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Income Tax Deductions 2012

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Income Tax Deductions 2012

Income tax deductions 2012 13. Income tax deductions 2012   Basis of Property Table of Contents Introduction Useful Items - You may want to see: Cost BasisReal Property Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostProperty Received for Services Taxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed From Personal to Business or Rental Use Stocks and Bonds Introduction This chapter discusses how to figure your basis in property. Income tax deductions 2012 It is divided into the following sections. Income tax deductions 2012 Cost basis. Income tax deductions 2012 Adjusted basis. Income tax deductions 2012 Basis other than cost. Income tax deductions 2012 Your basis is the amount of your investment in property for tax purposes. Income tax deductions 2012 Use the basis to figure gain or loss on the sale, exchange, or other disposition of property. Income tax deductions 2012 Also use it to figure deductions for depreciation, amortization, depletion, and casualty losses. Income tax deductions 2012 If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Income tax deductions 2012 Only the basis allocated to the business or investment use of the property can be depreciated. Income tax deductions 2012 Your original basis in property is adjusted (increased or decreased) by certain events. Income tax deductions 2012 For example, if you make improvements to the property, increase your basis. Income tax deductions 2012 If you take deductions for depreciation or casualty losses, or claim certain credits, reduce your basis. Income tax deductions 2012 Keep accurate records of all items that affect the basis of your property. Income tax deductions 2012 For more information on keeping records, see chapter 1. Income tax deductions 2012 Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 525 Taxable and Nontaxable Income 535 Business Expenses 537 Installment Sales 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 551 Basis of Assets 946 How To Depreciate Property Cost Basis The basis of property you buy is usually its cost. Income tax deductions 2012 The cost is the amount you pay in cash, debt obligations, other property, or services. Income tax deductions 2012 Your cost also includes amounts you pay for the following items: Sales tax, Freight, Installation and testing, Excise taxes, Legal and accounting fees (when they must be capitalized), Revenue stamps, Recording fees, and Real estate taxes (if you assume liability for the seller). Income tax deductions 2012 In addition, the basis of real estate and business assets may include other items. Income tax deductions 2012 Loans with low or no interest. Income tax deductions 2012    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 any amount considered to be unstated interest. Income tax deductions 2012 You generally have unstated interest if your interest rate is less than the applicable federal rate. Income tax deductions 2012   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Income tax deductions 2012 Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Income tax deductions 2012 If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Income tax deductions 2012 Lump sum purchase. Income tax deductions 2012   If you buy buildings and the land on which they stand for a lump sum, allocate the cost basis among the land and the buildings. Income tax deductions 2012 Allocate the cost basis according to the respective fair market values (FMVs) of the land and buildings at the time of purchase. Income tax deductions 2012 Figure the basis of each asset by multiplying the lump sum by a fraction. Income tax deductions 2012 The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Income tax deductions 2012    If you are not certain of the FMVs of the land and buildings, you can allocate the basis according to their assessed values for real estate tax purposes. Income tax deductions 2012 Fair market value (FMV). Income tax deductions 2012   FMV is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the necessary facts. Income tax deductions 2012 Sales of similar property on or about the same date may be helpful in figuring the FMV of the property. Income tax deductions 2012 Assumption of mortgage. Income tax deductions 2012   If you buy property and assume (or buy the property subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage. Income tax deductions 2012 Settlement costs. Income tax deductions 2012   Your basis includes the settlement fees and closing costs you paid for buying the property. Income tax deductions 2012 (A fee for buying property is a cost that must be paid even if you buy the property for cash. Income tax deductions 2012 ) Do not include fees and costs for getting a loan on the property in your basis. Income tax deductions 2012   The following are some of the settlement fees or closing costs you can include in the basis of your property. Income tax deductions 2012 Abstract fees (abstract of title fees). Income tax deductions 2012 Charges for installing utility services. Income tax deductions 2012 Legal fees (including fees for the title search and preparation of the sales contract and deed). Income tax deductions 2012 Recording fees. Income tax deductions 2012 Survey fees. Income tax deductions 2012 Transfer taxes. Income tax deductions 2012 Owner's title insurance. Income tax deductions 2012 Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Income tax deductions 2012   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Income tax deductions 2012   The following are some of the settlement fees and closing costs you cannot include in the basis of property. Income tax deductions 2012 Casualty insurance premiums. Income tax deductions 2012 Rent for occupancy of the property before closing. Income tax deductions 2012 Charges for utilities or other services related to occupancy of the property before closing. Income tax deductions 2012 Charges connected with getting a loan, such as points (discount points, loan origination fees), mortgage insurance premiums, loan assumption fees, cost of a credit report, and fees for an appraisal required by a lender. Income tax deductions 2012 Fees for refinancing a mortgage. Income tax deductions 2012 Real estate taxes. Income tax deductions 2012   If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. Income tax deductions 2012 You cannot deduct them as an expense. Income tax deductions 2012    If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. Income tax deductions 2012 Do not include that amount in the basis of your property. Income tax deductions 2012 If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Income tax deductions 2012 Points. Income tax deductions 2012   If you pay points to get a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. Income tax deductions 2012 Generally, you deduct the points over the term of the loan. Income tax deductions 2012 For more information on how to deduct points, see chapter 23. Income tax deductions 2012 Points on home mortgage. Income tax deductions 2012   Special rules may apply to points you and the seller pay when you get a mortgage to buy your main home. Income tax deductions 2012 If certain requirements are met, you can deduct the points in full for the year in which they are paid. Income tax deductions 2012 Reduce the basis of your home by any seller-paid points. Income tax deductions 2012 Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments (increases and decreases) to the cost basis or basis other than cost (discussed later) of the property. Income tax deductions 2012 The result is the adjusted basis. Income tax deductions 2012 Increases to Basis Increase the basis of any property by all items properly added to a capital account. Income tax deductions 2012 Examples of items that increase basis are shown in Table 13-1. Income tax deductions 2012 These include the items discussed below. Income tax deductions 2012 Improvements. Income tax deductions 2012   Add to your basis in property the cost of improvements having a useful life of more than 1 year, that increase the value of the property, lengthen its life, or adapt it to a different use. Income tax deductions 2012 For example, improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, or paving your driveway. Income tax deductions 2012 Assessments for local improvements. Income tax deductions 2012   Add to the basis of property assessments for improvements such as streets and sidewalks if they increase the value of the property assessed. Income tax deductions 2012 Do not deduct them as taxes. Income tax deductions 2012 However, you can deduct as taxes assessments for maintenance or repairs, or for meeting interest charges related to the improvements. Income tax deductions 2012 Example. Income tax deductions 2012 Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected property owners for the cost of the conversion. Income tax deductions 2012 Add the assessment to your property's basis. Income tax deductions 2012 In this example, the assessment is a depreciable asset. Income tax deductions 2012 Decreases to Basis Decrease the basis of any property by all items that represent a return of capital for the period during which you held the property. Income tax deductions 2012 Examples of items that decrease basis are shown in Table 13-1. Income tax deductions 2012 These include the items discussed below. Income tax deductions 2012 Table 13-1. Income tax deductions 2012 Examples of Adjustments to Basis Increases to Basis Decreases to Basis • Capital improvements: • Exclusion from income of   Putting an addition on your home subsidies for energy conservation   Replacing an entire roof measures   Paving your driveway     Installing central air conditioning • Casualty or theft loss deductions   Rewiring your home and insurance reimbursements       • Assessments for local improvements:     Water connections     Extending utility service lines to the property • Postponed gain from the sale of a home   Sidewalks • Alternative motor vehicle credit  (Form 8910)   Roads       • Alternative fuel vehicle refueling     property credit (Form 8911)           • Residential energy credits (Form 5695)       • Casualty losses: • Depreciation and section 179 deduction   Restoring damaged property     • Nontaxable corporate distributions • Legal fees:     Cost of defending and perfecting a title • Certain canceled debt excluded from   Fees for getting a reduction of an assessment income     • Zoning costs • Easements           • Adoption tax benefits Casualty and theft losses. Income tax deductions 2012   If you have a casualty or theft loss, decrease the basis in your property by any insurance proceeds or other reimbursement and by any deductible loss not covered by insurance. Income tax deductions 2012    You must increase your basis in the property by the amount you spend on repairs that restore the property to its pre-casualty condition. Income tax deductions 2012   For more information on casualty and theft losses, see chapter 25. Income tax deductions 2012 Depreciation and section 179 deduction. Income tax deductions 2012   Decrease the basis of your qualifying business property by any section 179 deduction you take and the depreciation you deducted, or could have deducted (including any special depreciation allowance), on your tax returns under the method of depreciation you selected. Income tax deductions 2012   For more information about depreciation and the section 179 deduction, see Publication 946 and the Instructions for Form 4562. Income tax deductions 2012 Example. Income tax deductions 2012 You owned a duplex used as rental property that cost you $40,000, of which $35,000 was allocated to the building and $5,000 to