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Free tax returns 5. Free tax returns   Figuring Your Tax Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Tax Year Identification NumberF-1 and M-1 visa holders. Free tax returns J-1 visa holders. Free tax returns Filing StatusResident Aliens Nonresident Aliens Reporting Your Income DeductionsResident Aliens Nonresident Aliens ExemptionsResident Aliens Nonresident Aliens Itemized DeductionsResident Aliens Nonresident Aliens Tax Credits and PaymentsResident Aliens Nonresident Aliens Bona Fide Residents of American Samoa or Puerto Rico Introduction After you have determined your alien status, the source of your income, and if and how that income is taxed in the United States, your next step is to figure your tax. Free tax returns The information in this chapter is not as comprehensive for resident aliens as it is for nonresident aliens. Free tax returns Resident aliens should get publications, forms, and instructions for U. Free tax returns S. Free tax returns citizens, because the information for filing returns for resident aliens is generally the same as for U. Free tax returns S. Free tax returns citizens. Free tax returns If you are both a nonresident alien and a resident alien in the same tax year, see chapter 6 for a discussion of dual-status aliens. Free tax returns Topics - This chapter discusses: Identification numbers, Filing status, Deductions, Exemptions, Tax credits and payments, and Special rules for bona fide residents of American Samoa and Puerto Rico. Free tax returns Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 501 Exemptions, Standard Deduction, and Filing Information 521 Moving Expenses 526 Charitable Contributions 535 Business Expenses 597 Information on the United States–Canada Income Tax Treaty Form (and Instructions) W-7 Application for IRS Individual Taxpayer Identification Number 1040 U. Free tax returns S. Free tax returns Individual Income Tax Return 1040NR U. Free tax returns S. Free tax returns Nonresident Alien Income Tax Return 1040NR-EZ U. Free tax returns S. Free tax returns Income Tax Return for Certain Nonresident Aliens With No Dependents 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 3903 Moving Expenses 4563 Exclusion of Income for Bona Fide Residents of American Samoa 8959 Additional Medicare Tax See chapter 12 for information about getting these publications and forms. Free tax returns Tax Year You must figure your income and file a tax return on the basis of an annual accounting period called a tax year. Free tax returns If you have not previously established a fiscal tax year, your tax year is the calendar year. Free tax returns A calendar year is 12 consecutive months ending on December 31. Free tax returns If you have previously established a regular fiscal year (12 consecutive months ending on the last day of a month other than December or a 52–53 week year) and are considered to be a U. Free tax returns S. Free tax returns resident for any calendar year, you will be treated as a U. Free tax returns S. Free tax returns resident for any part of your fiscal year that falls within that calendar year. Free tax returns Identification Number A taxpayer identification number must be furnished on returns, statements, and other tax-related documents. Free tax returns For an individual, this is a social security number (SSN). Free tax returns If you do not have and are not eligible to get an SSN, you must apply for an individual taxpayer identification number (ITIN). Free tax returns An employer identification number (EIN) is required if you are engaged in a trade or business as a sole proprietor and have employees or a qualified retirement plan. Free tax returns You must furnish a taxpayer identification number if you are: An alien who has income effectively connected with the conduct of a U. Free tax returns S. Free tax returns trade or business at any time during the year, An alien who has a U. Free tax returns S. Free tax returns office or place of business at any time during the year, A nonresident alien spouse treated as a resident, as discussed in chapter 1, or Any other alien who files a tax return, an amended return, or a refund claim (but not information returns). Free tax returns Social security number (SSN). Free tax returns   Generally, you can get an SSN if you have been lawfully admitted to the United States for permanent residence or under other immigration categories that authorize U. Free tax returns S. Free tax returns employment. Free tax returns   To apply for this number, get Form SS-5, Application for a Social Security Card, from your local Social Security Administration (SSA) office or call the SSA at 1-800-772-1213. Free tax returns You can also download Form SS-5 from the SSA's website at www. Free tax returns socialsecurity. Free tax returns gov/ssnumber/ss5. Free tax returns htm. Free tax returns You must visit an SSA office in person and submit your Form SS-5 along with original documentation showing your age, identity, immigration status, and authority to work in the United States. Free tax returns Generally, you will receive your card about 2 weeks after the SSA has all of the necessary information. Free tax returns F-1 and M-1 visa holders. Free tax returns    If you are an F-1 or M-1 student, you must also show your Form I-20. Free tax returns For more information, see SSA Publication 05-10181, International Students and Social Security Numbers, available online at www. Free tax returns socialsecurity. Free tax returns gov/pubs/10181. Free tax returns html. Free tax returns J-1 visa holders. Free tax returns   If you are a J-1 exchange visitor, you will also need to show your Form DS-2019. Free tax returns For more information, see SSA Publication 05-10107, Foreign Workers and Social Security Numbers, available online at www. Free tax returns socialsecurity. Free tax returns gov/pubs/10107. Free tax returns html. Free tax returns Individual taxpayer identification number (ITIN). Free tax returns   If you do not have and are not eligible to get an SSN, you must apply for an ITIN. Free tax returns For details on how to do so, see Form W-7 and its instructions. Free tax returns Allow 6 to 10 weeks for the IRS to notify you of your ITIN. Free tax returns If you already have an ITIN, enter it wherever an SSN is required on your tax return. Free tax returns   An ITIN is for tax use only. Free tax returns It does not entitle you to social security benefits or change your employment or immigration status under U. Free tax returns S. Free tax returns law. Free tax returns   In addition to those aliens who are required to furnish a taxpayer identification number and are not eligible for an SSN, a Form W-7 must be filed for: Alien individuals who are claimed as dependents and are not eligible for an SSN, and Alien spouses who are claimed as exemptions and are not eligible for an SSN. Free tax returns Employer identification number (EIN). Free tax returns   An individual may use an SSN (or ITIN) for individual taxes and an EIN for business taxes. Free tax returns To apply for an EIN, file Form SS-4, Application for Employer Identification Number, with the IRS. Free tax returns Filing Status The amount of your tax depends on your filing status. Free tax returns Your filing status is important in determining whether you can take certain deductions and credits. Free tax returns The rules for determining your filing status are different for resident aliens and nonresident aliens. Free tax returns Resident Aliens Resident aliens can use the same filing statuses available to U. Free tax returns S. Free tax returns citizens. Free tax returns See your form instructions or Publication 501 for more information on filing status. Free tax returns Married filing jointly. Free tax returns   Generally, you can file as married filing jointly only if both you and your spouse were resident aliens for the entire tax year, or if you make one of the choices discussed in chapter 1 to treat your spouse as a resident alien for the entire tax year. Free tax returns Qualifying widow(er). Free tax returns   If your spouse died in 2011 or 2012, you did not remarry before the end of 2013, and you have a dependent child living with you, you may qualify to file as a qualifying widow(er) and use the joint return tax rates. Free tax returns This applies only if you could have filed a joint return with your spouse for the year your spouse died. Free tax returns Head of household. Free tax returns   You can qualify as head of household if you are unmarried or considered unmarried on the last day of the year and you pay more than half the cost of keeping up a home for you and a qualifying person. Free tax returns You must be a resident alien for the entire tax year. Free tax returns   You are considered unmarried for this purpose if your spouse was a nonresident alien at any time during the year and you do not make one of the choices discussed in chapter 1 to treat your spouse as a resident alien for the entire tax year. Free tax returns Note. Free tax returns   Even if you are considered unmarried for head of household purposes because you are married to a nonresident alien, you may still be considered married for purposes of the earned income credit. Free tax returns In that case, you will not be entitled to the credit. Free tax returns See Publication 596 for more information. Free tax returns Nonresident Aliens If you are a nonresident alien filing Form 1040NR, you may be able to use one of the filing statuses discussed later. Free tax returns If you are filing Form 1040NR-EZ, you can only claim “Single nonresident alien” or “Married nonresident alien” as your filing status. Free tax returns Married nonresident alien. Free tax returns   Married nonresident aliens who are not married to U. Free tax returns S. Free tax returns citizens or residents generally must use the Tax Table column or the Tax Computation Worksheet for married filing separate returns when determining the tax on income effectively connected with a U. Free tax returns S. Free tax returns trade or business. Free tax returns Exceptions. Free tax returns   Married nonresident aliens normally cannot use the Tax Table column or the Tax Computation Worksheet for single individuals. Free tax returns However, you may be able to file as single if you lived apart from your spouse during the last 6 months of the year and you are a married resident of Canada, Mexico, South Korea, or are a married U. Free tax returns S. Free tax returns national. Free tax returns See the instructions for Form 1040NR or Form 1040NR-EZ to see if you qualify. Free tax returns U. Free tax returns S. Free tax returns national is defined later in this section under Qualifying widow(er) . Free tax returns   A nonresident alien generally cannot file as married filing jointly. Free tax returns However, a nonresident alien who is married to a U. Free tax returns S. Free tax returns citizen or resident can choose to be treated as a resident and file a joint return on Form 1040, Form 1040A, or Form 1040EZ. Free tax returns For information on these choices, see chapter 1. Free tax returns If you do not make the choice to file jointly, file Form 1040NR or Form 1040NR-EZ and use the Tax Table column or the Tax Computation Worksheet for married individuals filing separately. Free tax returns Qualifying widow(er). Free tax returns   You may be eligible to file as a qualifying widow(er) and use the joint return tax rates if all of the following conditions apply. Free tax returns You were a resident of Canada, Mexico, or South Korea, or a U. Free tax returns S. Free tax returns national (defined later). Free tax returns Your spouse died in 2011 or 2012 and you did not remarry before the end of 2013. Free tax returns You have a dependent child living with you. Free tax returns See the instructions for Form 1040NR for the rules for filing as a qualifying widow(er) with a dependent child. Free tax returns   A U. Free tax returns S. Free tax returns national is an individual who, although not a U. Free tax returns S. Free tax returns citizen, owes his or her allegiance to the United States. Free tax returns U. Free tax returns S. Free tax returns nationals include American Samoans and Northern Mariana Islanders who chose to become U. Free tax returns S. Free tax returns nationals instead of U. Free tax returns S. Free tax returns citizens. Free tax returns Head of household. Free tax returns   You cannot file as head of household if you are a nonresident alien at any time during the tax year. Free tax returns However, if you are married, your spouse can qualify as a head of household if: Your spouse is a resident alien or U. Free tax returns S. Free tax returns citizen for the entire tax year, You do not choose to be treated as a resident alien, and Your spouse meets the other requirements for this filing status, as discussed earlier under Resident Aliens . Free tax returns Note. Free tax returns   Even if your spouse is considered unmarried for head of household purposes because you are a nonresident alien, your spouse may still be considered married for