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H&r Block Free Federal Tax Return

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H&r Block Free Federal Tax Return

H&r block free federal tax return 2. H&r block free federal tax return   American Opportunity Credit Table of Contents Introduction Can You Claim the CreditWho Can Claim the Credit Who Cannot Claim the Credit What Expenses QualifyQualified Education Expenses No Double Benefit Allowed Expenses That Do Not Qualify Who Is an Eligible StudentException. H&r block free federal tax return Who Can Claim a Dependent's Expenses Figuring the CreditEffect of the Amount of Your Income on the Amount of Your Credit Refundable Part of Credit Claiming the Credit Introduction For 2013, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. H&r block free federal tax return They are the American opportunity credit (this chapter) and the lifetime learning credit ( chapter 3 ). H&r block free federal tax return This chapter explains: Who can claim the American opportunity credit, What expenses qualify for the credit, Who is an eligible student, Who can claim a dependent's expenses, How to figure the credit, How to claim the credit, and When the credit must be repaid. H&r block free federal tax return What is the tax benefit of the American opportunity credit. H&r block free federal tax return   For the tax year, you may be able to claim an American opportunity credit of up to $2,500 for qualified education expenses paid for each eligible student. H&r block free federal tax return   A tax credit reduces the amount of income tax you may have to pay. H&r block free federal tax return Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. H&r block free federal tax return Forty percent of the American opportunity credit may be refundable. H&r block free federal tax return This means that if the refundable portion of your credit is more than your tax, the excess will be refunded to you. H&r block free federal tax return   Your allowable American opportunity credit may be limited by the amount of your income. H&r block free federal tax return Also, the nonrefundable part of the credit may be limited by the amount of your tax. H&r block free federal tax return Overview of the American opportunity credit. H&r block free federal tax return   See Table 2-1, Overview of the American Opportunity Credit , for the basics of this credit. H&r block free federal tax return The details are discussed in this chapter. H&r block free federal tax return Can you claim more than one education credit this year. H&r block free federal tax return   For each student, you can elect for any year only one of the credits. H&r block free federal tax return For example, if you elect to take the American opportunity credit for a child on your 2013 tax return, you cannot use that same child's qualified education expenses to figure the lifetime learning credit for 2013. H&r block free federal tax return   If you pay qualified education expenses for more than one student in the same year, you can choose to take the American opportunity credit on a per-student, per-year basis. H&r block free federal tax return If you pay qualified education expenses for a student (or students) for whom you do not claim the American opportunity credit, you can use the adjusted qualified education expenses of that student (or those students) in figuring your lifetime learning credit. H&r block free federal tax return This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year. H&r block free federal tax return Differences between the American opportunity and lifetime learning credits. H&r block free federal tax return   There are several differences between these two credits. H&r block free federal tax return For example, you can claim the American opportunity credit based on the same student's expenses for no more than 4 tax years, which includes any tax years you claimed the Hope Scholarship Credit for that student. H&r block free federal tax return However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses. H&r block free federal tax return The differences between these credits are shown in Appendix B, Highlights of Education Tax Benefits for Tax Year 2013 near the end of this publication. H&r block free federal tax return If you claim the American opportunity credit for any student, you can choose between using that student's adjusted qualified education expenses for the American opportunity credit or the lifetime learning credit. H&r block free federal tax return If you have the choice, the American opportunity credit will always be greater than the lifetime learning credit. H&r block free federal tax return Table 2-1. H&r block free federal tax return Overview of the American Opportunity Credit Maximum credit Up to $2,500 credit per eligible student Limit on modified adjusted gross income (MAGI) $180,000 if married filing jointly; $90,000 if single, head of household, or qualifying widow(er) Refundable or nonrefundable 40% of credit may be refundable; the rest is nonrefundable Number of years of postsecondary education Available ONLY if the student had not completed the first 4 years of postsecondary education before 2013 Number of tax years credit available Available ONLY for 4 tax years per eligible student (including any year(s) Hope Scholarship Credit was claimed) Type of program required Student must be pursuing a program leading to a degree or other recognized education credential Number of courses Student must be enrolled at least half time for at least one academic period that begins during the tax year Felony drug conviction As of the end of 2013, the student had not been convicted of a felony for possessing or distributing a controlled substance Qualified expenses Tuition, required enrollment fees, and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance Payments for academic periods Payments made in 2013 for academic periods beginning in 2013 or beginning in the first 3 months of 2014 Can You Claim the Credit The following rules will help you determine if you are eligible to claim the American opportunity credit on your tax return. H&r block free federal tax return Who Can Claim the Credit Generally, you can claim the American opportunity credit if all three of the following requirements are met. H&r block free federal tax return You pay qualified education expenses of higher education. H&r block free federal tax return You pay the education expenses for an eligible student. H&r block free federal tax return The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. H&r block free federal tax return Student qualifications. H&r block free federal tax return   Generally, you can take the American opportunity credit for a student only if all of the following four requirements are