the land. Income tax deductions 2012 You added an improvement to the duplex that cost $10,000. Income tax deductions 2012 In February last year, the duplex was damaged by fire. Income tax deductions 2012 Up to that time, you had been allowed depreciation of $23,000. Income tax deductions 2012 You sold some salvaged material for $1,300 and collected $19,700 from your insurance company. Income tax deductions 2012 You deducted a casualty loss of $1,000 on your income tax return for last year. Income tax deductions 2012 You spent $19,000 of the insurance proceeds for restoration of the duplex, which was completed this year. Income tax deductions 2012 You must use the duplex's adjusted basis after the restoration to determine depreciation for the rest of the property's recovery period. Income tax deductions 2012 Figure the adjusted basis of the duplex as follows: Original cost of duplex $35,000 Addition to duplex 10,000 Total cost of duplex $45,000 Minus: Depreciation 23,000 Adjusted basis before casualty $22,000 Minus: Insurance proceeds $19,700     Deducted casualty loss 1,000     Salvage proceeds 1,300 22,000 Adjusted basis after casualty $-0- Add: Cost of restoring duplex 19,000 Adjusted basis after restoration $19,000 Note. Income tax deductions 2012 Your basis in the land is its original cost of $5,000. Income tax deductions 2012 Easements. Income tax deductions 2012   The amount you receive for granting an easement is generally considered to be proceeds from the sale of an interest in real property. Income tax deductions 2012 It reduces the basis of the affected part of the property. Income tax deductions 2012 If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. Income tax deductions 2012   If the gain is on a capital asset, see chapter 16 for information about how to report it. Income tax deductions 2012 If the gain is on property used in a trade or business, see Publication 544 for information about how to report it. Income tax deductions 2012 Exclusion of subsidies for energy conservation measures. Income tax deductions 2012   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. Income tax deductions 2012 Reduce the basis of the property for which you received the subsidy by the excluded amount. Income tax deductions 2012 For more information about this subsidy, see chapter 12. Income tax deductions 2012 Postponed gain from sale of home. Income tax deductions 2012    If you postponed gain from the sale of your main home under rules in effect before May 7, 1997, you must reduce the basis of the home you acquired as a replacement by the amount of the postponed gain. Income tax deductions 2012 For more information on the rules for the sale of a home, see chapter 15. Income tax deductions 2012 Basis Other Than Cost There are many times when you cannot use cost as basis. Income tax deductions 2012 In these cases, the fair market value or the adjusted basis of the property can be used. Income tax deductions 2012 Fair market value (FMV) and adjusted basis were discussed earlier. Income tax deductions 2012 Property Received for Services If you receive property for your services, include the FMV of the property in income. Income tax deductions 2012 The amount you include in income becomes your basis. Income tax deductions 2012 If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. Income tax deductions 2012 Restricted property. Income tax deductions 2012   If you receive property for your services and the property is subject to certain restrictions, your basis in the property is its FMV when it becomes substantially vested. Income tax deductions 2012 However, this rule does not apply if you make an election to include in income the FMV of the property at the time it is transferred to you, less any amount you paid for it. Income tax deductions 2012 Property is substantially vested when it is transferable or when it is not subject to a substantial risk of forfeiture (you do not have a good chance of losing it). Income tax deductions 2012 For more information, see Restricted Property in Publication 525. Income tax deductions 2012 Bargain purchases. Income tax deductions 2012   A bargain purchase is a purchase of an item for less than its FMV. Income tax deductions 2012 If, as compensation for services, you buy goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. Income tax deductions 2012 Your basis in the property is its FMV (your purchase price plus the amount you include in income). Income tax deductions 2012   If the difference between your purchase price and the FMV is a qualified employee discount, do not include the difference in income. Income tax deductions 2012 However, your basis in the property is still its FMV. Income tax deductions 2012 See Employee Discounts in Publication 15-B. Income tax deductions 2012 Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. Income tax deductions 2012 A taxable gain or deductible loss also is known as a recognized gain or loss. Income tax deductions 2012 If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. Income tax deductions 2012 Involuntary Conversions If you receive replacement property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property using the basis of the converted property. Income tax deductions 2012 Similar or related property. Income tax deductions 2012   If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the same as the converted property's basis on the date of the conversion, with the following adjustments. Income tax deductions 2012 Decrease the basis by the following. Income tax deductions 2012 Any loss you recognize on the involuntary conversion. Income tax deductions 2012 Any money you receive that you do not spend on similar property. Income tax deductions 2012 Increase the basis by the following. Income tax deductions 2012 Any gain you recognize on the involuntary conversion. Income tax deductions 2012 Any cost of acquiring the replacement property. Income tax deductions 2012 Money or property not similar or related. Income tax deductions 2012    If you receive money or property not similar or related in service or use to the converted property, and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the conversion. Income tax deductions 2012 Example. Income tax deductions 2012 The state condemned your property. Income tax deductions 2012 The adjusted basis of the property was $26,000 and the state paid you $31,000 for it. Income tax deductions 2012 You realized a gain of $5,000 ($31,000 − $26,000). Income tax deductions 2012 You bought replacement property similar in use to the converted property for $29,000. Income tax deductions 2012 You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. Income tax deductions 2012 Your unrecognized gain is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. Income tax deductions 2012 The basis of the replacement property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of replacement property $26,000 Allocating the basis. Income tax deductions 2012   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Income tax deductions 2012 Basis for depreciation. Income tax deductions 2012   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Income tax deductions 2012 For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Income tax deductions 2012 Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Income tax deductions 2012 If you receive property in a nontaxable exchange, its basis is generally the same as the basis of the property you transferred. Income tax deductions 2012 See Nontaxable Trades in chapter 14. Income tax deductions 2012 Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Income tax deductions 2012 To qualify as a like-kind exchange, the property traded and the property received must be both of the following. Income tax deductions 2012 Qualifying property. Income tax deductions 2012 Like-kind property. Income tax deductions 2012 The basis of the property you receive is generally the same as the adjusted basis of the property you gave up. Income tax deductions 2012 If you trade property in a like-kind exchange and also pay money, the basis of the property received is the adjusted basis of the property you gave up increased by the money you paid. Income tax deductions 2012 Qualifying property. Income tax deductions 2012   In a like-kind exchange, you must hold for investment or for productive use in your trade or business both the property you give up and the property you receive. Income tax deductions 2012 Like-kind property. Income tax deductions 2012   There must be an exchange of like-kind property. Income tax deductions 2012 Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Income tax deductions 2012 The exchange of real estate for real estate and personal property for similar personal property are exchanges of like-kind property. Income tax deductions 2012 Example. Income tax deductions 2012 You trade in an old truck used in your business with an adjusted basis of $1,700 for a new one costing $6,800. Income tax deductions 2012 The dealer allows you $2,000 on the old truck, and you pay $4,800. Income tax deductions 2012 This is a like-kind exchange. Income tax deductions 2012 The basis of the new truck is $6,500 (the adjusted basis of the old one, $1,700, plus the amount you paid, $4,800). Income tax deductions 2012 If you sell your old truck to a third party for $2,000 instead of trading it in and then buy a new one from the dealer, you have a taxable gain of $300 on the sale (the $2,000 sale price minus the $1,700 adjusted basis). Income tax deductions 2012 The basis of the new truck is the price you pay the dealer. Income tax deductions 2012 Partially nontaxable exchanges. Income tax deductions 2012   A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Income tax deductions 2012 The basis of the property you receive is the same as the adjusted basis of the property you gave up, with the following adjustments. Income tax deductions 2012 Decrease the basis by the following amounts. Income tax deductions 2012 Any money you receive. Income tax deductions 2012 Any loss you recognize on the exchange. Income tax deductions 2012 Increase the basis by the following amounts. Income tax deductions 2012 Any additional costs you incur. Income tax deductions 2012 Any gain you recognize on the exchange. Income tax deductions 2012 If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Income tax deductions 2012 Allocation of basis. Income tax deductions 2012   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Income tax deductions 2012 The rest is the basis of the like-kind property. Income tax deductions 2012 More information. Income tax deductions 2012   See Like-Kind Exchanges in chapter 1 of Publication 544 for more information. Income tax deductions 2012 Basis for depreciation. Income tax deductions 2012   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind exchange. Income tax deductions 2012 For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Income tax deductions 2012 Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. Income tax deductions 2012 The same rule applies to a transfer by your former spouse that is incident to divorce. Income tax deductions 2012 However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. Income tax deductions 2012 If the property transferred to you is a series E, series EE, or series I U. Income tax deductions 2012 S. Income tax deductions 2012 savings bond, the transferor must include in income the interest accrued to the date of transfer. Income tax deductions 2012 Your basis in the bond immediately after the transfer is equal to the transferor's basis increased by the interest income includible in the transferor's income. Income tax deductions 2012 For more information on these bonds, see chapter 7. Income tax deductions 2012 At the time of the transfer, the transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. Income tax deductions 2012 For more information about the transfer of property from a spouse, see chapter 14. Income tax deductions 2012 Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. Income tax deductions 2012 FMV less than donor's adjusted basis. Income tax deductions 2012   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Income tax deductions 2012 Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. Income tax deductions 2012 Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. Income tax deductions 2012 See Adjusted Basis , earlier. Income tax deductions 2012 Example. Income tax deductions 2012 You received an acre of land as a gift. Income tax deductions 2012 At the time of the gift, the land had an FMV of $8,000. Income tax deductions 2012 The donor's adjusted basis was $10,000. Income tax deductions 2012 After you received the property, no events occurred to increase or decrease your basis. Income tax deductions 2012 If you later sell the property for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis at the time of the gift ($10,000) as your basis to figure gain. Income tax deductions 2012 If you sell the property for $7,000, you will have a $1,000 loss because you must use the FMV at the time of the gift ($8,000) as your basis to figure loss. Income tax deductions 2012 If the sales price is between $8,000 and $10,000, you have neither gain nor loss. Income tax deductions 2012 Business property. Income tax deductions 2012   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Income tax deductions 2012 FMV equal to or greater than donor's adjusted basis. Income tax deductions 2012   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. Income tax deductions 2012 Increase your basis by all or part of any gift tax paid, depending on the date of the gift, explained later. Income tax deductions 2012   Also, for figuring gain or loss from a sale or other disposition or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. Income tax deductions 2012 See Adjusted Basis , earlier. Income tax deductions 2012   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. Income tax deductions 2012 Figure the increase by multiplying the gift tax paid by a fraction. Income tax deductions 2012 The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. Income tax deductions 2012   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Income tax deductions 2012 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. Income tax deductions 2012 Example. Income tax deductions 2012 In 2013, you received a gift of property from your mother that had an FMV of $50,000. Income tax deductions 2012 Her adjusted basis was $20,000. Income tax deductions 2012 The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Income tax deductions 2012 She paid a gift tax of $7,320 on the property. Income tax deductions 2012 Your basis is $26,076, figured as follows: Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000     Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . Income tax deductions 2012 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. Income tax deductions 2012 If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. Income tax deductions 2012 However, your basis cannot exceed the FMV of the gift at the time it was given to you. Income tax deductions 2012 Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. Income tax deductions 2012 The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation. Income tax deductions 2012 The value under the special-use valuation method for real property used in farming or a closely held business if elected for estate tax purposes. Income tax deductions 2012 The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. Income tax deductions 2012 If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Income tax deductions 2012 For more information, see the instructions to Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Income tax deductions 2012 Property inherited from a decedent who died in 2010. Income tax deductions 2012   If you inherited property from a decedent who died in 2010, special rules may apply. Income tax deductions 2012 For more information, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. Income tax deductions 2012 Community property. Income tax deductions 2012   In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. Income tax deductions 2012 When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. Income tax deductions 2012 For this rule to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. Income tax deductions 2012 Example. Income tax deductions 2012 You and your spouse owned community property that had a basis of $80,000. Income tax deductions 2012 When your spouse died, half the FMV of the community interest was includible in your spouse's estate. Income tax deductions 2012 The FMV of the community interest was $100,000. Income tax deductions 2012 The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). Income tax deductions 2012 The basis of the other half to your spouse's heirs is also $50,000. Income tax deductions 2012 For more information about community property, see Publication 555, Community Property. Income tax deductions 2012 Property Changed From Personal to Business or Rental Use If you hold property for personal use and then change it to business use or use it to produce rent, you can begin to depreciate the property at the time of the change. Income tax deductions 2012 To do so, you must figure its basis for depreciation at the time of the change. Income tax deductions 2012 An example of changing property held for personal use to business or rental use would be renting out your former personal residence. Income tax deductions 2012 Basis for depreciation. Income tax deductions 2012   The basis for depreciation is the lesser of the following amounts. Income tax deductions 2012 The FMV of the property on the date of the change. Income tax deductions 2012 Your adjusted basis on the date of the change. Income tax deductions 2012 Example. Income tax deductions 2012 Several years ago, you paid $160,000 to have your house built on a lot that cost $25,000. Income tax deductions 2012 You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. Income tax deductions 2012 Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. Income tax deductions 2012 Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). Income tax deductions 2012 On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. Income tax deductions 2012 The basis for figuring depreciation on the house is its FMV on the date of the change ($165,000) because it is less than your adjusted basis ($178,000). Income tax deductions 2012 Sale of property. Income tax deductions 2012   If you later sell or dispose of property changed to business or rental use, the basis you use will depend on whether you are figuring gain or loss. Income tax deductions 2012 Gain. Income tax deductions 2012   The basis for figuring a gain is your adjusted basis in the property when you sell the property. Income tax deductions 2012 Example. Income tax deductions 2012 Assume the same facts as in the previous example except that you sell the property at a gain after being allowed depreciation deductions of $37,500. Income tax deductions 2012 Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). Income tax deductions 2012 Loss. Income tax deductions 2012   Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Income tax deductions 2012 Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Income tax deductions 2012 Example. Income tax deductions 2012 Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. Income tax deductions 2012 In this case, you would start with the FMV on the date of the change to rental use ($180,000), because it is less than the adjusted basis of $203,000 ($178,000 + $25,000 (land)) on that date. Income tax deductions 2012 Reduce that amount ($180,000) by the depreciation deductions ($37,500). Income tax deductions 2012 The basis for loss is $142,500 ($180,000 − $37,500). Income tax deductions 2012 Stocks and Bonds The basis of stocks or bonds you buy generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. Income tax deductions 2012 If you get stocks or bonds other than by purchase, your basis is usually determined by the FMV or the previous owner's adjusted basis, as discussed earlier. Income tax deductions 2012 You must adjust the basis of stocks for certain events that occur after purchase. Income tax deductions 2012 For example, if you receive additional stock from nontaxable stock dividends or stock splits, reduce your basis for each share of stock by dividing the adjusted basis of the old stock by the number of shares of old and new stock. Income tax deductions 2012 This rule applies only when the additional stock received is identical to the stock held. Income tax deductions 2012 Also reduce your basis when you receive nontaxable distributions. Income tax deductions 2012 They are a return of capital. Income tax deductions 2012 Example. Income tax deductions 2012 In 2011 you bought 100 shares of XYZ stock for $1,000 or $10 a share. Income tax deductions 2012 In 2012 you bought 100 shares of XYZ stock for $1,600 or $16 a share. Income tax deductions 2012 In 2013 XYZ declared a 2-for-1 stock split. Income tax deductions 2012 You now have 200 shares of stock with a basis of $5 a share and 200 shares with a basis of $8 a share. Income tax deductions 2012 Other basis. Income tax deductions 2012   There are other ways to figure the basis of stocks or bonds depending on how you acquired them. Income tax deductions 2012 For detailed information, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Income tax deductions 2012 Identifying stocks or bonds sold. Income tax deductions 2012   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 stocks or bonds. Income tax deductions 2012 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. Income tax deductions 2012 For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Income tax deductions 2012 Mutual fund shares. Income tax deductions 2012   If you sell mutual fund shares you acquired at various times and prices and left on deposit in an account kept by a custodian or agent, you can elect to use an average basis. Income tax deductions 2012 For more information, see Publication 550. Income tax deductions 2012 Bond premium. Income tax deductions 2012   If you buy a taxable bond at a premium and elect to amortize the premium, reduce the basis of the bond by the amortized premium you deduct each year. Income tax deductions 2012 See Bond Premium Amortization in chapter 3 of Publication 550 for more information. Income tax deductions 2012 Although you cannot deduct the premium on a tax-exempt bond, you must amortize the premium each year and reduce your basis in the bond by the amortized amount. Income tax deductions 2012 Original issue discount (OID) on debt instruments. Income tax deductions 2012   You must increase your basis in an OID debt instrument by the OID you include in income for that instrument. Income tax deductions 2012 See Original Issue Discount (OID) in chapter 7 and Publication 1212, Guide To Original Issue Discount (OID) Instruments. Income tax deductions 2012 Tax-exempt obligations. Income tax deductions 2012    OID on tax-exempt obligations is generally not taxable. Income tax deductions 2012 However, when you dispose of a tax-exempt obligation issued after September 3, 1982, and acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. Income tax deductions 2012 The accrued OID is added to the basis of the obligation to determine your gain or loss. Income tax deductions 2012 See chapter 4 of Publication 550. Income tax deductions 2012 Prev  Up  Next   Home   More Online Publications
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Understanding Your CP104 Notice

