your tenants. Free state filing income tax The nature of your business risks connected with the properties. Free state filing income tax Leasehold replaced with fee simple property. Free state filing income tax   Fee simple property you will use in your trade or business or for investment can qualify as replacement property that is similar or related in service or use to a condemned leasehold if you use it in the same business and for the identical purpose as the condemned leasehold. Free state filing income tax   A fee simple property interest generally is a property interest that entitles the owner to the entire property with unconditional power to dispose of it during his or her lifetime. Free state filing income tax A leasehold is property held under a lease, usually for a term of years. Free state filing income tax Outdoor advertising display replaced with real property. Free state filing income tax   You can elect to treat an outdoor advertising display as real property. Free state filing income tax If you make this election and you replace the display with real property in which you hold a different kind of interest, your replacement property can qualify as like-kind property. Free state filing income tax For example, real property bought to replace a destroyed billboard and leased property on which the billboard was located qualify as property of a like-kind. Free state filing income tax   You can make this election only if you did not claim a section 179 deduction for the display. Free state filing income tax You cannot cancel this election unless you get the consent of the IRS. Free state filing income tax   An outdoor advertising display is a sign or device rigidly assembled and permanently attached to the ground, a building, or any other permanent structure used to display a commercial or other advertisement to the public. Free state filing income tax Substituting replacement property. Free state filing income tax   Once you designate certain property as replacement property on your tax return, you cannot substitute other qualified property. Free state filing income tax But, if your previously designated replacement property does not qualify, you can substitute qualified property if you acquire it within the replacement period. Free state filing income tax Controlling interest in a corporation. Free state filing income tax   You can replace property by acquiring a controlling interest in a corporation that owns property similar or related in service or use to your condemned property. Free state filing income tax You have controlling interest if you own stock having at least 80% of the combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. Free state filing income tax Basis adjustment to corporation's property. Free state filing income tax   The basis of property held by the corporation at the time you acquired control must be reduced by your postponed gain, if any. Free state filing income tax You are not required to reduce the adjusted basis of the corporation's properties below your adjusted basis in the corporation's stock (determined after reduction by your postponed gain). Free state filing income tax   Allocate this reduction to the following classes of property in the order shown below. Free state filing income tax Property that is similar or related in service or use to the condemned property. Free state filing income tax Depreciable property not reduced in (1). Free state filing income tax All other property. Free state filing income tax If two or more properties fall in the same class, allocate the reduction to each property in proportion to the adjusted basis of all the properties in that class. Free state filing income tax The reduced basis of any single property cannot be less than zero. Free state filing income tax Main home replaced. Free state filing income tax   If your gain from a condemnation of your main home is more than you can exclude from your income (see Main home condemned under Gain or Loss From Condemnations, earlier), you can postpone reporting the rest of the gain by buying replacement property that is similar or related in service or use. Free state filing income tax The replacement property must cost at least as much as the amount realized from the condemnation minus the excluded gain. Free state filing income tax   You must reduce the basis of your replacement property by the postponed gain. Free state filing income tax Also, if you postpone reporting any part of your gain under these rules, you are treated as having owned and used the replacement property as your main home for the period you owned and used the condemned property as your main home. Free state filing income tax Example. Free state filing income tax City authorities condemned your home that you had used as a personal residence for 5 years prior to the condemnation. Free state filing income tax The city paid you a condemnation award of $400,000. Free state filing income tax Your adjusted basis in the property was $80,000. Free state filing income tax You realize a gain of $320,000 ($400,000 − $80,000). Free state filing income tax You purchased a new home for $100,000. Free state filing income tax You can exclude $250,000 of the realized gain from your gross income. Free state filing income tax The amount realized is then treated as being $150,000 ($400,000 − $250,000) and the gain realized is $70,000 ($150,000 amount realized − $80,000 adjusted basis). Free state filing income tax You must recognize $50,000 of the gain ($150,000 amount realized − $100,000 cost of new home). Free state filing income tax The remaining $20,000 of realized gain is postponed. Free state filing income tax Your basis in the new home is $80,000 ($100,000 cost − $20,000 gain postponed). Free state filing income tax Replacement period. Free state filing income tax   To postpone reporting your gain from a condemnation, you must buy replacement property within a certain period of time. Free state filing income tax This is the replacement period. Free state filing income tax   The replacement period for a condemnation begins on the earlier of the following dates. Free state filing income tax The date on which you disposed of the condemned property. Free state filing income tax The date on which the threat of condemnation began. Free state filing income tax   The replacement period generally ends 2 years after the end of the first tax year in which any part of the gain on the condemnation is realized. Free state filing income tax However, see the exceptions below. Free state filing income tax Three-year replacement period for certain property. Free state filing income tax   If real property held for use in a trade or business or for investment (not including property held primarily for sale) is condemned, the replacement period ends 3 years after the end of the first tax year in which any part of the gain on the condemnation is realized. Free state filing income tax However, this 3-year replacement period cannot be used if you replace the condemned property by acquiring control of a corporation owning property