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Irs 1040 Forms

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Irs 1040 Forms

Irs 1040 forms 3. Irs 1040 forms   Lifetime Learning 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 Student Who Can Claim a Dependent's Expenses Figuring the CreditEffect of the Amount of Your Income on the Amount of Your 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. Irs 1040 forms They are the American opportunity credit and the lifetime learning credit. Irs 1040 forms This chapter discusses the lifetime learning credit. Irs 1040 forms The American opportunity credit is discussed in chapter 2, The American Opportunity Credit . Irs 1040 forms This chapter explains: Who can claim the lifetime learning 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. Irs 1040 forms What is the tax benefit of the lifetime learning credit. Irs 1040 forms   For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all eligible students. Irs 1040 forms There is no limit on the number of years the lifetime learning credit can be claimed for each student. Irs 1040 forms   A tax credit reduces the amount of income tax you may have to pay. Irs 1040 forms Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. Irs 1040 forms The lifetime learning credit is a nonrefundable credit. Irs 1040 forms This means that it can reduce your tax to zero, but if the credit is more than your tax the excess will not be refunded to you. Irs 1040 forms   Your allowable lifetime learning credit may be limited by the amount of your income and the amount of your tax. Irs 1040 forms Can you claim more than one education credit this year. Irs 1040 forms   For each student, you can elect for any year only one of the credits. Irs 1040 forms For example, if you elect to take the lifetime learning credit for a child on your 2013 tax return, you cannot, for that same child, also claim the American opportunity credit for 2013. Irs 1040 forms   If you are eligible to claim the lifetime learning credit and you are also eligible to claim the American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both. Irs 1040 forms   If you pay qualified education expenses for more than one student in the same year, you can choose to take certain credits on a per-student, per-year basis. Irs 1040 forms 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. Irs 1040 forms Differences between the American opportunity and lifetime learning credits. Irs 1040 forms   There are several differences between these two credits. Irs 1040 forms For example, you can claim the American opportunity credit for the same student for no more than 4 tax years, but any year in which the Hope Scholarship Credit was claimed counts toward the 4 years. Irs 1040 forms 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. Irs 1040 forms 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. Irs 1040 forms Overview of the lifetime learning credit. Irs 1040 forms   See Table 3-1, Overview of the Lifetime Learning Credit for the basics of the lifetime learning credit. Irs 1040 forms The details are discussed in this chapter. Irs 1040 forms Can You Claim the Credit The following rules will help you determine if you are eligible to claim the lifetime learning credit on your tax return. Irs 1040 forms Who Can Claim the Credit Generally, you can claim the lifetime learning credit if all three of the following requirements are met. Irs 1040 forms You pay qualified education expenses of higher education. Irs 1040 forms You pay the education expenses for an eligible student. Irs 1040 forms The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Irs 1040 forms Table 3-1. Irs 1040 forms Overview of the Lifetime Learning Credit Maximum credit Up to $2,000 credit per return Limit on modified adjusted gross income (MAGI) $127,000 if married filling jointly;  $63,000 if single, head of household, or qualifying widow(er) Refundable or nonrefundable Nonrefundable—credit limited to the amount of tax you must pay on your taxable income Number of years of postsecondary education Available for all years of postsecondary education and for courses to acquire or improve job skills Number of tax years credit available Available for an unlimited number of years Type of program required Student does not need to be pursuing a program leading to a degree or other recognized education credential Number of courses Available for one or more courses Felony drug conviction Felony drug convictions do not make the student ineligible Qualified expenses Tuition and fees required for enrollment or attendance (including amounts required to be paid to the institution for course-related books, supplies, and equipment) Payments for academic periods Payments made in 2013 for academic periods beginning in 2013 or beginning in the first 3 months of 2014 Note. Irs 1040 forms 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. Irs 1040 forms “Qualified education expenses” are defined later under Qualified Education Expenses . Irs 1040 forms “Eligible students” are defined later under Who Is an Eligible Student . Irs 1040 forms A dependent for whom you claim an exemption is defined later under Who Can Claim a Dependent's Expenses . Irs 1040 forms You may find Figure 3-1, Can You Claim the Lifetime Learning Credit for 2013 , later, helpful in determining if you can claim a lifetime