met. H&r block free federal tax return As of the beginning of 2013, the student had not completed the first four years of postsecondary education (generally, the freshman through senior years of college), as determined by the eligible educational institution. H&r block free federal tax return For this purpose, do not include academic credit awarded solely because of the student's performance on proficiency examinations. H&r block free federal tax return Neither the American opportunity credit nor the Hope Scholarship Credit has been claimed (by you or anyone else) for this student for any four tax years before 2013. H&r block free federal tax return If the American opportunity credit (and Hope Scholarship Credit) has been claimed for this student for any three or fewer tax years before 2013, this requirement is met. H&r block free federal tax return For at least one academic period beginning (or treated as beginning) in 2013, the student both: Was enrolled in a program that leads to a degree, certificate, or other recognized educational credential; and Carried at least one-half the normal full-time workload for his or her course of study. H&r block free federal tax return The standard for what is half of the normal full-time work load is determined by each eligible educational institution. H&r block free federal tax return However, the standard may not be lower than any of those established by the U. H&r block free federal tax return S. H&r block free federal tax return Department of Education under the Higher Education Act of 1965. H&r block free federal tax return For purposes of whether the student satisfies this third requirement for 2013, treat an academic period beginning in the first three months of 2014 as if it began in 2013 if qualified education expenses for the student were paid in 2013 for that academic period. H&r block free federal tax return See Prepaid expenses, later. H&r block free federal tax return As of the end of 2013, the student had not been convicted of a federal or state felony for possessing or distributing a controlled substance. H&r block free federal tax return Example 1. H&r block free federal tax return Sharon was eligible for the Hope Scholarship Credit for 2007 and 2008 and for the American opportunity credit for 2010 and 2012. H&r block free federal tax return Her parents claimed the Hope Scholarship Credit for Sharon on their tax returns for 2007 and 2008 and claimed the American opportunity credit for Sharon on their 2010 tax return. H&r block free federal tax return Sharon claimed the American opportunity credit on her 2012 tax return. H&r block free federal tax return The American opportunity credit and Hope Scholarship Credit have been claimed for Sharon for four tax years before 2013. H&r block free federal tax return Therefore, the American opportunity credit cannot be claimed by Sharon for 2013. H&r block free federal tax return If Sharon were to file Form 8863 for 2013, she would check “Yes” for Part III, line 23, and would be eligible to claim only the lifetime learning credit. H&r block free federal tax return Example 2. H&r block free federal tax return Wilbert was eligible for the American opportunity credit for 2009, 2010, 2011, and 2013. H&r block free federal tax return His parents claimed the American opportunity credit for Wilbert on their tax returns for 2009, 2010, and 2011. H&r block free federal tax return No one claimed an American opportunity credit or Hope Scholarship Credit for Wilbert for any other tax year. H&r block free federal tax return The American opportunity credit and Hope Scholarship Credit have been claimed for Wilbert for only three tax years before 2013. H&r block free federal tax return Therefore, Wilbert meets the second requirement to be eligible for the American opportunity credit. H&r block free federal tax return If Wilbert were to file Form 8863 for 2013, he would check “No” for Part III, line 23. H&r block free federal tax return If Wilbert meets all of the other requirements, he is eligible for the American opportunity credit. H&r block free federal tax return Example 3. H&r block free federal tax return Glenda enrolls on a full-time basis in a degree program for the 2014 Spring semester, which begins in January 2014. H&r block free federal tax return Glenda pays her tuition for the 2014 Spring semester in December 2013. H&r block free federal tax return Because the tuition Glenda paid in 2013 relates to an academic period that begins in the first 3 months of 2014, her eligibility to claim an American opportunity credit in 2013 is determined as if the 2014 Spring semester began in 2013. H&r block free federal tax return If the requirements above are not met for any student, you cannot take the American opportunity credit for that student. H&r block free federal tax return You may be able to take the lifetime learning credit for part or all of that student's qualified education expenses instead. H&r block free federal tax return Note. H&r block free federal tax return Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you. H&r block free federal tax return “Qualified education expenses” are defined later under Qualified Education Expenses . H&r block free federal tax return “Eligible students” are defined later under Who Is an Eligible Student . H&r block free federal tax return A dependent for whom you claim an exemption is defined later under Who Can Claim a Dependent's Expenses . H&r block free federal tax return You may find Figure 2-1, Can You Claim the American Opportunity Credit for 2013 , later, helpful in determining if you can claim an American opportunity credit on your tax return. H&r block free federal tax return This image is too large to be displayed in the current screen. H&r block free federal tax return Please click the link to view the image. H&r block free federal tax return Figure 2-1 Can you claim the American opportunity credit for 2012? Who Cannot Claim the Credit You cannot claim the American opportunity credit for 2013 if any of the following apply. H&r block free federal tax return Your filing status is married filing separately. H&r block free federal tax return You are listed as a dependent on another person's tax return (such as your parents'). H&r block free federal tax return See Who Can Claim a Dependent's Expenses , later. H&r block free federal tax return Your modified adjusted gross income (MAGI) is $90,000 or more ($180,000 or more in the case of a joint return). H&r block free federal tax return MAGI is explained later under Effect of the Amount of Your Income on the Amount of Your Credit . H&r block free federal tax return You (or your spouse) were a nonresident alien for any part of 2013 and the nonresident alien did not elect to be treated as a resident alien for tax