We made changes to your excise tax return because we believe there was a miscalculation. As a result of these changes, there is a balance due.


What you need to do

  • Read your notice carefully — it explains the changes to your tax account.
  • Compare the figures on the notice with your excise tax return.
  • If you disagree with our change(s), contact us within 10 days from the date of your notice.
  • If you agree with our change(s), correct the copy of your excise tax return that you kept for your records.
  • Make your payment by your due date.
  • If you can’t pay the amount you owe, go to the payments page to find out more about your payment options.

You may want to

  • Download copies of the following materials (if they weren’t included with your notice).

 


Answers to Common Questions

Q. How can I find out what caused my tax return to change?

A. Please contact us at the toll free number listed on the top right corner of your notice for specific information about your tax return.

Q. What should I do if I disagree with the changes you made?

A. If you disagree, contact us at the toll free number listed on the top right corner of your notice or respond in writing within 10 days from the date of the notice. If your response provides us with additional information that justifies a reversal of the change, we’ll reverse the change we made to your account. If you agree with the change, please pay any additional balance due by the date specified in the notice.

Q. What happens if I can’t pay the full amount I owe?

A. You can arrange to make a payment plan with us if you can’t pay the full amount you owe. Go to the payments page to find out more about your payment options.

Q. Am I charged interest on the money I owe?

A. Not if you pay the full amount you owe by the date specified on the notice. However, interest accrues on the unpaid balance after that date.