learning credit on your tax return. Irs 1040 forms Who Cannot Claim the Credit You cannot claim the lifetime learning credit for 2013 if any of the following apply. Irs 1040 forms Your filing status is married filing separately. Irs 1040 forms You are listed as a dependent on another person's tax return (such as your parents'). Irs 1040 forms See Who Can Claim a Dependent's Expenses , later. Irs 1040 forms Your modified adjusted gross income (MAGI) is $63,000 or more ($127,000 or more in the case of a joint return). Irs 1040 forms MAGI is explained later under Effect of the Amount of Your Income on the Amount of Your Credit . Irs 1040 forms 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. Irs 1040 forms More information on nonresident aliens can be found in Publication 519. Irs 1040 forms You claim the American Opportunity Credit (see chapter 2) or a Tuition and Fees Deduction (see chapter 6) for the same student in 2013. Irs 1040 forms What Expenses Qualify The lifetime learning credit is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Irs 1040 forms Generally, the credit is allowed for qualified education expenses paid in 2013 for an academic period beginning in 2013 or in the first 3 months of 2014. Irs 1040 forms For example, if you paid $1,500 in December 2013 for qualified tuition for the spring 2014 semester beginning in January 2014, you may be able to use that $1,500 in figuring your 2013 credit. Irs 1040 forms Academic period. Irs 1040 forms   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. Irs 1040 forms 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. Irs 1040 forms Paid with borrowed funds. Irs 1040 forms   You can claim a lifetime learning credit for qualified education expenses paid with the proceeds of a loan. Irs 1040 forms You use the expenses to figure the lifetime learning credit for the year in which the expenses are paid, not the year in which the loan is repaid. Irs 1040 forms Treat loan disbursements sent directly to the educational institution as paid on the date the institution credits the student's account. Irs 1040 forms Student withdraws from class(es). Irs 1040 forms   You can claim a lifetime learning credit for qualified education expenses not refunded when a student withdraws. Irs 1040 forms Qualified Education Expenses For purposes of the lifetime learning credit, qualified education expenses are tuition and certain related expenses required for enrollment in a course at an eligible educational institution. Irs 1040 forms The course must be either part of a postsecondary degree program or taken by the student to acquire or improve job skills. Irs 1040 forms Eligible educational institution. Irs 1040 forms   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. Irs 1040 forms S. Irs 1040 forms Department of Education. Irs 1040 forms It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Irs 1040 forms The educational institution should be able to tell you if it is an eligible educational institution. Irs 1040 forms   Certain educational institutions located outside the United States also participate in the U. Irs 1040 forms S. Irs 1040 forms Department of Education's Federal Student Aid (FSA) programs. Irs 1040 forms Related expenses. Irs 1040 forms   Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution for enrollment or attendance. Irs 1040 forms Prepaid expenses. Irs 1040 forms   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. Irs 1040 forms See Academic period , earlier. Irs 1040 forms For example, 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). Irs 1040 forms 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). Irs 1040 forms In the following examples, assume that each student is an eligible student at an eligible educational institution. Irs 1040 forms Example 1. Irs 1040 forms   Jackson is a sophomore in University V's degree program in dentistry. Irs 1040 forms 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. Irs 1040 forms Because the equipment rental fee must be paid to University V for enrollment and attendance, Jackson's equipment rental fee is a qualified expense. Irs 1040 forms Example 2. Irs 1040 forms   Donna and Charles, 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. Irs 1040 forms 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. Irs 1040 forms Charles bought his books from a friend, so what he paid for them is not a qualified education expense. Irs 1040 forms Donna bought hers at College W's bookstore. Irs 1040 forms Although Donna paid College W directly for her first-year books and materials, her payment is not a qualified expense because the books and materials are not required to be purchased from College W for enrollment or attendance at the institution. Irs 1040 forms Example 3. Irs 1040 forms   When Marci enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. Irs 1040 forms 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 student government. Irs 1040 forms No portion of the fee covers personal expenses. Irs 1040 forms Although labeled as a student activity fee, the fee is required for Marci's enrollment and attendance at College X. Irs 1040 forms Therefore, it is a qualified expense. Irs 1040 forms No Double Benefit Allowed You cannot do any of the following: Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim a lifetime learning credit based on those same