purposes. H&r block free federal tax return More information on nonresident aliens can be found in Publication 519, U. H&r block free federal tax return S. H&r block free federal tax return Tax Guide for Aliens. H&r block free federal tax return What Expenses Qualify The American opportunity credit is based on adjusted qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. H&r block free federal tax return Generally, the credit is allowed for adjusted qualified education expenses paid in 2013 for an academic period beginning in 2013 or beginning in the first three months of 2014. H&r block free federal tax return For example, if you paid $1,500 in December 2013 for qualified tuition for the spring 2014 semester beginning January 2014, you can use that $1,500 in figuring your 2013 credit. H&r block free federal tax return Academic period. H&r block free federal tax return   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. H&r block free federal tax return In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. H&r block free federal tax return Paid with borrowed funds. H&r block free federal tax return   You can claim an American opportunity credit for qualified education expenses paid with the proceeds of a loan. H&r block free federal tax return Use the expenses to figure the American opportunity credit for the year in which the expenses are paid, not the year in which the loan is repaid. H&r block free federal tax return Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account. H&r block free federal tax return Student withdraws from class(es). H&r block free federal tax return   You can claim an American opportunity credit for qualified education expenses not refunded when a student withdraws. H&r block free federal tax return Qualified Education Expenses For purposes of the American opportunity credit, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. H&r block free federal tax return Eligible educational institution. H&r block free federal tax return   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. H&r block free federal tax return S. H&r block free federal tax return Department of Education. H&r block free federal tax return It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. H&r block free federal tax return The educational institution should be able to tell you if it is an eligible educational institution. H&r block free federal tax return   Certain educational institutions located outside the United States also participate in the U. H&r block free federal tax return S. H&r block free federal tax return Department of Education's Federal Student Aid (FSA) programs. H&r block free federal tax return Related expenses. H&r block free federal tax return   Student-activity fees are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance. H&r block free federal tax return   However, expenses for books, supplies, and equipment needed for a course of study are included in qualified education expenses whether or not the materials are purchased from the educational institution. H&r block free federal tax return Prepaid expenses. H&r block free federal tax return   Qualified education expenses paid in 2013 for an academic period that begins in the first three months of 2014 can be used in figuring an education credit for 2013 only. H&r block free federal tax return See Academic period, earlier. H&r block free federal tax return For example, if you pay $2,000 in December 2013, for qualified tuition for the 2014 winter quarter that begins in January 2014, you can use that $2,000 in figuring an education credit for 2013 only (if you meet all the other requirements). H&r block free federal tax return    You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 education credit(s). H&r block free federal tax return   In the following examples, assume that each student is an eligible student at an eligible educational institution. H&r block free federal tax return Example 1. H&r block free federal tax return Jefferson is a sophomore in University V's degree program in dentistry. H&r block free federal tax return This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. H&r block free federal tax return Because the equipment rental is needed for his course of study, Jefferson's equipment rental fee is a qualified expense. H&r block free federal tax return Example 2. H&r block free federal tax return Grace and William, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. H&r block free federal tax return The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. H&r block free federal tax return William bought his books from a friend; Grace bought hers at College W's bookstore. H&r block free federal tax return Both are qualified education expenses for the American opportunity credit. H&r block free federal tax return Example 3. H&r block free federal tax return When Kelly enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. H&r block free federal tax return This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and the student government. H&r block free federal tax return No portion of the fee covers personal expenses. H&r block free federal tax return Although labeled as a student activity fee, the fee is required for Kelly's enrollment and attendance at College X and is a qualified expense. H&r block free federal tax return No Double Benefit Allowed You cannot do any of the following. H&r block free federal tax return Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim an American opportunity credit based on those same expenses. H&r block free federal tax return Claim an American opportunity credit in the same year that you are claiming a tuition and fees deduction for the same student. H&r block free federal tax return Claim an American opportunity credit for any student and use any of that student's expenses in figuring your lifetime learning credit. H&r block free federal tax return Figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP) using the same expenses you used to figure the American opportunity credit. H&r block free federal tax return See Coordination With American Opportunity and Lifetime Learning Credits in chapter 7, Coverdell Education Savings Account, and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8, Qualified Tuition Program. H&r block free federal tax return Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. H&r block free federal tax return See Adjustments to Qualified Education Expenses, next. H&r block free federal tax return Adjustments to Qualified Education Expenses For each student, reduce the qualified education expenses paid by or on behalf of that student under the following rules. H&r block free federal tax return The result is the amount of adjusted qualified education expenses for each student. H&r block free federal tax return