purposes of the earned income credit. Free tax returns In that case, your spouse will not be entitled to the credit. Free tax returns See Publication 596 for more information. Free tax returns Estates and trusts. Free tax returns   A nonresident alien estate or trust using Form 1040NR must use Tax Rate Schedule W in the Form 1040NR instructions when determining the tax on income effectively connected with a U. Free tax returns S. Free tax returns trade or business. Free tax returns Special rules for aliens from certain U. Free tax returns S. Free tax returns possessions. Free tax returns   A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico for the entire tax year and who is temporarily working in the United States should read Bona Fide Residents of American Samoa or Puerto Rico, at the end of this chapter, for information about special rules. Free tax returns Reporting Your Income You must report each item of income that is taxable according to the rules in chapters 2, 3, and 4. Free tax returns For resident aliens, this includes income from sources both within and outside the United States. Free tax returns For nonresident aliens, this includes both income that is effectively connected with a trade or business in the United States (subject to graduated tax rates) and income from U. Free tax returns S. Free tax returns sources that is not effectively connected (subject to a flat 30% tax rate or lower tax treaty rate). Free tax returns Deductions Resident and nonresident aliens can claim similar deductions on their U. Free tax returns S. Free tax returns tax returns. Free tax returns However, nonresident aliens generally can claim only deductions related to income that is effectively connected with their U. Free tax returns S. Free tax returns trade or business. Free tax returns Resident Aliens You can claim the same deductions allowed to U. Free tax returns S. Free tax returns citizens if you are a resident alien for the entire tax year. Free tax returns While the discussion that follows contains some of the same general rules and guidelines that apply to you, it is specifically directed toward nonresident aliens. Free tax returns You should get Form 1040 and instructions for more information on how to claim your allowable deductions. Free tax returns Nonresident Aliens You can claim deductions to figure your effectively connected taxable income. Free tax returns You generally cannot claim deductions related to income that is not connected with your U. Free tax returns S. Free tax returns business activities. Free tax returns Except for personal exemptions, and certain itemized deductions, discussed later, you can claim deductions only to the extent they are connected with your effectively connected income. Free tax returns Ordinary and necessary business expenses. Free tax returns   You can deduct all ordinary and necessary expenses in the operation of your U. Free tax returns S. Free tax returns trade or business to the extent they relate to income effectively connected with that trade or business. Free tax returns The deduction for travel expenses while in the United States is discussed under Itemized Deductions, later. Free tax returns For information about other business expenses, see Publication 535. Free tax returns Losses. Free tax returns   You can deduct losses resulting from transactions that you entered into for profit and that you were not reimbursed for by insurance, etc. Free tax returns to the extent that they relate to income that is effectively connected with a trade or business in the United States. Free tax returns Educator expenses. Free tax returns   If you were an eligible educator in 2013, you can deduct as an adjustment to income up to $250 in unreimbursed qualified expenses you paid or incurred during 2013 for books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment, and other equipment and materials used in the classroom. Free tax returns For more information, see your tax form instructions. Free tax returns Individual retirement arrangement (IRA). Free tax returns   If you made contributions to a traditional IRA for 2013, you may be able to take an IRA deduction. Free tax returns But you must have taxable compensation effectively connected with a U. Free tax returns S. Free tax returns trade or business to do so. Free tax returns A Form 5498 should be sent to you by May 31, 2014, that shows all contributions to your traditional IRA for 2013. Free tax returns If you were covered by a retirement plan (qualified pension, profit-sharing (including 401(k)), annuity, SEP, SIMPLE, etc. Free tax returns ) at work or through self-employment, your IRA deduction may be reduced or eliminated. Free tax returns But you can still make contributions to a traditional IRA even if you cannot deduct them. Free tax returns If you made nondeductible contributions to a traditional IRA for 2013, you must report them on Form 8606, Nondeductible IRAs. Free tax returns   For more information, see Publication 590, Individual Retirement Arrangements (IRAs). Free tax returns Moving expenses. Free tax returns   If you are a nonresident alien temporarily in the United States earning taxable income for performing personal services, you can deduct moving expenses to the United States if you meet both of the following tests. Free tax returns You are a full-time employee for at least 39 weeks during the 12 months right after you move, or if you are self-employed, you work full time for at least 39 weeks during the first 12 months and 78 weeks during the first 24 months right after you move. Free tax returns Your new job location is at least 50 miles farther (by the shortest commonly traveled route) from your former home than your former job location was. Free tax returns If you had no former job location, the new job location must be at least 50 miles from your former home. Free tax returns   You cannot deduct the moving expense you have when returning to your home abroad or moving to a foreign job site. Free tax returns   Figure your deductible moving expenses to the United States on Form 3903, and deduct them on line 26 of Form 1040NR. Free tax returns   For more information on the moving expense deduction, see Publication 521. Free tax returns Reimbursements. Free tax returns   If your employer reimbursed you for allowable moving expenses under an accountable plan, your employer should have excluded these reimbursements from your income. Free tax returns You can only deduct allowable moving expenses that were not reimbursed by your employer or that were reimbursed but the reimbursement was included in your income. Free tax returns For more information, see Publication 521. Free tax returns Moving expense or travel expense. Free tax returns   If you deduct moving expenses to the United States, you cannot also deduct travel expenses (discussed later under Itemized Deductions) while temporarily away from your tax home in a foreign country. Free tax returns Moving expenses are based on a change in your principal place of business while travel expenses are based on your temporary absence from your principal place of business. Free tax returns Self-employed SEP, SIMPLE, and qualified retirement plans. Free tax returns   If you are self-employed, you may be able to deduct contributions to a SEP, SIMPLE, or qualified retirement plan that provides retirement benefits for yourself and your common-law employees, if any. Free tax returns To make deductible contributions for yourself, you must have net earnings from self-employment that are effectively connected with your U. Free tax returns S. Free tax returns trade or business. Free tax returns   Get Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans), for further information. Free tax returns Penalty on early withdrawal of savings. Free tax returns   You must include in income all effectively connected interest income you receive or that is credited to your account during the year. Free tax returns Do not reduce it by any penalty you must pay on an early withdrawal from a time savings account. Free tax returns However, if the interest income is effectively connected with your U. Free tax returns S. Free tax returns trade or business during the year, you can deduct on line 30 of Form 1040NR the amount of the early withdrawal penalty that the banking institution charged. Free tax returns Student loan interest expense. Free tax returns   If you paid interest on a student loan in 2013, you may be able to deduct up to $2,500 of the interest you paid. Free tax returns Generally, you can claim the deduction if all the following requirements are met. Free tax returns Your filing status is any filing status except married filing separately. Free tax returns Your modified adjusted gross income is less than $75,000. Free tax returns No one else is claiming an exemption for you on his or her 2013 tax return. Free tax returns You paid interest on a loan taken out only to pay tuition and other qualified higher education expenses for yourself, your spouse, someone who was your dependent when the loan was taken out, or someone you could have claimed as a dependent for the year the loan was taken out except that: The person filed a joint return, The person had gross income that was equal to or more than the exemption amount for that year ($3,900 for 2013), or You could be claimed as a dependent on someone else's return. Free tax returns The loan is not from a related person or a person who borrowed the proceeds under a qualified employer plan or a contract purchased under such a plan. Free tax returns The education expenses were paid or incurred within a reasonable period of time before or after the loan was taken out. Free tax returns The person for whom the expenses were paid or incurred was an eligible student. Free tax returns Use the worksheet in the Form 1040NR or Form 1040NR-EZ instructions to figure the deduction. Free tax returns For more information, see Publication 970, Tax Benefits for Education. Free tax returns Exemptions Resident aliens can claim personal exemptions and exemptions for dependents in the same way as U. Free tax returns S. Free tax returns citizens. Free tax returns However, nonresident aliens generally can claim only a personal exemption for themselves on their U. Free tax returns S. Free tax returns tax return. Free tax returns Resident Aliens You can claim personal exemptions and exemptions for dependents according to the dependency rules for U. Free tax returns S. Free tax returns citizens. Free tax returns You can claim an exemption for your spouse on a separate return if your spouse had no gross income for U. Free tax returns S. Free tax returns tax purposes and was not the dependent of another taxpayer. Free tax returns You can claim this exemption even if your spouse has not been a resident alien for a full tax year or is an alien who has not come to the United States. Free tax returns You can claim an exemption for each person who qualifies as a dependent according to the rules for U. Free tax returns S. Free tax returns citizens. Free tax returns The dependent must be a citizen or national (defined earlier) of the United States or be a resident of the United States, Canada, or Mexico for some part of the calendar year in which your tax year begins. Free tax returns Get Publication 501 for more information. Free tax returns Your spouse and each dependent for whom you claim an exemption must have either an SSN or an ITIN. Free tax returns See Identification Number, earlier. Free tax returns Nonresident Aliens Generally, if you are a nonresident alien engaged in a trade or business in the United States, you can claim only one personal exemption ($3,900 for 2013). Free tax returns You may be able to claim an exemption for a spouse and a dependent if you are described in any of the following discussions. Free tax returns Your spouse and each dependent for whom you claim an exemption must have either an SSN or an ITIN. Free tax returns See Identification Number, earlier. Free tax returns Residents of Mexico or Canada or U. Free tax returns S. Free tax returns nationals. Free tax returns   If you are a resident of Mexico or Canada or a national of the United States (defined earlier), you can also claim a personal exemption for your spouse if your spouse had no gross income for U. Free tax returns S. Free tax returns tax purposes and cannot be claimed as the dependent on another U. Free tax returns S. Free tax returns taxpayer's return. Free tax returns In addition, you can claim exemptions for your dependents who meet certain tests. Free tax returns Residents of Mexico, Canada, or nationals of the United States must use the same rules as U. Free tax returns S. Free tax returns citizens to determine who is a dependent and for which dependents exemptions can be claimed. Free tax returns See Publication 501 for these rules. Free tax returns For purposes of these rules, dependents who are U. Free tax returns S. Free tax returns nationals meet the citizenship test discussed in Publication 501. Free tax returns Residents of South Korea. Free tax returns   Nonresident aliens who are residents of South