expenses. Irs 1040 forms Claim a lifetime learning credit in the same year that you are claiming a tuition and fees deduction for the same student. Irs 1040 forms Claim a lifetime learning credit and an American opportunity credit based on the same qualified education expenses. Irs 1040 forms Claim a lifetime learning credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP). Irs 1040 forms 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. Irs 1040 forms 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. Irs 1040 forms See Adjustments to Qualified Education Expenses, next. Irs 1040 forms This image is too large to be displayed in the current screen. Irs 1040 forms Please click the link to view the image. Irs 1040 forms Figure 3-1 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. Irs 1040 forms The result is the amount of adjusted qualified education expenses for each student. Irs 1040 forms Tax-free educational assistance. Irs 1040 forms   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. Irs 1040 forms See Academic period , earlier. Irs 1040 forms   Some tax-free educational assistance received after 2013 may be treated as a refund of qualified education expenses paid in 2013. Irs 1040 forms 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). Irs 1040 forms   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. Irs 1040 forms 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. Irs 1040 forms   Tax-free educational assistance includes: The tax-free part 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), 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. Irs 1040 forms Generally, any scholarship or fellowship is treated as tax free. Irs 1040 forms 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. Irs 1040 forms 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. Irs 1040 forms 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. Irs 1040 forms 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. Irs 1040 forms For examples, see Coordination with Pell grants and other scholarships, later. Irs 1040 forms Refunds. Irs 1040 forms   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. Irs 1040 forms Some tax-free educational assistance received after 2013 may be treated as a refund. Irs 1040 forms See Tax-free educational assistance , earlier. Irs 1040 forms Refunds received in 2013. Irs 1040 forms   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. Irs 1040 forms Refunds received after 2013 but before your income tax return is filed. Irs 1040 forms   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. Irs 1040 forms Refunds received after 2013 and after your income tax return is filed. Irs 1040 forms   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. Irs 1040 forms See Credit recapture, next. Irs 1040 forms Credit recapture. Irs 1040 forms    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. Irs 1040 forms 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. Irs 1040 forms You then refigure your education credit(s) for 2013 and figure the amount by which your 2013 tax liability would have increased if you had claimed the refigured credit(s). Irs 1040 forms Include that amount as an additional tax for the year the refund or tax-free assistance was received. Irs 1040 forms Example. Irs 1040 forms   You pay $9,300 in tuition and fees in December 2013, and your child began college in January 2014. Irs 1040 forms You filed your 2013 tax return on February 14, 2014, and claimed a lifetime learning credit of $1,860. Irs 1040 forms You claimed no other tax credits. Irs 1040 forms After you filed your return, your child withdrew from two courses and you received a refund of $2,900. Irs 1040 forms You must refigure your 2013 lifetime learning credit using $6,400 of qualified education expenses instead of $9,300. Irs 1040 forms The refigured credit is $1,280 and your tax liability increased by $580. Irs 1040 forms See instructions for your 2014 income tax return to determine where to include this tax. Irs 1040 forms 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. Irs 1040 forms Amounts that do not reduce qualified education expenses. Irs 1040 forms   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. Irs 1040 forms   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. Irs 1040 forms 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. Irs 1040 forms The use of the money is not restricted. Irs 1040 forms For examples, see Adjustments to Qualified Education Expenses in chapter 2, American Opportunity Credit. Irs 1040 forms Coordination with Pell grants and other scholarships. Irs 1040 forms   In some cases, you may be able to reduce your tax liability by including scholarships in income. Irs 1040 forms 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. Irs 1040 forms The scholarship must be one that may (by its terms) be applied to expenses (such as room and board) other than qualified education expenses. Irs 1040 forms Example 1—No scholarship. Irs 1040 forms Judy Green, who is unmarried, is taking courses at a public community college to be recertified to teach in public schools. Irs 1040 forms Her AGI and her MAGI, for purposes of the credit, are $27,000. Irs 1040 forms Judy takes the standard deduction of $5,950 and personal exemption of $3,800, reducing her AGI to taxable income of $17,250 and her tax before credits