Q. Will I receive a penalty if I can’t pay the full amount?

A. Yes, you will receive a late payment penalty. You can contact us at the number given on your notice if you’re unable to pay the full amount shown in your specific notice because of circumstances beyond your control. Contact us by the due date of your payment and, depending on your situation, we may be able to remove the penalty.


Tips for next year

Consider filing your excise taxes electronically. Filing online can help you to avoid mistakes and find credits and deductions for which you may qualify. Learn more about e-file.

Page Last Reviewed or Updated: 23-Jan-2014

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The Income Tax Deductions 2012

Income tax deductions 2012 31. Income tax deductions 2012   Tax on Unearned Income of Certain Children Table of Contents What's New Introduction Useful Items - You may want to see: Which Parent's Return To UseParents Who Do Not File a Joint Return Parent's Election To Report Child's Interest and DividendsEffect of Making the Election Figuring Child's Income Figuring Additional Tax Tax for Certain Children Who Have Unearned IncomeProviding Parental Information (Form 8615, lines A–C) Step 1. Income tax deductions 2012 Figuring the Child's Net Unearned Income (Form 8615, Part I) Step 2. Income tax deductions 2012 Figuring Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) Step 3. Income tax deductions 2012 Figuring the Child's Tax (Form 8615, Part III) What's New Net Investment Income Tax. Income tax deductions 2012 . Income tax deductions 2012  For tax years beginning after December 31, 2012, a child whose tax is figured on Form 8615 may be subject to the Net Investment Income Tax (NIIT). Income tax deductions 2012 NIIT is a 3. Income tax deductions 2012 8% tax on the lesser of the net investment income or the excess of the child's modified adjusted gross income (MAGI) over the threshold amount. Income tax deductions 2012 Use Form 8960, Net Investment Income Tax, to figure this tax. Income tax deductions 2012 For more information on NIIT, go to www. Income tax deductions 2012 irs. Income tax deductions 2012 gov and enter “Net Investment Income Tax” in the search box. Income tax deductions 2012 Introduction This chapter discusses the following two rules that may affect the tax on unearned income of certain children. Income tax deductions 2012 If the child's interest and dividend income (including capital gain distributions) total less than $10,000, the child's parent may be able to choose to include that income on the parent's return rather than file a return for the child. Income tax deductions 2012 (See Parent's Election To Report Child's Interest and Dividends , later. Income tax deductions 2012 ) If the child's interest, dividends, and other unearned income total more than $2,000, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. Income tax deductions 2012 (See Tax for Certain Children Who Have Unearned Income , later. Income tax deductions 2012 ) For these rules, the term “child” includes a legally adopted child and a stepchild. Income tax deductions 2012 These rules apply whether or not the child is a dependent. Income tax deductions 2012 Useful Items - You may want to see: Publication 929 Tax Rules for Children and Dependents Form (and Instructions) 8615 Tax for Certain Children Who Have Unearned Income 8814 Parents' Election To Report Child's Interest and Dividends Which Parent's Return To Use If a child's parents are married to each other and file a joint return, use the joint return to figure the tax on the child's unearned income. Income tax deductions 2012 The tax rate and other return information from that return are used to figure the child's tax as explained later under Tax for Certain Children Who Have Unearned Income . Income tax deductions 2012 Parents Who Do Not File a Joint Return For parents who do not file a joint return, the following discussions explain which parent's tax return must be used to figure the tax. Income tax deductions 2012 Only the parent whose tax return is used can make the election described under Parent's Election To Report Child's Interest and Dividends . Income tax deductions 2012 Parents are married. Income tax deductions 2012   If the child's parents file separate returns, use the return of the parent with the greater taxable income. Income tax deductions 2012 Parents not living together. Income tax deductions 2012   If the child's parents are married to each other but not living together, and the parent with whom the child lives (the custodial parent) is considered unmarried, use the return of the custodial parent. Income tax deductions 2012 If the custodial parent is not considered unmarried, use the return of the parent with the greater taxable income. Income tax deductions 2012   For an explanation of when a married person living apart from his or her spouse is considered unmarried, see Head of Household in chapter 2. Income tax deductions 2012 Parents are divorced. Income tax deductions 2012   If the child's parents are divorced or legally separated, and the parent who had custody of the child for the greater part of the year (the custodial parent) has not remarried, use the return of the custodial parent. Income tax deductions 2012 Custodial parent remarried. Income tax deductions 2012   If the custodial parent has remarried, the stepparent (rather than the noncustodial parent) is treated as the child's other parent. Income tax deductions 2012 Therefore, if the custodial parent and the stepparent file a joint return, use that joint return. Income tax deductions 2012 Do not use the return of the noncustodial parent. Income tax deductions 2012   If the custodial parent and the stepparent are married, but file separate returns, use the return of the one with the greater taxable income. Income tax deductions 2012 If the custodial parent and the stepparent are married but not living together, the earlier discussion under Parents not living together applies. Income tax deductions 2012 Parents never married. Income tax deductions 2012   If a child's parents have never been married to each other, but lived together all year, use the return of the parent with the greater taxable income. Income tax deductions 2012 If the parents did not live together all year, the rules explained earlier under Parents are divorced apply. Income tax deductions 2012 Widowed parent remarried. Income tax deductions 2012   If a widow or widower remarries, the new spouse is treated as the child's other parent. Income tax deductions 2012 The rules explained earlier under Custodial parent remarried apply. Income tax deductions 2012 Parent's Election To Report Child's Interest and Dividends You may be able to elect to include your child's interest and dividend income (including capital gain distributions) on your tax return. Income tax deductions 2012 If you do, your child will not have to file a return. Income tax deductions 2012 You can make this election only if all the following conditions are met. Income tax deductions 2012 Your child was under age 19 (or under age 24 if a full-time student) at the end of the year. Income tax deductions 2012 Your child had income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends). Income tax deductions 2012 The child's gross income was less than $10,000. Income tax deductions 2012 The child is required to file a return unless you make this election. Income tax deductions 2012 The child does not file a joint return for the year. Income tax deductions 2012 No estimated tax payment was made for the year, and no overpayment from the previous year (or from any amended return) was applied to this year under your child's name and social security number. Income tax deductions 2012 No federal income tax was taken out of your child's income under the backup withholding rules. Income tax deductions 2012 You are the parent whose return must be used when applying the special tax rules for children. Income tax deductions 2012 (See Which Parent's Return To Use , earlier. Income tax deductions 2012 ) These conditions are also shown in Figure 31-A. Income tax deductions 2012 Certain January 1 birthdays. Income tax deductions 2012   A child born on January 1, 1995, is considered