Tax-free educational assistance. H&r block free federal tax return   For tax-free educational assistance received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. H&r block free federal tax return See Academic period, earlier. H&r block free federal tax return   Some tax-free educational assistance received after 2013 may be treated as a refund of qualified education expenses paid in 2013. H&r block free federal tax return This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2013 for qualified education expenses paid on behalf of a student in 2013 (or attributable to enrollment at an eligible educational institution during 2013). H&r block free federal tax return   If this tax-free educational assistance is received after 2013 but before you file your 2013 income tax return, see Refunds received after 2013 but before your income tax return is filed, later. H&r block free federal tax return If this tax-free educational assistance is received after 2013 and after you file your 2013 income tax return, see Refunds received after 2013 and after your income tax return is filed, later. H&r block free federal tax return   Tax-free educational assistance includes: The tax-free parts of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions). H&r block free federal tax return Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. H&r block free federal tax return Generally, any scholarship or fellowship is treated as tax free. H&r block free federal tax return However, a scholarship or fellowship is not treated as tax free to the extent the student includes it in gross income (if the student is required to file a tax return for the year the scholarship or fellowship is received) and either of the following is true. H&r block free federal tax return The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. H&r block free federal tax return The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. H&r block free federal tax return You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received. H&r block free federal tax return For examples, see Coordination with Pell grants and other scholarships, later. H&r block free federal tax return Refunds. H&r block free federal tax return   A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. H&r block free federal tax return Some tax-free educational assistance received after 2013 may be treated as a refund. H&r block free federal tax return See Tax-free educational assistance, earlier. H&r block free federal tax return Refunds received in 2013. H&r block free federal tax return   For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses for 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013. H&r block free federal tax return Refunds received after 2013 but before your income tax return is filed. H&r block free federal tax return   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid before you file an income tax return for 2013, the amount of qualified education expenses for 2013 is reduced by the amount of the refund. H&r block free federal tax return Refunds received after 2013 and after your income tax return is filed. H&r block free federal tax return   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid after you file an income tax return for 2013, you may need to repay some or all of the credit. H&r block free federal tax return See Credit recapture, next. H&r block free federal tax return Credit recapture. H&r block free federal tax return    If any tax-free educational assistance for the qualified education expenses paid in 2013, or any refund of your qualified education expenses paid in 2013, is received after you file your 2013 income tax return, you must recapture (repay) any excess credit. H&r block free federal tax return You do this by refiguring the amount of your adjusted qualified education expenses for 2013 by reducing the expenses by the amount of the refund or tax-free educational assistance. H&r block free federal tax return You then refigure your education credit(s) for 2013 and figure the amount by which your 2013 tax liability would have increased if you claimed the refigured credit(s). H&r block free federal tax return Include that amount as an additional tax for the year the refund or tax-free assistance was received. H&r block free federal tax return Example. H&r block free federal tax return   You paid $7,000 tuition and fees in August 2013, and your child began college in September 2013. H&r block free federal tax return You filed your 2013 tax return on February 17, 2014, and claimed an American opportunity credit of $2,500. H&r block free federal tax return After you filed your return, you received a refund of $4,000. H&r block free federal tax return You must refigure your 2013 American opportunity credit using $3,000 of qualified education expenses instead of $7,000. H&r block free federal tax return The refigured credit is $2,250. H&r block free federal tax return The increase to your tax liability is also $250. H&r block free federal tax return Include the difference of $250 as additional tax on your 2014 tax return. H&r block free federal tax return See the instructions for your 2014 income tax return to determine where to include this tax. H&r block free federal tax return If you pay qualified education expenses in 2014 for an academic period that begins in the first 3 months of 2014 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2014 instead of reducing your expenses for 2013. H&r block free federal tax return Amounts that do not reduce qualified education expenses. H&r block free federal tax return   Do not reduce qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. H&r block free federal tax return   Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations. H&r block free federal tax return The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. H&r block free federal tax return The use of the money is not restricted. H&r block free federal tax return Example 1. H&r block free federal tax return Joan paid $3,000 for tuition and $5,000 for room and board at University X. H&r block free federal tax return The university did not require her to pay any fees in addition to her tuition in order to enroll in or attend classes. H&r block free federal tax return To help pay these costs, she was awarded a $2,000 scholarship and a $4,000 student loan. H&r block free federal tax return The terms of the scholarship state that it can be used to pay any of Joan's college expenses. H&r block free federal tax return University X applies the $2,000 scholarship against Joan's $8,000 total bill, and Joan pays the $6,000 balance of her bill from University X with a combination of her student loan and her savings. H&r block free federal tax return Joan does not report any portion of the scholarship as