is $2,156. Irs 1040 forms She claims no credits other than the lifetime learning credit. Irs 1040 forms In July 2013 she paid $700 for the summer 2013 semester; in August 2013 she paid $1,900 for the fall 2013 semester; and in December 2013 she paid another $1,900 for the spring semester beginning in January 2014. Irs 1040 forms Judy and the college meet all requirements for the lifetime learning tax credit. Irs 1040 forms She can use all of the $4,500 tuition she paid in 2013 when figuring her 2013 lifetime learning credit. Irs 1040 forms She claims a $900 lifetime learning credit and her tax after credits is $1,256. Irs 1040 forms Example 2—Scholarship excluded from income. Irs 1040 forms The facts are the same as in Example 1—No scholarship, except that Judy was awarded a $1,500 scholarship. Irs 1040 forms Under the terms of her scholarship, it may be used to pay any educational expenses, including room and board. Irs 1040 forms If Judy excludes the scholarship from income, she will be deemed (for purposes of computing her education credit) as having used the scholarship to pay for tuition, required fees, and course materials. Irs 1040 forms Only $3,000 of the $4,500 tuition she paid in 2013 could be used when figuring her 2013 lifetime learning credit. Irs 1040 forms Her lifetime learning credit would be reduced to $600 and her tax after credits would be $1,556. Irs 1040 forms Example 3—Scholarship included in income. Irs 1040 forms The facts are the same as in Example 2—Scholarship excluded from income. Irs 1040 forms If, unlike Example 2, Judy includes the $1,500 scholarship in income, she will be deemed to have used the entire scholarship to pay for room and board. Irs 1040 forms Judy's AGI will increase to $28,500, her taxable income would be $18,750, and her tax before credits would be $2,381. Irs 1040 forms She would be able to use the $4,500 of adjusted qualified education expenses to figure her credit. Irs 1040 forms Judy could claim a $900 lifetime learning credit and her tax after credits would be $1,481. Irs 1040 forms 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. Irs 1040 forms This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. Irs 1040 forms Sports, games, hobbies, and noncredit courses. Irs 1040 forms   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. Irs 1040 forms However, if the course of instruction or other education is part of the student's degree program or is taken by the student to acquire or improve job skills, these expenses can qualify. Irs 1040 forms Comprehensive or bundled fees. Irs 1040 forms   Some eligible educational institutions combine all of their fees for an academic period into one amount. Irs 1040 forms 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 above, contact the institution. Irs 1040 forms 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. Irs 1040 forms See Figuring the Credit , later, for more information about Form 1098-T. Irs 1040 forms Who Is an Eligible Student For purposes of the lifetime learning credit, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution (as defined under Qualified Education Expenses , earlier). Irs 1040 forms 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 a lifetime learning credit for your dependent's expenses for that year. Irs 1040 forms For you to claim a lifetime learning credit for your dependent's expenses, you must also claim an exemption for your dependent. Irs 1040 forms You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c. Irs 1040 forms IF you. Irs 1040 forms . Irs 1040 forms . Irs 1040 forms THEN only. Irs 1040 forms . Irs 1040 forms . Irs 1040 forms claim an exemption on your tax return for a dependent who is an eligible student you can claim the lifetime learning credit based on that dependent's expenses. Irs 1040 forms The dependent cannot claim the credit. Irs 1040 forms 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 lifetime learning credit. Irs 1040 forms You cannot claim the credit based on this dependent's expenses. Irs 1040 forms Expenses paid by dependent. Irs 1040 forms   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. Irs 1040 forms Include these expenses when figuring the amount of your lifetime learning credit. Irs 1040 forms    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. Irs 1040 forms Expenses paid by you. Irs 1040 forms   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 lifetime learning credit. Irs 1040 forms If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring the lifetime learning credit. Irs 1040 forms Expenses paid by others. Irs 1040 forms   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. Irs 1040 forms In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. Irs 1040 forms If you claim an exemption on your tax return for the student, you are considered to have paid the expenses. Irs 1040 forms Example. Irs 1040 forms In 2013, Ms. Irs 1040 forms Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. Irs 1040 forms For purposes of claiming a lifetime learning credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself. Irs 1040 forms Unless an exemption for Todd is claimed on someone else's 2013 tax return, only Todd can use the payment to claim a lifetime learning credit. Irs 1040 forms 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 a lifetime learning credit. Irs 1040 forms If