to be age 19 at the end of 2013. Income tax deductions 2012 You cannot make this election for such a child unless the child was a full-time student. Income tax deductions 2012   A child born on January 1, 1990, is considered to be age 24 at the end of 2013. Income tax deductions 2012 You cannot make this election for such a child. Income tax deductions 2012 Full-time student. Income tax deductions 2012   A full-time student is a child who during some part of each of any 5 calendar months of the year was enrolled as a full-time student at a school, or took a full-time on-farm training course given by a school or a state, county, or local government agency. Income tax deductions 2012 A school includes a technical, trade, or mechanical school. Income tax deductions 2012 It does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet. Income tax deductions 2012 How to make the election. Income tax deductions 2012   Make the election by attaching Form 8814 to your Form 1040. Income tax deductions 2012 (If you make this election, you cannot file Form 1040A or Form 1040EZ. Income tax deductions 2012 ) Attach a separate Form 8814 for each child for whom you make the election. Income tax deductions 2012 You can make the election for one or more children and not for others. Income tax deductions 2012 Effect of Making the Election The federal income tax on your child's income may be more if you make the Form 8814 election. Income tax deductions 2012 Rate may be higher. Income tax deductions 2012   If your child received qualified dividends or capital gain distributions, you may pay up to $100 more tax if you make this election instead of filing a separate tax return for the child. Income tax deductions 2012 This is because the tax rate on the child's income between $1,000 and $2,000 is 10% if you make this election. Income tax deductions 2012 However, if you file a separate return for the child, the tax rate may be as low as 0% (zero percent) because of the preferential tax rates for qualified dividends and capital gain distributions. Income tax deductions 2012 Deductions you cannot take. Income tax deductions 2012   By making the Form 8814 election, you cannot take any of the following deductions that the child would be entitled to on his or her return. Income tax deductions 2012 The additional standard deduction if the child is blind. Income tax deductions 2012 The deduction for a penalty on an early withdrawal of your child's savings. Income tax deductions 2012 Itemized deductions (such as your child's investment expenses or charitable contributions). Income tax deductions 2012 Reduced deductions or credits. Income tax deductions 2012   If you use Form 8814, your increased adjusted gross income may reduce certain deductions or credits on your return including the following. Income tax deductions 2012 Deduction for contributions to a traditional individual retirement arrangement (IRA). Income tax deductions 2012 Deduction for student loan interest. Income tax deductions 2012 Itemized deductions for medical expenses, casualty and theft losses, and certain miscellaneous expenses. Income tax deductions 2012 Credit for child and dependent care expenses. Income tax deductions 2012 Child tax credit. Income tax deductions 2012 Education tax credits. Income tax deductions 2012 Earned income credit. Income tax deductions 2012 Penalty for underpayment of estimated tax. Income tax deductions 2012   If you make this election for 2013 and did not have enough tax withheld or pay enough estimated tax to cover the tax you owe, you may be subject to a penalty. Income tax deductions 2012 If you plan to make this election for 2014, you may need to increase your federal income tax withholding or your estimated tax payments to avoid the penalty. Income tax deductions 2012 See chapter 4 for more information. Income tax deductions 2012 Figuring Child's Income Use Form 8814, Part I, to figure your child's interest and dividend income to report on your return. Income tax deductions 2012 Only the amount over $2,000 is added to your income. Income tax deductions 2012 The amount over $2,000 is shown on Form 8814, line 6. Income tax deductions 2012 Unless the child's income includes qualified dividends or capital gain distributions (discussed next), the same amount is shown on Form 8814, line 12. Income tax deductions 2012 Include the amount from Form 8814, line 12, on Form 1040, line 21. Income tax deductions 2012 Enter “Form 8814” on the dotted line next to line 21. Income tax deductions 2012 If you file more than one Form 8814, include the total amounts from line 12 of all your Forms 8814 on Form 1040, line 21. Income tax deductions 2012 Capital gain distributions and qualified dividends. Income tax deductions 2012   If your child's dividend income included any capital gain distributions, see Capital gain distributions under Figuring Child's Income in Publication 929, Part 2. Income tax deductions 2012 If your child's dividend income included any qualified dividends, see Qualified dividends under Figuring Child's Income in Publication 929, Part 2. Income tax deductions 2012 Figuring Additional Tax Use Form 8814, Part II, to figure the tax on the $2,000 of your child's interest and dividends that you do not include in your income. Income tax deductions 2012 This tax is added to the tax figured on your income. Income tax deductions 2012 This additional tax is the smaller of: 10% × (your child's gross income − $1,000), or $100. Income tax deductions 2012 Include the amount from line 15 of all your Forms 8814 in the total on Form 1040, line 44. Income tax deductions 2012 Check box a on Form 1040, line 44. Income tax deductions 2012 Figure 31-A. Income tax deductions 2012 Can You Include Your Child's Income On Your Tax Return? Please click here for the text description of the image. Income tax deductions 2012 Figure 31–A. Income tax deductions 2012 Can You Include Your Child's Income On Your Tax Return? Tax for Certain Children Who Have Unearned Income If a child's interest, dividends, and other unearned income total more than $2,000, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. Income tax deductions 2012 If the parent does not or cannot choose to include the child's income on the parent's return, use Form 8615 to figure the child's tax. Income tax deductions 2012 Attach the completed form to the child's Form 1040 or Form 1040A. Income tax deductions 2012 When Form 8615 must be filed. Income tax deductions 2012   Form 8615 must be filed for a child if all of the following statements are true. Income tax deductions 2012 The child's investment income was more than $2,000. Income tax deductions 2012 The child is required to file a return for 2013. Income tax deductions 2012 The child either: Was under age 18 at the end of the year, Was age 18 at the end of the year and did not have earned income that was more than half of his or her support, or Was over age 18 and under age 24 at the end of the year, was a full-time student, and did not have earned income that was more than half of his or her support. Income tax deductions 2012 At least one of the child's parents was alive at the end of 2013. Income tax deductions 2012 The child does not file a joint return for 2013. Income tax deductions 2012 These conditions are also shown in  Figure 31-B. Income tax deductions 2012 Earned income. Income tax deductions 2012   Earned income includes salaries, wages, tips, and other payments received for personal services performed. Income tax deductions 2012 It does not include unearned income as defined later in this chapter. Income tax deductions 2012 Support. Income tax deductions 2012   Your child's support includes all amounts spent to provide the child with food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. Income tax deductions 2012 To figure your child's support, count support provided by you, your child, and others. Income tax deductions 2012 However, a scholarship received by your child is not considered support if your child is a full-time student. Income tax deductions 2012 See chapter 3 for details about support. Income tax deductions 2012 Certain January 1 birthdays. Income tax deductions 2012   Use the following chart to determine whether certain children with January 1 birthdays meet condition 3 under When Form 8615 must be filed. Income tax deductions 2012 Figure 31-B. Income tax deductions 2012 Do You Have To Use Form 8615 To Figure Your Child's Tax? Please click here for the text description of the image. Income tax deductions 2012 Figure 31-B. Income tax deductions 2012 Do You Have To Use Form 8615 To Figure Your Child's Tax?    