Korea may be able to claim exemptions for a spouse and children. Free tax returns The income tax treaty with South Korea imposes two additional requirements on South Korean residents: The spouse and all children claimed must live with the alien in the United States at some time during the tax year, and The additional deduction for the exemptions must be prorated based on the ratio of the alien's U. Free tax returns S. Free tax returns source gross income effectively connected with a U. Free tax returns S. Free tax returns trade or business for the tax year to the alien's entire income from all sources during the tax year. Free tax returns Example. Free tax returns Mr. Free tax returns Park, a nonresident alien who is a resident of South Korea, lives temporarily in the United States with his wife and two children. Free tax returns During the tax year he receives U. Free tax returns S. Free tax returns compensation of $18,000. Free tax returns He also receives $6,000 of income from sources outside the United States that is not effectively connected with his U. Free tax returns S. Free tax returns trade or business. Free tax returns Thus, his total income for the year is $24,000. Free tax returns Mr. Free tax returns Park meets all requirements for claiming exemptions for his spouse and two children. Free tax returns The additional deduction for 2013 is $8,775 figured as follows: $18,000 $24,000 × $11,700* = $8,775               *3 × $3,900 = $11,700   Students and business apprentices from India. Free tax returns   Students and business apprentices who are eligible for the benefits of Article 21(2) of the United States–India Income Tax Treaty may be able to claim exemptions for their spouse and dependents. Free tax returns   You can claim an exemption for your spouse if he or she had no gross income during the year and cannot be claimed as a dependent on another U. Free tax returns S. Free tax returns taxpayer's return. Free tax returns   You can claim exemptions for each of your dependents not admitted to the United States on “F-2,” “J-2,” or “M-2” visas if they meet the same rules that apply to U. Free tax returns S. Free tax returns citizens. Free tax returns See Publication 501 for these rules. Free tax returns   List your spouse and dependents on line 7c of Form 1040NR. Free tax returns Enter the total on the appropriate line to the right of line 7c. Free tax returns Itemized Deductions Nonresident aliens can claim some of the same itemized deductions that resident aliens can claim. Free tax returns However, nonresident aliens can claim itemized deductions only if they have income effectively connected with their U. Free tax returns S. Free tax returns trade or business. Free tax returns Resident Aliens You can claim the same itemized deductions as U. Free tax returns S. Free tax returns citizens, using Schedule A of Form 1040. Free tax returns These deductions include certain medical and dental expenses, state and local income taxes, real estate taxes, interest you paid on a home mortgage, charitable contributions, casualty and theft losses, and miscellaneous deductions. Free tax returns If you do not itemize your deductions, you can claim the standard deduction for your particular filing status. Free tax returns For further information, see Form 1040 and instructions. Free tax returns Nonresident Aliens You can deduct certain itemized deductions if you receive income effectively connected with your U. Free tax returns S. Free tax returns trade or business. Free tax returns These deductions include state and local income taxes, charitable contributions to U. Free tax returns S. Free tax returns organizations, casualty and theft losses, and miscellaneous deductions. Free tax returns Use Schedule A of Form 1040NR to claim itemized deductions. Free tax returns If you are filing Form 1040NR-EZ, you can only claim a deduction for state or local income taxes. Free tax returns If you are claiming any other itemized deduction, you must file Form 1040NR. Free tax returns Standard deduction. Free tax returns   Nonresident aliens cannot claim the standard deduction. Free tax returns However, see Students and business apprentices from India , next. Free tax returns Students and business apprentices from India. Free tax returns   A special rule applies to students and business apprentices who are eligible for the benefits of Article 21(2) of the United States–India Income Tax Treaty. Free tax returns You can claim the standard deduction provided you do not claim itemized deductions. Free tax returns   Use Worksheet 5-1 to figure your standard deduction. Free tax returns If you are married and your spouse files a return and itemizes deductions, you cannot take the standard deduction. Free tax returns State and local income taxes. Free tax returns   You can deduct state and local income taxes you paid on income that is effectively connected with a trade or business in the United States. Free tax returns If you received a refund or rebate in 2013 of taxes you paid in an earlier year, do not reduce your deduction by that amount. Free tax returns Instead, you must include the refund or rebate in income if you deducted the taxes in the earlier year and the deduction reduced your tax. Free tax returns See Recoveries in Publication 525 for details on how to figure the amount to include in income. Free tax returns Charitable contributions. Free tax returns   You can deduct your charitable contributions or gifts to qualified organizations subject to certain limits. Free tax returns Qualified organizations include organizations that are religious, charitable, educational, scientific, or literary in nature, or that work to prevent cruelty to children or animals. Free tax returns Certain organizations that promote national or international amateur sports competition are also qualified organizations. Free tax returns Foreign organizations. Free tax returns   Contributions made directly to a foreign organization are not deductible. Free tax returns However, you can deduct contributions to a U. Free tax returns S. Free tax returns organization that transfers funds to a charitable foreign organization if the U. Free tax returns S. Free tax returns organization controls the use of the funds or if the foreign organization is only an administrative arm of the U. Free tax returns S. Free tax returns organization. Free tax returns   For more information about organizations that qualify to receive charitable contributions, see Publication 526, Charitable Contributions. Free tax returns Worksheet 5-1. Free tax returns 2013 Standard Deduction Worksheet for Students and Business Apprentices From India Caution. Free tax returns If you are married filing a separate return and your spouse itemizes deductions, do not complete this worksheet. Free tax returns You cannot take the standard deduction even if you were born before January 2, 1949, or are blind. Free tax returns 1 Enter the amount shown below for your filing status. Free tax returns           Single or married filing separately—$6,100 Qualifying widow(er)—$12,200 1. Free tax returns           2 Can you be claimed as a dependent on someone else's U. Free tax returns S. Free tax returns income tax return?  No. Free tax returns Enter the amount from line 1 on line 4. Free tax returns Skip line 3 and go to line 5. Free tax returns   Yes. Free tax returns Go to line 3. Free tax returns         3 Is your earned income* more than $650?           Yes. Free tax returns Add $350 to your earned income. Free tax returns Enter the total. Free tax returns           No. Free tax returns Enter $1,000 3. Free tax returns       4 Enter the smaller of line 1 or line 3 4. Free tax returns   5 If born before January 2, 1949, OR blind, enter $1,200 ($1,500 if single). Free tax returns If born before January 2, 1949, AND blind, enter $2,400 ($3,000 if single). Free tax returns Otherwise, enter -0- 5. Free tax returns   6 Add lines 4 and 5. Free tax returns Enter the total here and on Form 1040NR, line 38 (or Form 1040NR-EZ, line 11). Free tax returns Print “Standard Deduction Allowed Under U. Free tax returns S. Free tax returns –India Income Tax Treaty” in the space to the left of these lines. Free tax returns This is your standard deduction for 2013. Free tax returns 6. Free tax returns   *Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. Free tax returns It also includes any amount received as a scholarship that you must include in your income. Free tax returns Generally, your earned income is the total of the amount(s) you reported on Form 1040NR, lines 8,12,13, and 19, minus amounts on lines 27 and 31 (or Form 1040NR-EZ, lines 3 and 5, minus any amount on line 8). Free tax returns Contributions from which you benefit. Free tax returns   If you receive a benefit as a result of making a contribution to a qualified organization, you can deduct only the amount of your contribution that is more than the value of the benefit you receive. Free tax returns   If you pay more than the fair market value to a qualified organization for merchandise, goods, or services, the amount you pay that is more than the value of the item can be a charitable contribution. Free tax returns For the excess amount to qualify, you must pay it with the intent to make a charitable contribution. Free tax returns Cash contributions. Free tax returns   You cannot deduct a cash contribution, regardless of the amount, unless you keep as a record of the contribution a bank record (such as a canceled check, a bank copy of a canceled check, or a bank statement containing the name of the charity, the date, and the amount) or a written record from the charity. Free tax returns The written record must include the name of the charity, date of the contribution, and the amount of the contribution. Free tax returns   You may deduct a cash contribution of $250 or more only if you have a written statement from the charitable organization showing: The amount of any money contributed, Whether the organization gave you any goods or services in return for your contribution, and A description and estimate of the value of any goods or services described in (2). Free tax returns If you received only intangible religious benefits, the organization must state this, but it does not have to describe or value the benefit. Free tax returns Noncash contributions. Free tax returns   For contributions not made in cash, the records you must keep depend on the amount of your deduction. Free tax returns See Publication 526 for details. Free tax returns For example, if you make a noncash contribution and the amount of your deduction is more than $500, you must complete and attach to your tax return Form 8283, Noncash Charitable Contributions. Free tax returns If you deduct more than $500 for a contribution of a motor vehicle, boat, or airplane, you must also attach a statement from the charitable organization to your return. Free tax returns If your total deduction is over $5,000, you also may have to get appraisals of the values of the property. Free tax returns If the donated property is valued at more than $5,000, you must obtain a qualified appraisal. Free tax returns You generally must attach to your tax return an appraisal of any property if your deduction for the property is more than $500,000. Free tax returns See Form 8283 and its instructions for details. Free tax returns Contributions of appreciated property. Free tax returns   If you contribute property to a qualified organization, the amount of your charitable contribution is generally the fair market value of the property at the time of the contribution. Free tax returns However, if you contribute property with a fair market value that is more than your basis in it, you may have to reduce the fair market value by the amount of appreciation (increase in value) when you figure your deduction. Free tax returns Your basis in the property is generally what you paid for it. Free tax returns If you need more information about basis, get Publication 551, Basis of Assets. Free tax returns   Different rules apply to figuring your deduction, depending on whether the property is: Ordinary income property, or Capital gain property. Free tax returns For information about these rules, see Publication 526. Free tax returns Limit. Free tax returns   The amount you can deduct in a tax year is limited in the same way it is for a citizen or resident of the United States. Free tax returns For a discussion of limits on charitable contributions and other information, get Publication 526. Free tax returns Casualty and theft losses. Free tax returns   You can deduct your loss from fire, storm, shipwreck, or other casualty, or theft of property even though your property is not connected with a U. Free tax returns S. Free tax returns trade or business. Free tax returns The property can be personal use property or income-producing property not connected with a U. Free tax returns S. Free tax returns trade or business. Free tax returns The property must be located in the United States at the time of the casualty or theft. Free tax returns You can deduct theft losses only in the year