anyone else claims an exemption for Todd, Todd cannot claim a lifetime learning credit. Irs 1040 forms Tuition reduction. Irs 1040 forms   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. Irs 1040 forms 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. Irs 1040 forms For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Irs 1040 forms Figuring the Credit The amount of the lifetime learning credit is 20% of the first $10,000 of qualified education expenses you paid for all eligible students. Irs 1040 forms The maximum amount of lifetime learning credit you can claim for 2013 is $2,000 (20% × $10,000). Irs 1040 forms However, that amount may be reduced based on your MAGI. Irs 1040 forms See Effect of the Amount of Your Income on the Amount of Your Credit , later. Irs 1040 forms Example. Irs 1040 forms Bruce and Toni Harper are married and file a joint tax return. Irs 1040 forms For 2013, their MAGI is $75,000. Irs 1040 forms Toni is attending a local college (an eligible educational institution) to earn credits toward a degree in nursing. Irs 1040 forms She already has a bachelor's degree in history and wants to become a nurse. Irs 1040 forms In August 2013, Toni paid $5,000 of qualified education expenses for her fall 2013 semester. Irs 1040 forms Bruce and Toni can claim a $1,000 (20% × $5,000) lifetime learning credit on their 2013 joint tax return. Irs 1040 forms Form 1098-T. Irs 1040 forms   To help you figure your lifetime learning credit, the student should receive Form 1098-T. Irs 1040 forms 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. Irs 1040 forms An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. Irs 1040 forms However, the amounts in boxes 1 and 2 of Form 1098-T might be different from what you paid. Irs 1040 forms When figuring the credit, use only the amounts you paid or are deemed to have paid in 2013 for qualified education expenses. Irs 1040 forms   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. Irs 1040 forms    The eligible educational institution may ask for a completed Form W-9S, or similar statement to obtain the student's name, address, and taxpayer identification number. Irs 1040 forms Effect of the Amount of Your Income on the Amount of Your Credit The amount of your lifetime learning credit is phased out (gradually reduced) if your MAGI is between $53,000 and $63,000 ($107,000 and $127,000 if you file a joint return). Irs 1040 forms You cannot claim a lifetime learning credit if your MAGI is $63,000 or more ($127,000 or more if you file a joint return). Irs 1040 forms Modified adjusted gross income (MAGI). Irs 1040 forms   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Irs 1040 forms MAGI when using Form 1040A. Irs 1040 forms   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Irs 1040 forms MAGI when using Form 1040. Irs 1040 forms   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. Irs 1040 forms You can use Worksheet 3-1 to figure your MAGI. Irs 1040 forms Worksheet 3-1. Irs 1040 forms MAGI for the Lifetime Learning Credit 1. Irs 1040 forms Enter your adjusted gross income  (Form 1040, line 38)   1. Irs 1040 forms   2. Irs 1040 forms Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Irs 1040 forms       3. Irs 1040 forms Enter your foreign housing deduction (Form 2555, line 50)   3. Irs 1040 forms       4. Irs 1040 forms Enter the amount of income from Puerto Rico you are excluding   4. Irs 1040 forms       5. Irs 1040 forms Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Irs 1040 forms       6. Irs 1040 forms Add the amounts on lines 2, 3, 4, and 5   6. Irs 1040 forms   7. Irs 1040 forms Add the amounts on lines 1 and 6. Irs 1040 forms  This is your modified adjusted  gross income. Irs 1040 forms Enter this amount  on Form 8863, line 14   7. Irs 1040 forms   Phaseout. Irs 1040 forms   If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 10-18 of Form 8863. Irs 1040 forms The same method is shown in the following example. Irs 1040 forms Example. Irs 1040 forms You are filing a joint return with a MAGI of $112,000. Irs 1040 forms In 2013, you paid $6,600 of qualified education expenses. Irs 1040 forms You figure the tentative lifetime learning credit (20% of the first $10,000 of qualified education expenses you paid for all eligible students). Irs 1040 forms The result is a $1,320 (20% x $6,600) tentative credit. Irs 1040 forms Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($1,320) by a fraction. Irs 1040 forms The numerator of the fraction is $127,000 (the upper limit for those filing a joint return) minus your MAGI. Irs 1040 forms The denominator is $20,000, the range of incomes for the phaseout ($107,000 to $127,000). Irs 1040 forms The result is the amount of your phased out (reduced) lifetime learning credit ($990). Irs 1040 forms   $1,320 × $127,000 − $112,000  $20,000 = $990   Claiming the Credit You claim the lifetime learning credit by completing Form 8863 and submitting it with your Form 1040 or 1040A. Irs 1040 forms Enter the credit on Form 1040, line 49, or Form 1040A, line 31. Irs 1040 forms Note. Irs 1040 forms In Appendix A, Illustrated Example of Education Credits 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. Irs 1040 forms Prev  Up  Next   Home   More Online Publications
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Tax Law Changes Related to National Disaster Relief