income on her tax return. H&r block free federal tax return In figuring the amount of either education credit (American opportunity or lifetime learning), Joan must reduce her qualified education expenses by the amount of the scholarship ($2,000) because she excluded the entire scholarship from her income. H&r block free federal tax return The student loan is not tax-free educational assistance, so she does not need to reduce her qualified expenses by any part of the loan proceeds. H&r block free federal tax return Joan is treated as having paid $1,000 in qualified education expenses ($3,000 tuition – $2,000 scholarship). H&r block free federal tax return Example 2. H&r block free federal tax return The facts are the same as in Example 1, except that Joan reports her entire scholarship as income on her tax return. H&r block free federal tax return Because Joan reported the entire $2,000 scholarship in her income, she does not need to reduce her qualified education expenses. H&r block free federal tax return Joan is treated as having paid $3,000 in qualified education expenses. H&r block free federal tax return Coordination with Pell grants and other scholarships. H&r block free federal tax return   In some cases, you may be able to reduce your tax liability by including scholarships in income. H&r block free federal tax return If you are claiming an education credit for a claimed dependent who received a scholarship, you may be able to reduce your tax liability if the student includes the scholarship in income. H&r block free federal tax return The scholarship must be one that may (by its terms) be applied to expenses (such as room and board) other than qualified education expenses. H&r block free federal tax return Example 1—No scholarship. H&r block free federal tax return Bill Pass, age 28 and unmarried, enrolled full-time in 2013 as a first-year student at a local college to earn a degree in law enforcement. H&r block free federal tax return This was his first year of postsecondary education. H&r block free federal tax return During 2013, he paid $5,600 for his qualified education expenses and $4,400 for his room and board for the fall 2013 semester. H&r block free federal tax return He and the college meet all the requirements for the American opportunity credit. H&r block free federal tax return Bill's AGI and his MAGI, for purposes of figuring his credit, are $30,000. H&r block free federal tax return Bill takes the standard deduction of $5,950 and personal exemption of $3,800, reducing his AGI to taxable income of $20,250. H&r block free federal tax return His income tax liability, before credits, is $2,599 and Bill claims no credits other than the American opportunity credit. H&r block free federal tax return He figures his American opportunity credit based on qualified education expenses of $4,000, which results in a credit of $2,500 and tax after credits of $99. H&r block free federal tax return Example 2—Scholarship excluded from income. H&r block free federal tax return The facts are the same as in Example 1—No scholarship, except that Bill was awarded a $5,600 scholarship. H&r block free federal tax return Under the terms of his scholarship, it may be used to pay any educational expenses, including room and board. H&r block free federal tax return If Bill excludes the scholarship from income, he will be deemed (for purposes of computing his education credit) to have used the scholarship to pay for tuition, required fees, and course materials. H&r block free federal tax return His adjusted qualified education expenses will be zero and he will not have an education credit. H&r block free federal tax return Therefore, Bill's tax after credits would be $2,599. H&r block free federal tax return Example 3—Scholarship partially included in income. H&r block free federal tax return The facts are the same as in Example 2—Scholarship excluded from income. H&r block free federal tax return If, unlike Example 2, Bill includes $4,000 of the scholarship in income, he will be deemed to have used that amount to pay for room and board. H&r block free federal tax return The remaining $1,600 of the $5,600 scholarship will reduce his qualified education expenses and his adjusted qualified education expenses will be $4,000. H&r block free federal tax return Bill's AGI will increase to $34,000, his taxable income will increase to $24,250, and his tax before credits will increase to $3,199. H&r block free federal tax return Based on his adjusted qualified education expenses of $4,000, Bill would be able to claim an American opportunity tax credit of $2,500 and his tax after credits would be $699. H&r block free federal tax return Expenses That Do Not Qualify Qualified education expenses do not include amounts paid for: Insurance, Medical expenses (including student health fees), Room and board, Transportation, or Similar personal, living, or family expenses. H&r block free federal tax return This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. H&r block free federal tax return Sports, games, hobbies, and noncredit courses. H&r block free federal tax return   Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. H&r block free federal tax return However, if the course of instruction or other education is part of the student's degree program, these expenses can qualify. H&r block free federal tax return Comprehensive or bundled fees. H&r block free federal tax return   Some eligible educational institutions combine all of their fees for an academic period into one amount. H&r block free federal tax return If you do not receive or do not have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed earlier, contact the institution. H&r block free federal tax return The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T, Tuition Statement. H&r block free federal tax return See Figuring the Credit , later, for more information about Form 1098-T. H&r block free federal tax return Who Is an Eligible Student To claim the American opportunity credit, the student for whom you pay qualified education expenses must be an eligible student. H&r block free federal tax return This is a student who meets all of the following requirements. H&r block free federal tax return The student did not have expenses that were used to figure an American opportunity credit in any 4 earlier tax years. H&r block free federal tax return This includes any tax year(s) in which you claimed the Hope Scholarship Credit for the same student. H&r block free federal tax return The student had not completed the first 4 years of postsecondary education (generally, the freshman, sophomore, junior, and senior years of college) before 2013. H&r block free federal tax return For at least one academic period beginning in 2013, the student