in which you discover the loss. Free tax returns   The amount of the loss is the fair market value of the property immediately before the casualty or theft less its fair market value immediately after the casualty or theft (but not more than its cost or adjusted basis) less any insurance or other reimbursement. Free tax returns The fair market value of property immediately after a theft is considered zero, because you no longer have the property. Free tax returns   If your property is covered by insurance, you should file a timely insurance claim for reimbursement. Free tax returns If you do not, you cannot deduct this loss as a casualty or theft loss. Free tax returns   Figure your deductible casualty and theft losses on Form 4684, Casualties and Thefts. Free tax returns Losses from personal use property. Free tax returns    You cannot deduct the first $100 of each casualty or theft loss to property held for personal use. Free tax returns You can deduct only the total of these losses for the year (reduced by the $100 limit) that is more than 10% of your adjusted gross income (line 37, Form 1040NR) for the year. Free tax returns Losses from income-producing property. Free tax returns   These losses are not subject to the limitations that apply to personal use property. Free tax returns Use Section B of Form 4684 to figure your deduction for these losses. Free tax returns Job expenses and other miscellaneous deductions. Free tax returns   You can deduct job expenses, such as allowable unreimbursed travel expenses (discussed next), and other miscellaneous deductions. Free tax returns Generally, the allowable deductions must be related to effectively connected income. Free tax returns Deductible expenses include: Union dues, Safety equipment and small tools needed for your job, Dues to professional organizations, Subscriptions to professional journals, Tax return preparation fees, and Casualty and theft losses of property used in performing services as an employee (employee property). Free tax returns   Most miscellaneous itemized deductions are deductible only if they are more than 2% of your adjusted gross income (line 37, Form 1040NR). Free tax returns For more information on miscellaneous deductions, see the instructions for Form 1040NR. Free tax returns Travel expenses. Free tax returns   You may be able to deduct your ordinary and necessary travel expenses while you are temporarily performing personal services in the United States. Free tax returns Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for one year or less. Free tax returns You must be able to show you were present in the United States on an activity that required your temporary absence from your regular place of work. Free tax returns   For example, if you have established a “tax home” through regular employment in a foreign country, and intend to return to similar employment in the same country at the end of your temporary stay in the United States, you can deduct reasonable travel expenses you paid. Free tax returns You cannot deduct travel expenses for other members of your family or party. Free tax returns Deductible travel expenses. Free tax returns   If you qualify, you can deduct your expenses for: Transportation—airfare, local transportation, including train, bus, etc. Free tax returns , Lodging—rent paid, utilities (do not include telephone), hotel or motel room expenses, and Meal expenses—actual expenses allowed if you keep records of the amounts, or, if you do not wish to keep detailed records, you are generally allowed a standard meal allowance amount depending on the date and area of your travel. Free tax returns You generally can deduct only 50% of unreimbursed meal expenses. Free tax returns The standard meal allowance rates for high-cost areas are available at www. Free tax returns gsa. Free tax returns gov/perdiem. Free tax returns The rates for other areas are in Publication 463. Free tax returns   Use Form 2106 or 2106-EZ to figure your allowable expenses that you claim on line 7 of Schedule A (Form 1040NR). Free tax returns Expenses allocable to U. Free tax returns S. Free tax returns tax-exempt income. Free tax returns   You cannot deduct an expense, or part of an expense, that is allocable to U. Free tax returns S. Free tax returns tax-exempt income, including income exempt by tax treaty. Free tax returns Example. Free tax returns Irina Oak, a citizen of Poland, resided in the United States for part of the year to acquire business experience from a U. Free tax returns S. Free tax returns company. Free tax returns During her stay in the United States, she received a salary of $8,000 from her Polish employer. Free tax returns She received no other U. Free tax returns S. Free tax returns source income. Free tax returns She spent $3,000 on travel expenses, of which $1,000 were for meals. Free tax returns None of these expenses were reimbursed. Free tax returns Under the tax treaty with Poland, $5,000 of her salary is exempt from U. Free tax returns S. Free tax returns income tax. Free tax returns In filling out Form 2106-EZ, she must reduce her deductible meal expenses by half ($500). Free tax returns She must reduce the remaining $2,500 of travel expenses by 62. Free tax returns 5% ($1,563) because 62. Free tax returns 5% ($5,000 ÷ $8,000) of her salary is exempt from tax. Free tax returns She enters the remaining total of $937 on line 7 of Schedule A (Form 1040NR). Free tax returns She completes the remaining lines according to the instructions for Schedule A. Free tax returns More information. Free tax returns   For more information about deductible expenses, reimbursements, and recordkeeping, get Publication 463. Free tax returns Tax Credits and Payments This discussion covers tax credits and payments for resident aliens, followed by a discussion of the credits and payments for nonresident aliens. Free tax returns Resident Aliens Resident aliens generally claim tax credits and report tax payments, including withholding, using the same rules that apply to U. Free tax returns S. Free tax returns citizens. Free tax returns The following items are some of the credits you may be able to claim. Free tax returns Foreign tax credit. Free tax returns   You can claim a credit, subject to certain limits, for income tax you paid or accrued to a foreign country on foreign source income. Free tax returns You cannot claim a credit for taxes paid or accrued on excluded foreign earned income. Free tax returns To claim a credit for income taxes paid or accrued to a foreign country, you generally will file Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), with your Form 1040. Free tax returns   For more information, get Publication 514, Foreign Tax Credit for Individuals. Free tax returns Child and dependent care credit. Free tax returns   You may be able to take this credit if you pay someone to care for your qualifying child who is under age 13, or your disabled dependent or disabled spouse, so that you can work or look for work. Free tax returns Generally, you must be able to claim an exemption for your dependent. Free tax returns   For more information, get Publication 503, Child and Dependent Care Expenses, and Form 2441, Child and Dependent Care Expenses. Free tax returns Credit for the elderly or the disabled. Free tax returns   You may qualify for this credit if you are 65 or older or if you retired on permanent and total disability. Free tax returns For more information on this credit, get Publication 524, Credit for the Elderly or the Disabled, and Schedule R (Form 1040A or 1040). Free tax returns Education credits. Free tax returns   You may qualify for these credits if you paid qualified education expenses for yourself, your spouse, or your dependent. Free tax returns There are two education credits: the American Opportunity Credit and the lifetime learning credit. Free tax returns You cannot claim these credits if you are married filing separately. Free tax returns Use Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits), to figure the credit. Free tax returns For more information, see Publication 970. Free tax returns Retirement savings contributions credit. Free tax returns   You may qualify for this credit (also known as the saver's credit) if you made eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement (IRA) in 2013. Free tax returns You cannot claim this credit if: You were born after January 1, 1996, You were a full-time student, Your exemption is claimed by someone else on his or her 2013 tax return, or Your adjusted gross income is more than: $59,000, if your filing status is married filing jointly, $44,250, if your filing status is head of household, or $29,500, if your filing status is single, married filing separately, or qualifying widow(er). Free tax returns Use Form 8880, Credit for Qualified Retirement Savings Contributions, to figure the credit. Free tax returns For more information, see Publication 590. Free tax returns Child tax credit. Free tax returns   You may be able to take this credit if you have a qualifying child. Free tax returns   A qualifying child for purposes of the child tax credit is a child who: Was under age 17 at the end of 2013. Free tax returns Is your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendant of any of them (for example, your grandchild, niece, or nephew). Free tax returns Is a U. Free tax returns S. Free tax returns citizen, a U. Free tax returns S. Free tax returns national, or a resident alien. Free tax returns Did not provide over half of his or her own support for 2013. Free tax returns Lived with you more than half of 2013. Free tax returns Temporary absences, such as for school, vacation, or medical care, count as time lived in the home. Free tax returns Is claimed as a dependent on your return. Free tax returns An adopted child is always treated as your own child. Free tax returns An adopted child includes a child lawfully placed with you for legal adoption. Free tax returns   See your form instructions for additional details. Free tax returns Adoption credit. Free tax returns   You may qualify to take a tax credit of up to $12,970 for qualifying expenses paid to adopt an eligible child. Free tax returns This amount may be allowed for the adoption of a child with special needs regardless of whether you have qualifying expenses. Free tax returns To claim the adoption credit, file Form 8839, Qualified Adoption Expenses, with your Form 1040. Free tax returns Earned income credit. Free tax returns   You may qualify for an earned income credit of up to $3,250 if a child lived with you in the United States and your earned income and adjusted gross income were each less than $37,870 ($43,210 if married filing jointly). Free tax returns If two children lived with you in the United States and your earned income and adjusted gross income were each less than $43,038 ($48,378 if married filing jointly), your credit could be as much as $5,372. Free tax returns If three or more children lived with you in the United States and your earned income and adjusted gross income were each less than $46,227 ($51,567 if married filing jointly), your credit could be as much as $6,044. Free tax returns If you do not have a qualifying child and your earned income and adjusted gross income were each less than $14,340 ($19,680 if married filing jointly), your credit could be as much as $487. Free tax returns You cannot claim the earned income credit if your filing status is married filing separately. Free tax returns    You and your spouse (if filing a joint return) and any qualifying child must have valid SSNs to claim this credit. Free tax returns You cannot claim the credit using an ITIN. Free tax returns If a social security card has a legend that says Not Valid for Employment and the number was issued so that you (or your spouse or your qualifying child) could receive a federally funded benefit, you cannot claim the earned income credit. Free tax returns An example of a federally funded benefit is Medicaid. Free tax returns If a card has this legend and the individual's immigration status has changed so that the individual is now a U. Free tax returns S. Free tax returns citizen or lawful permanent resident, ask the SSA to issue a new social security card without the legend. Free tax returns Other information. Free tax returns   There are other eligibility rules that are not discussed here. Free tax returns For more information, get Publication 596, Earned Income Credit. Free tax returns Nonresident Aliens You can claim some of the same credits that resident aliens can claim. Free tax returns You can also report certain taxes you paid, are considered to have paid, or that were withheld from your income. Free tax returns Credits Credits are allowed only if you receive effectively connected income. Free tax returns You may be able to claim some of the following credits. Free tax returns Foreign tax credit. Free tax returns   If you receive foreign source income that is effectively connected with a trade or business in the United States, you can claim a credit for any income taxes paid or accrued to any foreign country or U. Free