IF a child was born on. Income tax deductions 2012 . Income tax deductions 2012 . Income tax deductions 2012 THEN, at the end of 2013, the child is considered to be. Income tax deductions 2012 . Income tax deductions 2012 . Income tax deductions 2012 January 1, 1996 18* January 1, 1995 19** January 1, 1990 24*** *This child is not under age 18. Income tax deductions 2012 The child meets condition 3 only if the child did not have earned income that was more than half of the child's support. Income tax deductions 2012  **This child meets condition 3 only if the child was a full-time student who did not have earned income that was more than half of the child's support. Income tax deductions 2012  ***Do not use Form 8615 for this child. Income tax deductions 2012 Providing Parental Information (Form 8615, lines A–C) On Form 8615, lines A and B, enter the parent's name and social security number. Income tax deductions 2012 (If the parents filed a joint return, enter the name and social security number listed first on the joint return. Income tax deductions 2012 ) On line C, check the box for the parent's filing status. Income tax deductions 2012 See Which Parent's Return To Use at the beginning of this chapter for information on which parent's return information must be used on Form 8615. Income tax deductions 2012 Parent with different tax year. Income tax deductions 2012   If the parent and the child do not have the same tax year, complete Form 8615 using the information on the parent's return for the tax year that ends in the child's tax year. Income tax deductions 2012 Parent's return information not known timely. Income tax deductions 2012   If the information needed from the parent's return is not known by the time the child's return is due (usually April 15), you can file the return using estimates. Income tax deductions 2012   You can use any reasonable estimate. Income tax deductions 2012 This includes using information from last year's return. Income tax deductions 2012 If you use an estimated amount on Form 8615, enter “Estimated” on the line next to the amount. Income tax deductions 2012    When you get the correct information, file an amended return on Form 1040X, Amended U. Income tax deductions 2012 S. Income tax deductions 2012 Individual Income Tax Return. Income tax deductions 2012   Instead of using estimates, you can get an automatic 6-month extension of time to file if, by the date your return is due, you file Form 4868, Application for Automatic Extension of Time To File U. Income tax deductions 2012 S. Income tax deductions 2012 Individual Income Tax Return. Income tax deductions 2012 Extensions are discussed in chapter 1. Income tax deductions 2012 Step 1. Income tax deductions 2012 Figuring the Child's Net Unearned Income (Form 8615, Part I) The first step in figuring a child's tax using Form 8615 is to figure the child's net unearned income. Income tax deductions 2012 To do that, use Form 8615, Part I. Income tax deductions 2012 Line 1 (unearned income). Income tax deductions 2012   If the child had no earned income, enter on this line the adjusted gross income shown on the child's return. Income tax deductions 2012 Adjusted gross income is shown on Form 1040, line 38, or Form 1040A, line 22. Income tax deductions 2012 Form 1040EZ cannot be used if Form 8615 must be filed. Income tax deductions 2012   If the child had earned income, figure the amount to enter on Form 8615, line 1, by using the worksheet in the instructions for the form. Income tax deductions 2012   However, if the child has: excluded any foreign earned income, deducted either a loss from self-employment, or deducted a net operating loss from another year, then use the Alternate Worksheet for Form 8615, Line 1, in Publication 929 to figure the amount to enter on Form 8615, line 1. Income tax deductions 2012 Unearned income defined. Income tax deductions 2012   Unearned income is generally all income other than salaries, wages, and other amounts received as pay for work actually done. Income tax deductions 2012 It includes taxable interest, dividends (including capital gain distributions), capital gains, unemployment compensation, the taxable part of social security and pension payments, and certain distributions from trusts. Income tax deductions 2012 Unearned income includes amounts produced by assets the child obtained with earned income (such as interest on a savings account into which the child deposited wages). Income tax deductions 2012 Nontaxable income. Income tax deductions 2012   For this purpose, unearned income includes only amounts the child must include in total income. Income tax deductions 2012 Nontaxable unearned income, such as tax-exempt interest and the nontaxable part of social security and pension payments, is not included. Income tax deductions 2012 Income from property received as a gift. Income tax deductions 2012   A child's unearned income includes all income produced by property belonging to the child. Income tax deductions 2012 This is true even if the property was transferred to the child, regardless of when the property was transferred or purchased or who transferred it. Income tax deductions 2012   A child's unearned income includes income produced by property given as a gift to the child. Income tax deductions 2012 This includes gifts to the child from grandparents or any other person and gifts made under the Uniform Gift to Minors Act. Income tax deductions 2012 Example. Income tax deductions 2012 Amanda Black, age 13, received the following income. Income tax deductions 2012 Dividends — $800 Wages — $2,100 Taxable interest — $1,200 Tax-exempt interest — $100 Net capital gains — $100 The dividends were qualified dividends on stock given to her by her grandparents. Income tax deductions 2012 Amanda's unearned income is $2,100. Income tax deductions 2012 This is the total of the dividends ($800), taxable interest ($1,200), and net capital gains ($100). Income tax deductions 2012 Her wages are earned (not unearned) income because they are received for work actually done. Income tax deductions 2012 Her tax-exempt interest is not included because it is nontaxable. Income tax deductions 2012 Trust income. Income tax deductions 2012   If a child is the beneficiary of a trust, distributions of taxable interest, dividends, capital gains, and other unearned income from the trust are unearned income to the child. Income tax deductions 2012   However, for purposes of completing Form 8615, a taxable distribution from a qualified disability trust is considered earned income, not unearned income. Income tax deductions 2012 Line 2 (deductions). Income tax deductions 2012   If the child does not itemize deductions on Schedule A (Form 1040), enter $2,000 on line 2. Income tax deductions 2012   If the child does itemize deductions, enter on line 2 the larger of: $1,000 plus the portion of the child's itemized deductions on Schedule A (Form 1040), line 29, that are directly connected with the production of unearned income entered on line 1, or $2,000. Income tax deductions 2012 Directly connected. Income tax deductions 2012   Itemized deductions are directly connected with the production of unearned income if they are for expenses paid to produce or collect taxable income or to manage, conserve, or maintain property held for producing income. Income tax deductions 2012 These expenses include custodian fees and service charges, service fees to collect taxable interest and dividends, and certain investment counsel fees. Income tax deductions 2012   These expenses are added to certain other miscellaneous itemized deductions on Schedule A (Form 1040). Income tax deductions 2012 Only the amount greater than 2% of the child's adjusted gross income can be deducted. Income tax deductions 2012 See chapter 28 for more information. Income tax deductions 2012 Example 