was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. H&r block free federal tax return The student has not been convicted of any federal or state felony for possessing or distributing a controlled substance as of the end of 2013. H&r block free federal tax return These requirements are also shown in Figure 2-2, Who is an Eligible Student for the American Opportunity Credit , later. H&r block free federal tax return Completion of first 4 years. H&r block free federal tax return   A student has completed the first 4 years of postsecondary education if the institution at which the student is enrolled awards the student 4 years of academic credit at that institution for coursework completed by the student before 2013. H&r block free federal tax return This student generally would not be an eligible student for purposes of the American opportunity credit. H&r block free federal tax return Exception. H&r block free federal tax return   Any academic credit awarded solely on the basis of the student's performance on proficiency examinations is disregarded in determining whether the student has completed 4 years of postsecondary education. H&r block free federal tax return Enrolled at least half-time. H&r block free federal tax return   A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study. H&r block free federal tax return   The standard for what is half of the normal full-time work load is determined by each eligible educational institution. H&r block free federal tax return However, the standard may not be lower than any of those established by the U. H&r block free federal tax return S. H&r block free federal tax return Department of Education under the Higher Education Act of 1965. H&r block free federal tax return Please click here for the text description of the image. H&r block free federal tax return Figure 2-2 Example 1. H&r block free federal tax return Mack graduated from high school in June 2012. H&r block free federal tax return In September, he enrolled in an undergraduate degree program at College U, and attended full-time for both the 2012 fall and 2013 spring semesters. H&r block free federal tax return For the 2013 fall semester, Mack was enrolled less than half-time. H&r block free federal tax return Because Mack was enrolled in an undergraduate degree program on at least a half-time basis for at least one academic period that began during 2012 and at least one academic period that began during 2013, he is an eligible student for tax years 2012 and 2013 (including the 2013 fall semester when he enrolled at College U on less than a half-time basis). H&r block free federal tax return Example 2. H&r block free federal tax return After taking classes at College V on a part-time basis for a few years, Shelly became a full-time student for the 2013 spring semester. H&r block free federal tax return College V classified Shelly as a second-semester senior (fourth year) for the 2013 spring semester and as a first-semester graduate student (fifth year) for the 2013 fall semester. H&r block free federal tax return Because College V did not classify Shelly as having completed the first 4 years of postsecondary education as of the beginning of 2013, Shelly is an eligible student for tax year 2013. H&r block free federal tax return Therefore, the qualified education expenses paid for the 2013 spring semester and the 2013 fall semester are taken into account in calculating the American opportunity credit for 2013. H&r block free federal tax return Example 3. H&r block free federal tax return During the 2012 fall semester, Larry was a high school student who took classes on a half-time basis at College X. H&r block free federal tax return Larry was not enrolled as part of a degree program at College X because College X only admits students to a degree program if they have a high school diploma or equivalent. H&r block free federal tax return Because Larry was not enrolled in a degree program at College X during 2012, Larry was not an eligible student for tax year 2012. H&r block free federal tax return Example 4. H&r block free federal tax return The facts are the same as in Example 3. H&r block free federal tax return During the 2013 spring semester, Larry again attended College X but not as part of a degree program. H&r block free federal tax return Larry graduated from high school in June 2013. H&r block free federal tax return For the 2013 fall semester, Larry enrolled as a full-time student in College X as part of a degree program, and College X awarded Larry credit for his prior coursework at College X. H&r block free federal tax return Because Larry was enrolled in a degree program at College X for the 2013 fall term on at least a half-time basis, Larry is an eligible student for all of tax year 2013. H&r block free federal tax return Therefore, the qualified education expenses paid for classes taken at College X during both the 2013 spring semester (during which Larry was not enrolled in a degree program) and the 2013 fall semester are taken into account in computing any American opportunity credit. H&r block free federal tax return Example 5. H&r block free federal tax return Dee graduated from high school in June 2012. H&r block free federal tax return In January 2013, Dee enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a travel agent. H&r block free federal tax return Dee completed the program in December 2013, and was awarded a certificate. H&r block free federal tax return In January 2014, she enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a computer programmer. H&r block free federal tax return Dee is an eligible student for both tax years 2013 and 2014 because she meets the degree requirement, the work load requirement, and the year of study requirement for those years. H&r block free federal tax return Who Can Claim a Dependent's Expenses If there are qualified education expenses for your dependent during a tax year, either you or your dependent, but not both of you, can claim an American opportunity credit for your dependent's expenses for that year. H&r block free federal tax return For you to claim an American opportunity credit for your dependent's expenses, you must also claim an exemption for your dependent. H&r block free federal tax return You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c. H&r block free federal tax return IF you. H&r block free federal tax return . H&r block free federal tax return . H&r block free federal tax return THEN only. H&r block free federal tax return . H&r block free federal tax return . H&r block free federal tax return claim an exemption on  your tax return for a  dependent who is an  eligible student you can claim the American opportunity credit based on that dependent's expenses. H&r block free federal tax return The