tax returns S. Free tax returns possession on that income. Free tax returns   If you do not have foreign source income effectively connected with a U. Free tax returns S. Free tax returns trade or business, you cannot claim credits against your U. Free tax returns S. Free tax returns tax for taxes paid or accrued to a foreign country or U. Free tax returns S. Free tax returns possession. Free tax returns   You cannot take any credit for taxes imposed by a foreign country or U. Free tax returns S. Free tax returns possession on your U. Free tax returns S. Free tax returns source income if those taxes were imposed only because you are a citizen or resident of the foreign country or possession. Free tax returns   If you claim a foreign tax credit, you generally will have to attach to your return a Form 1116. Free tax returns See Publication 514 for more information. Free tax returns Child and dependent care credit. Free tax returns   You may qualify for this credit if you pay someone to care for your qualifying child who is under age 13, or your disabled dependent or disabled spouse, so that you can work or look for work. Free tax returns Generally, you must be able to claim an exemption for your dependent. Free tax returns   Married nonresident aliens can claim the credit only if they choose to file a joint return with a U. Free tax returns S. Free tax returns citizen or resident spouse as discussed in chapter 1, or if they qualify as certain married individuals living apart (see Joint Return Test in Publication 503). Free tax returns   The amount of your child and dependent care expense that qualifies for the credit in any tax year cannot be more than your earned income from the United States for that tax year. Free tax returns Earned income generally means wages, salaries, and professional fees for personal services performed. Free tax returns   For more information, get Publication 503. Free tax returns Education credits. Free tax returns   If you are a nonresident alien for any part of the year, you generally cannot claim the education credits. Free tax returns However, if you are married and choose to file a joint return with a U. Free tax returns S. Free tax returns citizen or resident spouse as discussed in chapter 1, you may be eligible for these credits. Free tax returns Retirement savings contributions credit. Free tax returns   You may qualify for this credit (also known as the saver's credit) if you made eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement (IRA) in 2013. Free tax returns You cannot claim this credit if: You were born after January 1, 1996, You were a full-time student, Your exemption is claimed by someone else on his or her 2013 tax return, or Your adjusted gross income is more than $29,500. Free tax returns Use Form 8880 to figure the credit. Free tax returns For more information, see Publication 590. Free tax returns Child tax credit. Free tax returns   You may be able to take this credit if you have a qualifying child. Free tax returns   A qualifying child for purposes of the child tax credit is a child who: Was under age 17 at the end of 2013. Free tax returns Is your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendant of any of them (for example, your grandchild, niece, or nephew). Free tax returns Is a U. Free tax returns S. Free tax returns citizen, a U. Free tax returns S. Free tax returns national, or a resident alien. Free tax returns Did not provide over half of his or her own support for 2013. Free tax returns Lived with you more than half of 2013. Free tax returns Temporary absences, such as for school, vacation, or medical care, count as time lived in the home. Free tax returns Is claimed as a dependent on your return. Free tax returns An adopted child is always treated as your own child. Free tax returns An adopted child includes a child lawfully placed with you for legal adoption. Free tax returns   See your form instructions for additional details. Free tax returns Adoption credit. Free tax returns   You may qualify to take a tax credit of up to $12,970 for qualifying expenses paid to adopt an eligible child. Free tax returns This amount may be allowed for the adoption of a child with special needs regardless of whether you have qualifying expenses. Free tax returns To claim the adoption credit, file Form 8839 with your Form 1040NR. Free tax returns   Married nonresident aliens can claim the credit only if they choose to file a joint return with a U. Free tax returns S. Free tax returns citizen or resident spouse as discussed in chapter 1, or if they qualify as certain married individuals living apart (see Married Persons Not Filing Jointly in the Form 8839 instructions). Free tax returns Credit for prior year minimum tax. Free tax returns   If you paid alternative minimum tax in a prior year, get Form 8801, Credit for Prior Year Minimum Tax—Individuals, Estates, and Trusts, to see if you qualify for this credit. Free tax returns Earned income credit. Free tax returns   If you are a nonresident alien for any part of the tax year, you generally cannot get the earned income credit. Free tax returns However, if you are married and choose to file a joint return with a U. Free tax returns S. Free tax returns citizen or resident spouse as discussed in chapter 1, you may be eligible for the credit. Free tax returns    You, your spouse, and any qualifying child must have valid SSNs to claim this credit. Free tax returns You cannot claim the credit using an ITIN. Free tax returns If a social security card has a legend that says Not Valid for Employment and the number was issued so that you (or your spouse or your qualifying child) could receive a federally funded benefit, you cannot claim the earned income credit. Free tax returns An example of a federally funded benefit is Medicaid. Free tax returns If a card has this legend and the individual's immigration status has changed so that the individual is now a U. Free tax returns S. Free tax returns citizen or lawful permanent resident, ask the SSA to issue a new social security card without the legend. Free tax returns   See Publication 596 for more information on the credit. Free tax returns Tax Withheld You can claim the tax withheld during the year as a payment against your U. Free tax returns S. Free tax returns tax. Free tax returns You claim it on line 61 of Form 1040NR or on line 18 of Form 1040NR-EZ. Free tax returns The tax withheld reduces any tax you owe with Form 1040NR or Form 1040NR-EZ. Free tax returns Withholding from wages. Free tax returns   Any federal income tax withheld from your wages during the tax year while you were a nonresident alien is allowed as a payment against your U. Free tax returns S. Free tax returns income tax liability for the same year. Free tax returns You can claim the income tax withheld whether or not you were engaged in a trade or business in the United States during the year, and whether or not the wages (or any other income) were connected with a trade or business in the United States. Free tax returns Excess social security tax withheld. Free tax returns   If you have two or more employers, you may be able to claim a credit against your U. Free tax returns S. Free tax returns income tax liability for social security tax withheld in excess of the maximum required. Free tax returns See Social Security and Medicare Taxes in chapter 8 for more information. Free tax returns Additional Medicare Tax. Free tax returns   Your employer is responsible for withholding the 0. Free tax returns 9% Additional Medicare Tax on Medicare wages or RRTA compensation it pays to you in excess of $200,000 in 2013. Free tax returns If you do not owe Additional Medicare Tax, you can claim a credit for any withheld Additional Medicare Tax against the total tax liability shown on your tax return by filing Form 8959. Free tax returns Tax paid on undistributed long-term capital gains. Free tax returns   If you are a shareholder in a mutual fund (or other regulated investment company) or real estate investment trust, you can claim a credit for your share of any taxes paid by the company on its undistributed long-term capital gains. Free tax returns You will receive information on Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains, which you must attach to your return. Free tax returns Tax withheld at the source. Free tax returns   You can claim as a payment any tax withheld at the source on investment and other fixed or determinable annual or periodic income paid to you. Free tax returns Fixed or determinable income includes interest, dividend, rental, and royalty income that you do not claim to be effectively connected income. Free tax returns Wage or salary payments can be fixed or determinable income to you, but usually are subject to withholding as discussed above. Free tax returns Taxes on fixed or determinable income are withheld at a 30% rate or at a lower treaty rate. Free tax returns Tax withheld on partnership income. Free tax returns   If you are a foreign partner in a partnership, the partnership will withhold tax on your share of effectively connected taxable income from the partnership. Free tax returns The partnership will give you a statement on Form 8805, Foreign Partner's Information Statement of Section 1446 Withholding Tax, showing the tax withheld. Free tax returns A partnership that is publicly traded may withhold on your actual distributions of effectively connected income. Free tax returns In this case, the partnership will give you a statement on Form 1042-S. Free tax returns Claim the tax withheld as a payment on line 61b or 61d of Form 1040NR, as appropriate. Free tax returns Claiming tax withheld on your return. Free tax returns   When you fill out your tax return, take extra care to enter the correct amount of any tax withheld shown on your information documents. Free tax returns The following table lists some of the more common information documents and shows where to find the amount of tax withheld. Free tax returns Form number Location  of tax  withheld RRB-1042S Box 12 SSA-1042S Box 9 W-2 Box 2 W-2c Box 2 1042-S Box 9 8805 Line 10 8288-A Box 2 Bona Fide Residents of American Samoa or Puerto Rico If you are a nonresident alien who is a bona fide resident of American Samoa or Puerto Rico for the entire tax year, you generally are taxed the same as resident aliens. Free tax returns You should file Form 1040 and report all income from sources both in and outside the United States. Free tax returns However, you can exclude the income discussed in the following paragraphs. Free tax returns For tax purposes other than reporting income, however, you will be treated as a nonresident alien. Free tax returns For example, you are not allowed the standard deduction, you cannot file a joint return, and you are not allowed a deduction for a dependent unless that person is a citizen or national of the United States. Free tax returns There are also limits on what deductions and credits are allowed. Free tax returns See Nonresident Aliens under Deductions , Itemized Deductions , and Tax Credits and Payments in this chapter. Free tax returns Residents of Puerto Rico. Free tax returns   If you are a bona fide resident of Puerto Rico for the entire year, you can exclude from gross income all income from sources in Puerto Rico (other than amounts for services performed as an employee of the United States or any of its agencies). Free tax returns   If you report income on a calendar year basis and you do not have wages subject to withholding, file your return and pay your tax by June 15. Free tax returns You must also make your first payment of estimated tax by June 15. Free tax returns You cannot file a joint income tax return or make joint payments of estimated tax. Free tax returns However, if you are married to a U. Free tax returns S. Free tax returns citizen or resident, see Nonresident Spouse Treated as a Resident in chapter 1. Free tax returns   If you earn wages subject to withholding, your U. Free tax returns S. Free tax returns income tax return is due by April 15. Free tax returns Your first payment of estimated tax is also due by April 15. Free tax returns For information on withholding and estimated tax, see chapter 8 . Free tax returns Residents of American Samoa. Free tax returns   If you are a bona fide resident of American Samoa for the entire year, you can exclude from gross income all income from sources in American Samoa (other than amounts for services performed as an employee of the U. Free tax returns S. Free tax returns government or any of its agencies). Free tax returns An employee of the American Samoan government is not considered an employee of the U. Free tax returns S. Free tax returns government or any of its agencies for purposes of the exclusion. Free tax returns For more information about this exclusion, get Form 4563 and Publication 570, Tax Guide for Individuals With Income From U. Free tax returns S. Free tax returns Possessions. Free tax returns Prev  Up  Next   Home   More Online Publications
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Letter 2840C Frequently Asked Questions (FAQs)