that is similar or related in service or use. Free state filing income tax Five-year replacement period for certain property. Free state filing income tax   The replacement period ends 5 years after the end of the first tax year in which any part of the gain is realized on the compulsory or involuntary conversion of the following qualified property. Free state filing income tax Property in any Midwestern disaster area compulsorily or involuntarily converted on or after the applicable disaster date as a result of severe storms, tornadoes, or flooding, but only if substantially all of the use of the replacement property is in a Midwestern disaster area. Free state filing income tax Property in the Kansas disaster area compulsorily or involuntarily converted after May 3, 2007, but only if substantially all of the use of the replacement property is in the Kansas disaster area. Free state filing income tax Property in the Hurricane Katrina disaster area compulsorily or involuntarily converted after August 24, 2005, as a result of Hurricane Katrina, but only if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area. Free state filing income tax Extended replacement period for taxpayers affected by other federally declared disasters. Free state filing income tax    If you are affected by a federally declared disaster, the IRS may grant disaster relief by extending the periods to perform certain tax-related acts for 2013, including the replacement period, by up to one year. Free state filing income tax For more information visit www. Free state filing income tax irs. Free state filing income tax gov/uac/Tax-Relief-in-Disaster-Situations. Free state filing income tax Weather-related sales of livestock in an area eligible for federal assistance. Free state filing income tax   Generally, if the sale or exchange of livestock is due to drought, flood, or other weather-related conditions in an area eligible for federal assistance, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the sale or exchange. Free state filing income tax    If the weather-related conditions continue for longer than 3 years, the replacement period may be extended on a regional basis until the end of your first drought-free year for the applicable region. Free state filing income tax See Notice 2006-82. Free state filing income tax You can find Notice 2006-82 on page 529 of Internal Revenue Bulletin 2006-39 at www. Free state filing income tax irs. Free state filing income tax gov/irb/2006-39_IRB/ar13. Free state filing income tax html. Free state filing income tax    Each year, the IRS publishes a list of counties, districts, cities, or parishes for which exceptional, extreme, or severe drought was reported during the preceding 12 months. Free state filing income tax If you qualified for a 4-year replacement period for livestock sold or exchanged on account of drought and your replacement period is scheduled to expire at the end of 2013 (or at the end of the tax year that includes August 31, 2013), see Notice 2013-62. Free state filing income tax You can find Notice 2013-62 on page 466 of Internal Revenue Bulletin 2013-45 at www. Free state filing income tax irs. Free state filing income tax gov/irb/2013-45_IRB/ar04. Free state filing income tax html. Free state filing income tax The replacement period will be extended under Notice 2006-82 if the applicable region is on the list included in Notice 2013-62. Free state filing income tax Determining when gain is realized. Free state filing income tax   If you are a cash basis taxpayer, you realize gain when you receive payments that are more than your basis in the property. Free state filing income tax If the condemning authority makes deposits with the court, you realize gain when you withdraw (or have the right to withdraw) amounts that are more than your basis. Free state filing income tax   This applies even if the amounts received are only partial or advance payments and the full award has not yet been determined. Free state filing income tax A replacement will be too late if you wait for a final determination that does not take place in the applicable replacement period after you first realize gain. Free state filing income tax   For accrual basis taxpayers, gain (if any) accrues in the earlier year when either of the following occurs. Free state filing income tax All events have occurred that fix the right to the condemnation award and the amount can be determined with reasonable accuracy. Free state filing income tax All or part of the award is actually or constructively received. Free state filing income tax For example, if you have an absolute right to a part of a condemnation award when it is deposited with the court, the amount deposited accrues in the year the deposit is made even though the full amount of the award is still contested. Free state filing income tax Replacement property bought before the condemnation. Free state filing income tax   If you buy your replacement property after there is a threat of condemnation but before the actual condemnation and you still hold the replacement property at the time of the condemnation, you have bought your replacement property within the replacement period. Free state filing income tax Property you acquire before there is a threat of condemnation does not qualify as replacement property acquired within the replacement period. Free state filing income tax Example. Free state filing income tax On April 3, 2012, city authorities notified you that your property would be condemned. Free state filing income tax On June 5, 2012, you acquired property to replace the property to be condemned. Free state filing income tax You still had the new property when the city took possession of your old property on September 4, 2013. Free state filing income tax You have made a replacement within the replacement period. Free state filing income tax Extension. Free state filing income tax   You can request an extension of the replacement period from the IRS director for your area. Free state filing income tax You should apply before the end of the replacement period. Free state filing income tax Your request should explain in detail why you need an extension. Free state filing income tax The IRS will consider a request filed within a reasonable time after the replacement period if you can show reasonable cause for the delay. Free state filing income tax An extension of the replacement period will be granted if you can show reasonable cause for not making the replacement within the regular period. Free state filing income tax   Ordinarily, requests for extensions are granted near the end of the replacement period or the extended replacement period. Free state filing income tax Extensions are usually limited to a period of 1 year or less. Free state filing income tax The high market value or scarcity of replacement property is not a sufficient reason for granting an extension. Free state filing income tax If your replacement property is being built and you clearly show that the replacement or restoration cannot be made within the replacement peri