dependent cannot claim the credit. H&r block free federal tax return do not claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption) the dependent can claim the American opportunity credit. H&r block free federal tax return You cannot claim the credit based on this dependent's expenses. H&r block free federal tax return Expenses paid by dependent. H&r block free federal tax return   If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. H&r block free federal tax return Include these expenses when figuring the amount of your American opportunity credit. H&r block free federal tax return    Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are treated as paid by your dependent. H&r block free federal tax return Expenses paid by you. H&r block free federal tax return   If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the American opportunity credit. H&r block free federal tax return If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring the American opportunity credit. H&r block free federal tax return Expenses paid by others. H&r block free federal tax return   Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. H&r block free federal tax return In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. H&r block free federal tax return If you claim an exemption on your tax return for the student, you are considered to have paid the expenses. H&r block free federal tax return Example. H&r block free federal tax return In 2013, Ms. H&r block free federal tax return Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. H&r block free federal tax return For purposes of claiming an American opportunity credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself. H&r block free federal tax return Unless an exemption for Todd is claimed on someone else's 2013 tax return, only Todd can use the payment to claim an American opportunity credit. H&r block free federal tax return If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2013 tax return, whoever claims the exemption may be able to use the expenses to claim an American opportunity credit. H&r block free federal tax return If anyone else claims an exemption for Todd, Todd cannot claim an American opportunity credit. H&r block free federal tax return Tuition reduction. H&r block free federal tax return    When an eligible educational institution provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. H&r block free federal tax return If it is taxable, the employee is treated as receiving a payment of that amount and, in turn, paying it to the educational institution on behalf of the student. H&r block free federal tax return For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. H&r block free federal tax return Figuring the Credit The amount of the American opportunity credit (per eligible student) is the sum of: 100% of the first $2,000 of qualified education expenses you paid for the eligible student, and 25% of the next $2,000 of qualified education expenses you paid for that student. H&r block free federal tax return The maximum amount of American opportunity credit you can claim in 2013 is $2,500 multiplied by the number of eligible students. H&r block free federal tax return You can claim the full $2,500 for each eligible student for whom you paid at least $4,000 of adjusted qualified education expenses. H&r block free federal tax return However, the credit may be reduced based on your MAGI. H&r block free federal tax return See Effect of the Amount of Your Income on the Amount of Your Credit , later. H&r block free federal tax return Example. H&r block free federal tax return Jack and Kay Ford are married and file a joint tax return. H&r block free federal tax return For 2013, they claim an exemption for their dependent daughter on their tax return. H&r block free federal tax return Their MAGI is $70,000. H&r block free federal tax return Their daughter is in her junior (third) year of studies at the local university. H&r block free federal tax return Jack and Kay paid qualified education expenses of $4,300 in 2013. H&r block free federal tax return Jack and Kay, their daughter, and the local university meet all of the requirements for the American opportunity credit. H&r block free federal tax return Jack and Kay can claim a $2,500 American opportunity credit in 2013. H&r block free federal tax return This is 100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000. H&r block free federal tax return Form 1098-T. H&r block free federal tax return   To help you figure your American opportunity credit, the student should receive Form 1098-T, Tuition Statement. H&r block free federal tax return Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2014. H&r block free federal tax return An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. H&r block free federal tax return However, the amounts in boxes 1 and 2 of Form 1098-T might be different than what you paid. H&r block free federal tax return When figuring the credit, use only the amounts you paid or are deemed to have paid in 2013 for qualified education expenses. H&r block free federal tax return   In addition, Form 1098-T should give other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements or refunds, and whether the student was enrolled at least half-time or was a graduate student. H&r block free federal tax return    The eligible educational institution may ask for a completed Form W-9S, Request for Student's or Borrower's Taxpayer Identification Number and Certification, or similar statement to obtain the student's name, address, and taxpayer identification number. H&r block free federal tax return Effect of the Amount of Your Income on the Amount of Your Credit The amount of your American opportunity credit is phased out (gradually reduced) if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). H&r block free federal tax return You cannot claim an American opportunity credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return). H&r block free federal tax return Modified adjusted gross income (MAGI). H&r block free federal tax return   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. H&r block free federal tax return MAGI when using Form 1040A. H&r block free federal tax return   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. H&r block free federal tax return MAGI when using Form 1040. H&r block free federal tax return   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. H&r block free federal tax return You can use Worksheet 2-1, next, to figure your MAGI. H&r block free federal tax return    Worksheet 2-1. H&r block free federal tax return MAGI for the American Opportunity Credit 1. H&r block free federal tax return Enter your adjusted gross income  (Form 1040, line 38)   1. H&r block free federal tax return   2. H&r block