What is the letter telling me?

This letter is confirming an Installment Agreement request you made when you filed a balance due return and confirms the payment date and the payment amount. The letter explains the fees charged for paying monthly and explains how to apply for the Low Income Fee Reduction (if you qualify).

What do I have to do?

Make monthly payments by the due date contained in the letter.

How much time do I have?

The letter contains the due date of the payment.

What happens if I don't take any action?

Failing to make timely installment payments will cause the account to default which could result in levy, lien actions and additional fees.

Who should I contact?

You can call the toll free number provided in the letter. The person who answers the phone will assist you.

What if I don't agree or have already taken corrective action?

If you don't agree, you should call the telephone number on the letter as soon as possible. If you have already taken corrective action, you can call the toll free number to verify that your installment agreement is in place.

Page Last Reviewed or Updated: 30-Jan-2014

The Free Tax Returns

Free tax returns 1. Free tax returns   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 tax returns Amount realized on a recourse debt. Free tax returns 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 tax returns S. Free tax returns Individual Income Tax Return 1040X Amended U. Free tax returns S. Free tax returns 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 tax returns However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. Free tax returns See chapter 5 for information about getting publications and forms. Free tax returns Sales and Exchanges A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Free tax returns An exchange is a transfer of property for other property or services. Free tax returns The following discussions describe the kinds of transactions that are treated as sales or exchanges and explain how to figure gain or loss. Free tax returns Sale or lease. Free tax returns    Some agreements that seem to be leases may really be conditional sales contracts. Free tax returns The intention of the parties to the agreement can help you distinguish between a sale and a lease. Free tax returns   There is no test or group of tests to prove what the parties intended when they made the agreement. Free tax returns You should consider each agreement based on its own facts and circumstances. Free tax returns For more information, see chapter 3 in Publication 535, Business Expenses. Free tax returns Cancellation of a lease. Free tax returns    Payments received by a tenant for the cancellation of a lease are treated as an amount realized from the sale of property. Free tax returns 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 tax returns Copyright. Free tax returns    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 tax returns 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 tax returns 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 tax returns   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 tax returns For more information, see Section 1231 Gains and Losses in chapter 3. Free tax returns Easement. Free tax returns   The amount received for granting an easement is subtracted from the basis of the property. Free tax returns 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 tax returns 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 tax returns   Any amount received that is more than the basis to be reduced is a taxable gain. Free tax returns The transaction is reported as a sale of property. Free tax returns   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 tax returns 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 tax returns   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 tax returns 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 tax returns See Gain or Loss From Condemnations, later. Free tax returns Property transferred to satisfy debt. Free tax returns   A transfer of property to satisfy a debt is an exchange. Free tax returns Note's maturity date extended. Free tax returns   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 tax returns Also, it is not considered a closed and completed transaction that would result in a gain or loss. Free tax returns 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 tax returns Each case must be determined by its own facts. Free tax returns For more information, see Regulations section 1. Free tax returns 1001-3. Free tax returns Transfer on death. Free tax returns   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 tax returns No taxable gain or deductible loss results from the transfer. Free tax returns Bankruptcy. Free tax returns   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 tax returns Consequently, the transfer generally does not result in gain or loss. Free tax returns For more information, see Publication 908, Bankruptcy Tax Guide. Free tax returns Gain or Loss From Sales and Exchanges You usually realize gain or loss when property is sold or exchanged. Free tax returns A gain is the amount you realize from a sale or exchange of property that is more than its adjusted basis. Free tax returns A loss is the adjusted basis of the property that is more than the amount you realize. Free tax returns   Table 1-1. Free tax returns How To Figure Whether You Have a Gain or Loss IF your. Free tax returns . Free tax returns . Free tax returns THEN you have a. Free tax returns . Free tax returns . Free tax returns Adjusted basis is more than the amount realized, Loss. Free tax returns Amount realized is more than the adjusted basis, Gain. Free tax returns Basis. Free tax returns   You must know the basis of your property to determine whether you have a gain or loss from its sale or other disposition. Free tax returns The basis of property you buy is usually its cost. Free tax returns 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 tax returns See Basis Other Than Cost in Publication 551, Basis of Assets. Free tax returns 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 tax returns See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. Free tax returns Adjusted basis. Free tax returns   The adjusted basis of property is your original cost or other basis plus (increased by) certain additions and minus (decreased by) certain deductions. Free tax returns Increases include costs of any improvements having a useful life of more than 1 year. Free tax returns Decreases include depreciation and casualty losses. Free tax returns For more details and additional examples, see Adjusted Basis in Publication 551. Free tax returns Amount realized. Free tax returns   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 tax returns 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 tax returns Fair market value. Free tax returns   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 tax returns If parties with adverse interests place a value on property in an arm's-length transaction, that is strong evidence of FMV. Free tax returns If there is a stated price for services, this price is treated as the FMV unless there is evidence to the contrary. Free tax returns Example. Free tax returns You used a building in your business that cost you $70,000. Free tax returns You made certain permanent improvements at a cost of $20,000 and deducted depreciation totaling $10,000. Free tax returns You sold the building for $100,000 plus property having an FMV of $20,000. Free tax returns The buyer assumed your real estate taxes of $3,000 and a mortgage of $17,000 on the building. Free tax returns The selling expenses were $4,000. Free tax returns Your gain on the sale is figured as follows. Free tax returns 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 tax returns   Your gain or loss realized from a sale or exchange of property is usually a recognized gain or loss for tax purposes. Free tax returns Recognized gains must be included in gross income. Free tax returns Recognized losses are deductible from gross income. Free tax returns However, your gain or loss realized from certain exchanges of property is not recognized for tax purposes. Free tax returns See Nontaxable Exchanges, later. Free tax returns 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 tax returns Interest in property. Free tax returns   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 tax returns 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 tax returns Your basis in the property is disregarded. Free tax returns This rule does not apply if all interests in the property are disposed of at the same time. Free tax returns Example 1. Free tax returns Your father dies and leaves his farm to you for life with a remainder interest to your younger brother. Free tax returns You decide to sell your life interest in the farm. Free tax returns The entire amount you receive is a recognized gain. Free tax returns Your basis in the farm is disregarded. Free tax returns Example 2. Free tax returns The facts are the same as in Example 1, except that your brother joins you in selling the farm. Free tax returns The entire interest in the property is sold, so your basis in the farm is not disregarded. Free tax returns Your gain or loss is the difference between your share of the sales price and your adjusted basis in the farm. Free tax returns Canceling a sale of real property. Free tax returns   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 tax returns If the buyer returns the property in the year of sale, no gain or loss is recognized. Free tax returns 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 tax returns 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 tax returns When the property is returned in a later year, you acquire a new basis in the property. Free tax returns That basis is equal to the amount you pay to the buyer. Free tax returns 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 tax returns You have a gain if the amount realized is more than your adjusted basis in the property. Free tax returns However, you do not have a loss if the amount realized is less than the adjusted basis of the property. Free tax returns Bargain sales to charity. Free tax returns   A bargain sale of property to a charitable organization is partly a sale or exchange and partly a charitable contribution. Free tax returns 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 tax returns The adjusted basis of the part sold is figured as follows. Free tax returns 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 tax returns This allocation rule does not apply if a charitable contribution deduction is not allowable. Free tax returns   See Publication 526, Charitable Contributions, for information on figuring your charitable contribution. Free tax returns Example. Free tax returns 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 tax returns Your adjusted basis in the property is $4,000. Free tax returns Your gain on the sale is $1,200, figured as follows. Free tax returns 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 tax returns You must subtract depreciation you took or could have taken from the basis of the business or rental part. Free tax returns However, see the special rule below for a home used partly for business or rental. Free tax returns 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 tax returns 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 tax returns Any gain on the personal part of the property is a capital gain. Free tax returns You cannot deduct a loss on the personal part. Free tax returns Home used partly for business or rental. Free tax returns    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 tax returns See Property Used Partly for Business or Rental, in Publication 523. Free tax returns 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 tax returns 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 tax returns 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 tax returns Figure the loss you can deduct as follows. Free tax returns Use the lesser of the property's adjusted basis or fair market value at the time of the change. Free tax returns Add to (1) the cost of any improvements and other increases to basis since the change. Free tax returns Subtract from (2) depreciation and any other decreases to basis since the change. Free tax returns Subtract the amount you realized on the sale from the result in (3). Free tax returns If the amount you realized is more than the result in (3), treat this result as zero. Free tax returns The result in (4) is the loss you can deduct. Free tax returns Example. Free tax returns You changed your main home to rental property 5 years ago. Free tax returns At the time of the change, the adjusted basis of your home was $75,000 and the fair market value was $70,000. Free tax returns This year, you sold the property for $55,000. Free tax returns You made no improvements to the property but you have depreciation expense of $12,620 over the 5 prior years. Free tax returns 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 tax returns 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 tax returns   If you have a gain on the sale, you generally must recognize the full amount of the gain. Free tax returns You figure the gain by subtracting your adjusted basis from your amount realized, as described earlier. Free tax returns   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 tax returns However, you may not be able to exclude the part of the gain allocated to any period of nonqualified use. Free tax returns   For more information, see Business Use or Rental of Home in Publication 523. Free tax returns In addition, special rules apply if the home sold was acquired in a like-kind exchange. Free tax returns See Special Situations in Publication 523. Free tax returns Also see Like-Kind Exchanges, later. Free tax returns Abandonments The abandonment of property is a disposition of property. Free tax returns 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 tax returns Generally, abandonment is not treated as a sale or exchange of the property. Free tax returns If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Free tax returns If your adjusted basis is more than the amount you realize (if any), then you have a loss. Free tax returns Loss from abandonment of business or investment property is deductible as a loss. Free tax returns 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 tax returns This rule also applies to leasehold improvements the lessor made for the lessee that were abandoned. Free tax returns 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 tax returns The abandonment loss is deducted in the tax year in which the loss is sustained. Free tax returns If the abandoned property is secured by debt, special rules apply. Free tax returns 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 tax returns For more information, including examples, see chapter 3 of Publication 4681. Free tax returns You cannot deduct any loss from abandonment of your home or other property held for personal use only. Free tax returns Cancellation of debt. Free tax returns   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 tax returns This income is separate from any loss realized from abandonment of the property. Free tax returns   You must report this income on your tax return unless one of the following applies. Free tax returns The cancellation is intended as a gift. Free tax returns The debt is qualified farm debt. Free tax returns The debt is qualified real property business debt. Free tax returns You are insolvent or bankrupt. Free tax returns The debt is qualified principal residence indebtedness. Free tax returns File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the income exclusion. Free tax returns For more information, including other exceptions and exclusion, see Publication 4681. Free tax returns Forms 1099-A and 1099-C. Free tax returns   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 tax returns 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 tax returns 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 tax returns For abandonments of property and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Free tax returns 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 tax returns The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Free tax returns This is true even if you voluntarily return the property to the lender. Free tax returns 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 tax returns Buyer's (borrower's) gain or loss. Free tax returns   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 tax returns The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Free tax returns See Gain or Loss From Sales and Exchanges, earlier. Free tax returns You can use Table 1-2 to figure your gain or loss from a foreclosure or repossession. Free tax returns Amount realized on a nonrecourse debt. Free tax returns   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 tax returns The full canceled debt is included even if the fair market value of the property is less than the canceled debt. Free tax returns Example 1. Free tax returns Chris bought a new car for $15,000. Free tax returns He paid $2,000 down and borrowed the remaining $13,000 from the dealer's credit company. Free tax returns Chris is not personally liable for the loan (nonrecourse debt), but pledges the new car as security. Free tax returns The credit company repossessed the car because he stopped making loan payments. Free tax returns The balance due after taking