1. Income tax deductions 2012 Roger, age 12, has unearned income of $8,000, no other income, no adjustments to income, and itemized deductions of $300 (net of the 2% limit) that are directly connected with his unearned income. Income tax deductions 2012 His adjusted gross income is $8,000, which is entered on Form 1040, line 38, and on Form 8615, line 1. Income tax deductions 2012 Roger enters $2,000 on line 2 because that is more than the total of $1,000 plus his directly connected itemized deductions of $300. Income tax deductions 2012 Example 2. Income tax deductions 2012 Eleanor, age 8, has unearned income of $16,000 and an early withdrawal penalty of $100. Income tax deductions 2012 She has no other income. Income tax deductions 2012 She has itemized deductions of $1,050 (net of the 2% limit) that are directly connected with the production of her unearned income. Income tax deductions 2012 Her adjusted gross income, entered on line 1, is $15,900 ($16,000 − $100). Income tax deductions 2012 The amount on line 2 is $2,050. Income tax deductions 2012 This is the larger of: $1,000 plus the $1,050 of directly connected itemized deductions, or $2,000. Income tax deductions 2012 Line 3. Income tax deductions 2012   Subtract line 2 from line 1 and enter the result on this line. Income tax deductions 2012 If zero or less, do not complete the rest of the form. Income tax deductions 2012 However, you must still attach Form 8615 to the child's tax return. Income tax deductions 2012 Figure the tax on the child's taxable income in the normal manner. Income tax deductions 2012 Line 4 (child's taxable income). Income tax deductions 2012   Enter on line 4 the child's taxable income from Form 1040, line 43, or Form 1040A, line 27. Income tax deductions 2012   However, if the child files Form 2555 or 2555-EZ to claim the foreign earned income exclusion, housing exclusion, or housing deduction, see the Form 8615 instructions or Pub. Income tax deductions 2012 929. Income tax deductions 2012 Line 5 (net unearned income). Income tax deductions 2012   A child's net unearned income cannot be more than his or her taxable income. Income tax deductions 2012 Enter on Form 8615, line 5, the smaller of line 3 or line 4. Income tax deductions 2012 This is the child's net unearned income. Income tax deductions 2012   If zero or less, do not complete the rest of the form. Income tax deductions 2012 However, you must still attach Form 8615 to the child's tax return. Income tax deductions 2012 Figure the tax on the child's taxable income in the normal manner. Income tax deductions 2012 Step 2. Income tax deductions 2012 Figuring Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) The next step in completing Form 8615 is to figure a tentative tax on the child's net unearned income at the parent's tax rate. Income tax deductions 2012 The tentative tax at the parent's tax rate is the difference between the tax on the parent's taxable income figured with the child's net unearned income (plus the net unearned income of any other child whose Form 8615 includes the tax return information of that parent) and the tax figured without it. Income tax deductions 2012 When figuring the tentative tax at the parent's tax rate on Form 8615, do not refigure any of the exclusions, deductions, or credits on the parent's return because of the child's net unearned income. Income tax deductions 2012 For example, do not refigure the medical expense deduction. Income tax deductions 2012 Figure the tentative tax on Form 8615, lines 6 through 13. Income tax deductions 2012 Note. Income tax deductions 2012 If the child or parent has any capital gains or losses, get Publication 929 for help in completing Form 8615, Part II. Income tax deductions 2012 Line 6 (parent's taxable income). Income tax deductions 2012   Enter on line 6 the parent's taxable income from Form 1040, line 43, Form 1040A, line 27, or Form 1040EZ, line 6. Income tax deductions 2012   If the Foreign Earned Income Tax Worksheet (in the Form 1040 instructions) was used to figure the parent's tax, enter the amount from line 3 of that worksheet instead of the parent's taxable income. Income tax deductions 2012 Line 7 (net unearned income of other children). Income tax deductions 2012   If the tax return information of the parent is also used on any other child's Form 8615, enter on line 7 the total of the amounts from line 5 of all the other children's Forms 8615. Income tax deductions 2012 Do not include the amount from line 5 of the Form 8615 being completed. Income tax deductions 2012 Example. Income tax deductions 2012 Paul and Jane Persimmon have three children, Sharon, Jerry, and Mike, who must attach Form 8615 to their tax returns. Income tax deductions 2012 The children's net unearned income amounts on line 5 of their Forms 8615 are: Sharon — $800 Jerry — $600 Mike — $1,000 Line 7 of Sharon's Form 8615 will show $1,600, the total of the amounts on line 5 of Jerry's and Mike's Forms 8615. Income tax deductions 2012 Line 7 of Jerry's Form 8615 will show $1,800 ($800 + $1,000). Income tax deductions 2012 Line 7 of Mike's Form 8615 will show $1,400 ($800 + $600). Income tax deductions 2012 Other children's information not available. Income tax deductions 2012   If the net unearned income of the other children is not available when the return is due, either file the return using estimates or get an extension of time to file. Income tax deductions 2012 See Parent's return information not known timely , earlier. Income tax deductions 2012 Line 11 (tentative tax). Income tax deductions 2012   Subtract line 10 from line 9 and enter the result on this line. Income tax deductions 2012 This is the tentative tax. Income tax deductions 2012   If line 7 is blank, skip lines 12a and 12b and enter the amount from line 11 on line 13. Income tax deductions 2012 Also skip the discussion for lines 12a and 12b that follows. Income tax deductions 2012 Lines 12a and 12b (dividing the tentative tax). Income tax deductions 2012   If an amount is entered on line 7, divide the tentative tax shown on line 11 among the children according to each child's share of the total net unearned income. Income tax deductions 2012 This is done on lines 12a, 12b, and 13. Income tax deductions 2012 Add the amount on line 7 to the amount on line 5 and enter the total on line 12a. Income tax deductions 2012 Divide the amount on line 5 by the amount on line 12a and enter the result, as a decimal, on line 12b. Income tax deductions 2012 Example. Income tax deductions 2012 In the earlier example under Line 7 (net unearned income of other children), Sharon's Form 8615 shows $1,600 on line 7. Income tax deductions 2012 The amount entered on line 12a is $2,400, the total of the amounts on lines 5 and 7 ($800 + $1,600). Income tax deductions 2012 The decimal on line 12b is  . Income tax deductions 2012 333, figured as follows and rounded to three places. Income tax deductions 2012   $800 = . Income tax deductions 2012 333     $2,400   Step 3. Income tax deductions 2012 Figuring the Child's Tax (Form 8615, Part III) The final step in figuring a child's tax using Form 8615 is to determine the larger of: The total of: The child's share of the tentative tax based on the parent's tax rate, plus The tax on the child's taxable income in excess of net unearned income, figured at the child's tax rate, or The tax on the child's taxable income, figured at the child's tax rate. Income tax deductions 2012 This is the child's tax. Income tax deductions 2012 It is figured on Form 8615, lines 14 through 18. Income tax deductions 2012 Alternative minimum tax. Income tax deductions 2012   A child may be subject to alternative minimum tax (AMT) if he or she has certain items given preferential treatment under the tax law. Income tax deductions 2012 See Alternative Minimum Tax (AMT) in chapter 30. Income tax deductions 2012    For more information on who is liable for AMT and how to figure it, see Form 6251, Alternative Minimum Tax—Individuals. Income tax deductions 2012 For information on special limits that apply to a child who files Form 6251, see Certain Children Under Age 24 in the Instructions for Form 6251. Income tax deductions 2012 Prev  Up  Next   Home   More Online Publications