free federal tax return Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. H&r block free federal tax return       3. H&r block free federal tax return Enter your foreign housing deduction (Form 2555, line 50)   3. H&r block free federal tax return       4. H&r block free federal tax return Enter the amount of income from Puerto Rico you are excluding   4. H&r block free federal tax return       5. H&r block free federal tax return Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. H&r block free federal tax return       6. H&r block free federal tax return Add the amounts on lines 2, 3, 4, and 5   6. H&r block free federal tax return   7. H&r block free federal tax return Add the amounts on lines 1 and 6. H&r block free federal tax return  This is your modified adjusted  gross income. H&r block free federal tax return Enter here and  on Form 8863, line 3   7. H&r block free federal tax return   Phaseout. H&r block free federal tax return   If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 2-7, of Form 8863, Part I. H&r block free federal tax return The same method is shown in the following example. H&r block free federal tax return Example. H&r block free federal tax return You are filing a joint return and your MAGI is $165,000. H&r block free federal tax return In 2013, you paid $5,000 of qualified education expenses. H&r block free federal tax return You figure a tentative American opportunity credit of $2,500 (100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000 of qualified education expenses). H&r block free federal tax return Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($2,500) by a fraction. H&r block free federal tax return The numerator of the fraction is $180,000 (the upper limit for those filing a joint return) minus your MAGI. H&r block free federal tax return The denominator is $20,000, the range of incomes for the phaseout ($160,000 to $180,000). H&r block free federal tax return The result is the amount of your phased out (reduced) American opportunity credit ($1,875). H&r block free federal tax return      $2,500 × $180,000 − $165,000  $20,000 = $1,875   Refundable Part of Credit Forty percent of the American opportunity credit is refundable for most taxpayers. H&r block free federal tax return However, if you were under age 24 at the end of 2013 and the conditions listed below apply to you, you cannot claim any part of the American opportunity credit as a refundable credit on your tax return. H&r block free federal tax return Instead, your allowed credit (figured on Form 8863, Part II) will be used to reduce your tax as a nonrefundable credit only. H&r block free federal tax return You do not qualify for a refund if items 1 (a, b, or c), 2, and 3 below apply to you. H&r block free federal tax return You were: Under age 18 at the end of 2013, or Age 18 at the end of 2013 and your earned income (defined below) was less than one-half of your support (defined below), or Over age 18 and under age 24 at the end of 2013 and a full-time student (defined below) and your earned income (defined below) was less than one-half of your support (defined below). H&r block free federal tax return At least one of your parents was alive at the end of 2013. H&r block free federal tax return You are filing a return as single, head of household, qualifying widow(er), or married filing separately for 2013. H&r block free federal tax return Earned income. H&r block free federal tax return   Earned income includes wages, salaries, professional fees, and other payments received for personal services actually performed. H&r block free federal tax return Earned income includes the part of any scholarship or fellowship that represents payment for teaching, research, or other services performed by the student that are required as a condition for receiving the scholarship or fellowship. H&r block free federal tax return Earned income does not include that part of the compensation for personal services rendered to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. H&r block free federal tax return   If you are a sole proprietor or a partner in a trade or business in which both personal services and capital are material income-producing factors, earned income also includes a reasonable allowance for compensation for personal services, but not more than 30% of your share of the net profits from that trade or business (after subtracting the deduction for one-half of self-employment tax). H&r block free federal tax return However, if capital is not an income-producing factor and your personal services produced the business income, the 30% limit does not apply. H&r block free federal tax return Support. H&r block free federal tax return   Your support includes food, shelter, clothing, medical and dental care, education, and the like. H&r block free federal tax return Generally, the amount of the item of support will be the amount of expenses incurred by the one furnishing such item. H&r block free federal tax return If the item of support is in the form of property or lodging, measure the amount of such item of support by its fair market value. H&r block free federal tax return However, a scholarship received by you is not considered support if you are a full-time student. H&r block free federal tax return See Publication 501 for details. H&r block free federal tax return Full-time student. H&r block free federal tax return   You are a full-time student for 2013 if during any part of any 5 calendar months during the year you were enrolled as a full-time student at an eligible educational institution (defined earlier), or took a full-time, on-farm training course given by such an institution or by a state, county, or local government agency. H&r block free federal tax return Claiming the Credit You claim the American opportunity credit by completing Form 8863 and submitting it with your Form 1040 or 1040A. H&r block free federal tax return Enter the nonrefundable part of the credit on Form 1040, line 49, or on Form 1040A, line 31. H&r block free federal tax return Enter the refundable part of the credit on Form 1040, line 66, or on Form 1040A, line 40. H&r block free federal tax return A filled-in Form 8863 is shown at the end of this publication. H&r block free federal tax return Note. H&r block free federal tax return In Appendix A. H&r block free federal tax return at the end of this publication, there is an example illustrating the use of Form 8863 when both the American opportunity credit and the lifetime learning credit are claimed on the same tax return. H&r block free federal tax return Prev  Up  Next   Home   More Online Publications
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The H&r Block Free Federal Tax Return

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