into account the payments Chris made was $10,000. Free tax returns The fair market value of the car when repossessed was $9,000. Free tax returns The amount Chris realized on the repossession is $10,000. Free tax returns 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 tax returns Chris figures his gain or loss on the repossession by comparing the amount realized ($10,000) with his adjusted basis ($15,000). Free tax returns He has a $5,000 nondeductible loss. Free tax returns Example 2. Free tax returns Abena paid $200,000 for her home. Free tax returns She paid $15,000 down and borrowed the remaining $185,000 from a bank. Free tax returns Abena is not personally liable for the loan (nonrecourse debt), but pledges the house as security. Free tax returns The bank foreclosed on the loan because Abena stopped making payments. Free tax returns 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 tax returns The amount Abena realized on the foreclosure is $180,000, the balance due and debt canceled by the foreclosure. Free tax returns She figures her gain or loss by comparing the amount realized ($180,000) with her adjusted basis ($175,000). Free tax returns She has a $5,000 realized gain. Free tax returns Amount realized on a recourse debt. Free tax returns   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 tax returns 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 tax returns The amount realized does not include the canceled debt that is your income from cancellation of debt. Free tax returns See Cancellation of debt, below. Free tax returns Seller's (lender's) gain or loss on repossession. Free tax returns   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 tax returns For more information, see Repossession in Publication 537. Free tax returns    Table 1-2. Free tax returns Worksheet for Foreclosures and Repossessions Part 1. Free tax returns Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Free tax returns Complete this part only  if you were personally liable for the debt. Free tax returns Otherwise,  go to Part 2. Free tax returns   1. Free tax returns 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 tax returns Enter the fair market value of the transferred property   3. Free tax returns Ordinary income from cancellation of debt upon foreclosure or    repossession. Free tax returns * Subtract line 2 from line 1. Free tax returns   If less than zero, enter zero   Part 2. Free tax returns Figure your gain or loss from foreclosure or repossession. Free tax returns   4. Free tax returns If you completed Part 1, enter the smaller of line 1 or line 2. Free tax returns   If you did not complete Part 1, enter the outstanding debt immediately before   the transfer of property   5. Free tax returns Enter any proceeds you received from the foreclosure sale   6. Free tax returns Add lines 4 and 5   7. Free tax returns Enter the adjusted basis of the transferred property   8. Free tax returns Gain or loss from foreclosure or repossession. Free tax returns Subtract line 7  from line 6   * The income may not be taxable. Free tax returns See Cancellation of debt. Free tax returns Cancellation of debt. Free tax returns   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 tax returns This income is separate from any gain or loss realized from the foreclosure or repossession. Free tax returns Report the income from cancellation of a debt related to a business or rental activity as business or rental income. Free tax returns    You can use Table 1-2 to figure your income from cancellation of debt. Free tax returns   You must report this income on your tax return unless one of the following applies. Free tax returns The cancellation is intended as a gift. Free tax returns The debt is qualified farm debt. Free tax returns The debt is qualified real property business debt. Free tax returns You are insolvent or bankrupt. Free tax returns The debt is qualified principal residence indebtedness. Free tax returns File Form 982 to report the income exclusion. Free tax returns Example 1. Free tax returns 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 tax returns In this case, the amount he realizes is $9,000. Free tax returns This is the lesser of the canceled debt ($10,000) or the car's fair market value ($9,000). Free tax returns Chris figures his gain or loss on the repossession by comparing the amount realized ($9,000) with his adjusted basis ($15,000). Free tax returns He has a $6,000 nondeductible loss. Free tax returns He also is treated as receiving ordinary income from cancellation of debt. Free tax returns That income is $1,000 ($10,000 − $9,000). Free tax returns This is the part of the canceled debt not included in the amount realized. Free tax returns Example 2. Free tax returns 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 tax returns In this case, the amount she realizes is $170,000. Free tax returns This is the lesser of the canceled debt ($180,000) or the fair market value of the house ($170,000). Free tax returns Abena figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($175,000). Free tax returns She has a $5,000 nondeductible loss. Free tax returns She also is treated as receiving ordinary income from cancellation of debt. Free tax returns (The debt is not exempt from tax as discussed under Cancellation of debt, above. Free tax returns ) That income is $10,000 ($180,000 − $170,000). Free tax returns This is the part of the canceled debt not included in the amount realized. Free tax returns Forms 1099-A and 1099-C. Free tax returns   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 tax returns 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 tax returns 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 tax returns For foreclosures or repossessions occurring in 2013, these forms should be sent to you by January 31, 2014. Free tax returns 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 tax returns Involuntary conversions are also called involuntary exchanges. Free tax returns Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes unless the property is your main home. Free tax returns You report the gain or deduct the loss on your tax return for the year you realize it. Free tax returns 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 tax returns However, depending on the type of property you receive, you may not have to report a gain on an involuntary conversion. Free tax returns 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 tax returns Your basis for the new property is the same as your basis for the converted property. Free tax returns This means that the gain is deferred until a taxable sale or exchange occurs. Free tax returns 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 tax returns This publication explains the treatment of a gain or loss from a condemnation or disposition under the threat of condemnation. Free tax returns If you have a gain or loss from the destruction or theft of property, see Publication 547. Free tax returns Condemnations A condemnation is the process by which private property is legally taken for public use without the owner's consent. Free tax returns 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 tax returns The owner receives a condemnation award (money or property) in exchange for the property taken. Free tax returns A condemnation is like a forced sale, the owner being the seller and the condemning authority being the buyer. Free tax returns Example. Free tax returns A local government authorized to acquire land for public parks informed you that it wished to acquire your property. Free tax returns After the local government took action to condemn your property, you went to court to keep it. Free tax returns But, the court decided in favor of the local government, which took your property and paid you an amount fixed by the court. Free tax returns This is a condemnation of private property for public use. Free tax returns Threat of condemnation. Free tax returns   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 tax returns You must have reasonable grounds to believe that, if you do not sell voluntarily, your property will be condemned. Free tax returns   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 tax returns 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 tax returns Reports of condemnation. Free tax returns   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 tax returns You must have reasonable grounds to believe that they will take necessary steps to condemn your property if you do not sell voluntarily. Free tax returns 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 tax returns Example. Free tax returns Your property lies along public utility lines. Free tax returns The utility company has the authority to condemn your property. Free tax returns The company informs you that it intends to acquire your property by negotiation or condemnation. Free tax returns A threat of condemnation exists when you receive the notice. Free tax returns Related property voluntarily sold. Free tax returns   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 tax returns A substantial economic relationship exists if together the properties were one economic unit. Free tax returns You also must show that the condemned property could not reasonably or adequately be replaced. Free tax returns You can elect to postpone reporting the gain by buying replacement property. Free tax returns See Postponement of Gain, later. Free tax returns 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 tax returns If your net condemnation award is more than the adjusted basis of the condemned property, you have a gain. Free tax returns You can postpone reporting gain from a condemnation if you buy replacement property. Free tax returns 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 tax returns See Postponement of Gain, later. Free tax returns If your net condemnation award is less than your adjusted basis, you have a loss. Free tax returns If your loss is from property you held for personal use, you cannot deduct it. Free tax returns You must report any deductible loss in the tax year it happened. Free tax returns You can use Part 2 of Table 1-3 to figure your gain or loss from a condemnation award. Free tax returns Main home condemned. Free tax returns   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 tax returns You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). Free tax returns For information on this exclusion, see Publication 523. Free tax returns 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 tax returns See Postponement of Gain, later. Free tax returns Table 1-3. Free tax returns Worksheet for Condemnations Part 1. Free tax returns Gain from severance damages. Free tax returns  If you did not receive severance damages, skip Part 1 and go to Part 2. Free tax returns   1. Free tax returns Enter gross severance damages received   2. Free tax returns Enter your expenses in getting severance damages   3. Free tax returns Subtract line 2 from line 1. Free tax returns If less than zero, enter -0-   4. Free tax returns Enter any special assessment on remaining property taken out of your award   5. Free tax returns Net severance damages. Free tax returns Subtract line 4 from line 3. Free tax returns If less than zero, enter -0-   6. Free tax returns Enter the adjusted basis of the remaining property   7. Free tax returns Gain from severance damages. Free tax returns Subtract line 6 from line 5. Free tax returns If less than zero, enter -0-   8. Free tax returns Refigured adjusted basis of the remaining property. Free tax returns Subtract line 5 from line 6. Free tax returns If less than zero, enter -0-   Part 2. Free tax returns Gain or loss from condemnation award. Free tax returns   9. Free tax returns Enter the gross condemnation award received   10. Free tax returns Enter your expenses in getting the condemnation award   11. Free tax returns If you completed Part 1, and line 4 is more than line 3, subtract line 3 from line 4. Free tax returns If you did not complete Part 1, but a special assessment was taken out of your award, enter that amount. Free tax returns Otherwise, enter -0-   12. Free tax returns Add lines 10 and 11   13. Free tax returns Net condemnation award. Free tax returns Subtract line 12 from line 9   14. Free tax returns Enter the adjusted basis of the condemned property   15. Free tax returns Gain from condemnation award. Free tax returns If line 14 is more than line 13, enter -0-. Free tax returns Otherwise, subtract line 14 from  line 13 and skip line 16   16. Free tax returns Loss from condemnation award. Free tax returns 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 tax returns )   Part 3. Free tax returns Postponed gain from condemnation. Free tax returns  (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 tax returns )   17. Free tax returns If you completed Part 1, and line 7 is more than zero, enter the amount from line 5. Free tax returns Otherwise, enter -0-   18. Free tax returns If line 15 is more than zero, enter the amount from line 13. Free tax returns Otherwise, enter -0-   19. Free tax returns Add lines 17 and 18. Free tax returns 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 tax returns Enter the total cost of replacement property and any expenses to restore the usefulness of your remaining property   21. Free tax returns Subtract line 20 from line 19. Free tax returns If less than zero, enter -0-   22. Free tax returns If you completed Part 1, add lines 7 and 15. Free tax returns Otherwise, enter the amount from line 15. Free tax returns 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 tax returns Recognized gain. Free tax returns Enter the smaller of line 21 or line 22. Free tax returns   24. Free tax returns Postponed gain. Free tax returns Subtract line 23 from line 22. Free tax returns If less than zero, enter -0-   Condemnation award. Free tax returns   A condemnation award is the money you are paid or the value of other property you receive for your condemned property. Free tax returns The award is also the amount you are paid for the sale of your property under threat of condemnation. Free tax returns Payment of your debts. Free tax returns   Amounts taken out of the award to pay your debts are considered paid to you. Free tax returns 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 tax returns Example. Free tax returns The state condemned your property for public use. Free tax returns The award was set at $200,000. Free tax returns The state paid you only $148,000 because it paid $50,000 to your mortgage holder and $2,000 accrued real estate taxes. Free tax returns You are considered to have received the entire $200,000 as a condemnation award. Free tax returns Interest on award. Free tax returns   If the condemning authority pays you interest for its delay in paying your award, it is not part of the condemnation award. Free tax returns You must report the interest separately as ordinary income. Free tax returns Payments to relocate. Free tax returns   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 tax returns Do not include them in your income. Free tax returns Replacement housing payments used to buy new property are included in the property's basis as part of your cost. Free tax returns Net condemnation award. Free tax returns   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 tax returns 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 tax returns This is discussed later under Special assessment taken out of award. Free tax returns Severance damages. Free tax returns    Severance damages are not part of the award paid for the property condemned. Free tax returns 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 tax returns   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 tax returns 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 tax returns   The contracting parties should agree on the specific amount of severance damages in writing. Free tax returns If this is not done, all proceeds from the condemning authority are considered awarded for your condemned property. Free tax returns   You cannot make a completely new allocation of the total award after the transaction is completed. Free tax returns However, you can show how much of the award both parties intended for severance damages. Free tax returns The severance damages part of the award is determined from all the facts and circumstances. Free tax returns Example. Free tax returns You sold part of your property to the state under threat of condemnation. Free tax returns The contract you and the condemning authority signed showed only the total purchase price. Free tax returns It did not specify a fixed sum for severance damages. Free tax returns However, at settlement, the condemning authority gave you closing papers showing clearly the part of the purchase price that was for severance damages. Free tax returns You may treat this part as severance damages. Free tax returns Treatment of severance damages. Free tax returns   Your net severance damages are treated as the amount realized from an involuntary conversion of the remaining part of your property. Free tax returns Use them to reduce the basis of the remaining property. Free tax returns 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 tax returns   If your net severance damages are more than the basis of your retained property, you have a gain. Free tax returns You may be able to postpone reporting the gain. Free tax returns See Postponement of Gain, later. Free tax returns    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 tax returns Net severance damages. Free tax returns   To figure your net severance damages, you first must reduce your severance damages by your expenses in obtaining the damages. Free tax returns 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 tax returns The balance is your net severance damages. Free tax returns Expenses of obtaining a condemnation award and severance damages. Free tax returns   Subtract the expenses of obtaining a condemnation award, such as legal, engineering, and appraisal fees, from the total award. Free tax returns Also, subtract the expenses of obtaining severance damages, which may include similar expenses, from the severance damages paid to you. Free tax returns If you cannot determine which part of your expenses is for each part of the condemnation proceeds, you must make a proportionate allocation. Free tax returns Example. Free tax returns You receive a condemnation award and severance damages. Free tax returns One-fourth of the total was designated as severance damages in your agreement with the condemning authority. Free tax returns You had legal expenses for the entire condemnation proceeding. Free tax returns You cannot determine how much of your legal expenses is for each part of the condemnation proceeds. Free tax returns You must allocate one-fourth of your legal expenses to the severance damages and the other three-fourths to the condemnation award. Free tax returns Special assessment retained out of award. Free tax returns   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 tax returns An assessment may be levied if the remaining part of your property benefited by the improvement resulting from the condemnation. Free tax returns Examples of improvements that may cause a special assessment are widening a street and installing a sewer. Free tax returns   To figure your net condemnation award, you must reduce the amount of the award by the assessment retained out of the award. Free tax returns Example. Free tax returns To widen the street in front of your home, the city condemned a 25-foot deep strip of your land. Free tax returns You were awarded $5,000 for this and spent $300 to get the award. Free tax returns Before paying the award, the city levied a special assessment of $700 for the street improvement against your remaining property. Free tax returns The city then paid you only $4,300. Free tax returns 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 tax returns 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 tax returns The net award would not change, even if you later paid the assessment from the amount you received. Free tax returns Severance damages received. Free tax returns   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 tax returns Any balance of the special assessment is used to reduce the condemnation award. Free tax returns Example. Free tax returns You were awarded $4,000 for the condemnation of your property and $1,000 for severance damages. Free tax returns You spent $300 to obtain the severance damages. Free tax returns A special assessment of $800 was retained out of the award. Free tax returns The $1,000 severance damages are reduced to zero by first subtracting the $300 expenses and then $700 of the special assessment. Free tax returns Your $4,000 condemnation award is reduced by the $100 balance of the special assessment, leaving a $3,900 net condemnation award. Free tax returns Part business or rental. Free tax returns   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 tax returns Figure your gain or loss separately because gain or loss on each part may be treated differently. Free tax returns   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 tax returns Example. Free tax returns You sold your building for $24,000 under threat of condemnation to a public utility company that had the authority to condemn. Free tax returns You rented half the building and lived in the other half. Free tax returns You paid $25,000 for the building and spent an additional $1,000 for a new roof. Free tax returns You claimed allowable depreciation of $4,600 on the rental half. Free tax returns You spent $200 in legal expenses to obtain the condemnation award. Free tax returns Figure your gain or loss as follows. Free tax returns     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 tax returns 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 tax returns Your basis for the new property is the same as your basis for the old. Free tax returns Money or unlike property received. Free tax returns   You ordinarily must report the gain if you receive money or unlike property. Free tax returns 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 tax returns 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 tax returns See Controlling interest in a corporation, later. Free tax returns   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 tax returns 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 tax returns   The basis of the replacement property is its cost, reduced by the postponed gain. Free tax returns 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 tax returns See Controlling interest in a corporation, later. Free tax returns You can use Part 3 of Table 1-3 to figure the gain you must report and your postponed gain. Free tax returns Postponing gain on severance damages. Free tax returns   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 tax returns See Treatment of severance damages, earlier. Free tax returns 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 tax returns   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 tax returns 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 tax returns   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 tax returns Postponing gain on the sale of related property. Free tax returns   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 tax returns You must meet the requirements explained earlier under Related property voluntarily sold. Free tax returns 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 tax returns Buying replacement property from a related person. Free tax returns   Certain taxpayers cannot postpone reporting gain from a condemnation if they buy the replacement property from a related person. Free tax returns For information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2. Free tax returns   This rule applies to the following taxpayers. Free tax returns C corporations. Free tax returns Partnerships in which more than 50% of the capital or profits interest is owned by  C corporations. Free tax returns 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 tax returns   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 tax returns If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. Free tax returns If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. Free tax returns Exception. Free tax returns   This rule does not apply if the related person acquired the property from an unrelated person within the replacement period. Free tax returns Advance payment. Free tax returns   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 tax returns Replacement property. Free tax returns   To postpone reporting gain, you must buy replacement property for the specific purpose of replacing your condemned property. Free tax returns You do not have to use the actual funds from the condemnation award to acquire the replacement property. Free tax returns Property you acquire by gift or inheritance does not qualify as replacement property. Free tax returns Similar or related in service or use. Free tax returns   Your replacement property must be similar or related in service or use to the property it replaces. Free tax returns   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 tax returns For a discussion of like-kind property, see Like-Kind Property under Like-Kind Exchanges, later. Free tax returns Owner-user. Free tax returns   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 tax returns Example. Free tax returns Your home was condemned and you invested the proceeds from the condemnation in a grocery store. Free tax returns Your replacement property is not similar or related in service or use to the condemned property. Free tax returns To be similar or related in service or use, your replacement property must also be used by you as your home. Free tax returns Owner-investor. Free tax returns   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 tax returns You decide this by determining all the following information. Free tax returns Whether the properties are of similar service to you. Free tax returns The nature of the business risks connected with the properties. Free tax returns What the properties demand of you in the way of management, service, and relations to your tenants. Free tax returns Example. Free tax returns You owned land and a building you rented to a manufacturing company. Free tax returns The building was condemned. Free tax returns During the replacement period, you had a new building built on other land you already owned. Free tax returns You rented out the new building for use as a wholesale grocery warehouse. Free tax returns 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 tax returns Your management activities. Free tax returns The amount and kind of services you provide to your tenants. Free tax returns The nature of your business risks connected with the properties. Free tax returns Leasehold replaced with fee simple property. Free tax returns   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 tax returns   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 tax returns A leasehold is property held under a lease, usually for a term of years. Free tax returns Outdoor advertising display replaced with real property. Free tax returns   You can elect to treat an outdoor advertising display as real property. Free tax returns 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 tax returns 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 tax returns   You can make this election only if you did not claim a section 179 deduction for the display. Free tax returns You cannot cancel this election unless you get the consent of the IRS. Free tax returns   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 tax returns Substituting replacement property. Free tax returns   Once you designate certain property as replacement property on your tax return, you cannot substitute other qualified property. Free tax returns But, if your previously designated replacement property does not qualify, you can substitute qualified property if you acquire it within the replacement period. Free tax returns Controlling interest in a corporation. Free tax returns   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 tax returns 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 tax returns Basis adjustment to corporation's property. Free tax returns   The basis of property held by the corporation at the time you acquired control must be reduced by your postponed gain, if any. Free tax returns 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 tax returns   Allocate this reduction to the following classes of property in the order shown below. Free tax returns Property that is similar or related in service or use to the condemned property. Free tax returns Depreciable property not reduced in (1). Free tax returns All other property. Free tax returns 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 tax returns The reduced basis of any single property cannot be less than zero. Free tax returns Main home replaced. Free tax returns   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 tax returns The replacement property must cost at least as much as the amount realized from the condemnation minus the excluded gain. Free tax returns   You must reduce the basis of your replacement property by the postponed gain. Free tax returns 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 tax returns Example. Free tax returns City authorities condemned your home that you had used as a personal residence for 5 years prior to the condemnation. Free tax returns The city paid you a condemnation award of $400,000. Free tax returns Your adjusted basis in the property was $80,000. Free tax returns You realize a gain of $320,000 ($400,000 − $80,000). Free tax returns You purchased a new home for $100,000. Free tax returns You can exclude $250,000 of the realized gain from your gross income. Free tax returns 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 tax returns You must recognize $50,000 of the gain ($150,000 amount realized − $100,000 cost of new home). Free tax returns The remaining $20,000 of realized gain is postponed. Free tax returns Your basis in the new home is $80,000 ($100,000 cost − $20,000 gain postponed). Free tax returns Replacement period. Free tax returns   To postpone reporting your gain from a condemnation, you must buy replacement property within a certain period of time. Free tax returns This is the replacement period. Free tax returns   The replacement period for a condemnation begins on the earlier of the following dates. Free tax returns The date on which you disposed of the condemned property. Free tax returns The date on which the threat of condemnation began. Free tax returns   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 tax returns However, see the exceptions below. Free tax returns Three-year replacement period for certain property. Free tax returns   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 tax returns 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 tax returns Five-year replacement period for certain property. Free tax returns   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 tax returns 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 tax returns 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 tax returns 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 tax returns Extended replacement period for taxpayers affected by other federally declared disasters. Free tax returns    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 tax returns For more information visit www. Free tax returns irs. Free tax returns gov/uac/Tax-Relief-in-Disaster-Situations. Free tax returns Weather-related sales of livestock in an area eligible for federal assistance. Free tax returns   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 tax returns    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 tax returns See Notice 2006-82. Free tax returns You can find Notice 2006-82 on page 529 of Internal Revenue Bulletin 2006-39 at www. Free tax returns irs. Free tax returns gov/irb/2006-39_IRB/ar13. Free tax returns html. Free tax returns    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 tax returns 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 tax returns You can find Notice 2013-62 on page 466 of Internal Revenue Bulletin 2013-45 at www. Free tax returns irs. Free tax returns gov/irb/2013-45_IRB/ar04. Free tax returns html. Free tax returns The replacement period will be extended under Notice 2006-82 if the applicable region is on the list included in Notice 2013-62. Free tax returns Determining when gain is realized. Free tax returns   If you are a cash basis taxpayer, you realize gain when you receive payments that are more than your basis in the property. Free tax returns 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 tax returns   This applies even if the amounts received are only partial or advance payments and the full award has not yet been determined. Free tax returns 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 tax returns   For accrual basis taxpayers, gain (if any) accrues in the earlier year when either of the following occurs. Free tax returns All events have occurred that fix the right to the condemnation award and the amount can be determined with reasonable accuracy. Free tax returns All or part of the award is actually or constructively received. Free tax returns 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 tax returns Replacement property bought before the condemnation. Free tax returns   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 tax returns Property you acquire before there is a threat of condemnation does not qualify as replacement property acquired within the replacement period. Free tax returns Example. Free tax returns On April 3, 2012, city authorities notified you that your property would be condemned. Free tax returns On June 5, 2012, you acquired property to replace the property to be condemned. Free tax returns You still had the new property when the city took possession of your old property on September 4, 2013. Free tax returns You have made a replacement within the replacement period. Free tax returns Extension. Free tax returns   You can request an extension of the replacement period from the IRS director for your area. Free tax returns You should apply before the end of the replacement period. Free tax returns Your request should explain in detail why you need an extension. Free tax returns 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 tax returns 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 tax returns   Ordinarily, requests for extensions are granted near the end of the replacement period or the extended replacement period. Free tax returns Extensions are usually limited to a period of 1 year or less. Free tax returns The high market value or scarcity of replacement property is not a sufficient reason for granting an extension. Free tax returns If your replacement property is being built and you clearly show that the replacement or restoration cannot be made within the replacement peri