FS-2009-8, January 2009

(Updated June 21, 2010 — For information regarding the filing of 2009 income tax returns, refer to the last section of this document, "Reporting Losses from a Federally Declared Disaster Occurring in 2010.")

The National Disaster Relief Act of 2008, Subtitle B or Title VII of the Emergency Economic Stabilization Act of 2008, signed into law on Oct. 3, 2008, as Public Law 110-343, provides tax relief for victims of federally declared disasters occurring after
Dec. 31, 2007, and before Jan. 1, 2010.

Prior to enactment of the National Disaster Relief Act, when a major disaster struck, Congress would draft legislation providing targeted tax benefits for taxpayers affected by the disaster that were specific to that particular disaster.

The National Disaster Relief Act, which provides a broad package of tax benefits that may be used by anyone who is affected by a federally declared disaster, effectively replaces the strategy of providing targeted benefits for disaster victims in the weeks or months following the incident. Certain provisions of the National Disaster Relief Act of 2008 do not apply to the Midwestern disaster areas –– disasters affecting the Midwest that were declared from May 20, 2008 through July 31, 2008 –– because the Heartland and Hurricane Ike Disaster Relief Act, part of the same legislation that resulted in the National Disaster Relief Act, provides other tax benefits. See Publication 4492-B for detailed information on the tax benefits that apply to the Midwestern disaster areas. 

The National Disaster Relief Act provides the following tax benefits: 

  • Allows all taxpayers, not just those who itemize, to claim the casualty loss deduction regardless of the taxpayer’s adjusted gross income level;
  • Increases the amount by which all individual taxpayers must reduce their personal casualty losses from each casualty from $100 to $500 for taxable years beginning after Dec. 31, 2008. The reduction amount returns to $100 for taxable years beginning after Dec. 31, 2009;   
  • Removes the requirement that the net casualty loss deduction be allowed only if the casualty loss exceeds 10 percent of the taxpayer’s adjusted gross income;
  • Provides a five-year net operating loss (NOL) carryback for qualified natural disaster losses.
  • Waives certain mortgage revenue bond requirements for affected taxpayers and allows the bond proceeds to be used for rebuilding.

For business taxpayers, the Act also:   

  • Allows an affected business taxpayer to deduct certain qualified disaster cleanup expenses;
  • Allows an affected business taxpayer to deduct 50 percent of the cost of qualifying property in addition to the regular depreciation allowance that is normally available; and
  • Increases the limits that an affected business taxpayer can expense for qualifying section 179 property.

Major portions of the National Disaster Relief Act are highlighted below.

See Publication 547, Casualties, Disasters, and Thefts, for information necessary in preparing 2008 tax returns. 

Section 706: Losses Attributable to Federally Declared Disasters

Section 706 of the National Disaster Relief Act provides relief to individual taxpayers whose personal-use property was damaged or destroyed by a casualty in a federally declared disaster area. 

Under prior law, individuals who suffered casualty losses as a result of a Presidentially-declared disaster –– the term was redefined as “federally declared disaster” in the legislation –– were required to reduce the loss from each casualty event by $100 and reduce the total of their casualty losses for the tax year by 10 percent of their adjusted gross income. In addition, these individuals were required to claim their casualty losses as an itemized deduction. 

The new law removes the 10 percent of adjusted gross income limitation for net disaster losses and allows individuals to claim the net disaster losses even if they do not itemize their deductions. 

To qualify, a loss must be attributable to a federally declared disaster and occur in an area determined by the President to warrant federal assistance. A federally declared disaster is any disaster subsequently determined by the President to warrant assistance by the federal government under the Stafford Act. The deduction is limited to the “net disaster loss” which consists of the excess of personal casualty losses attributable to a federally declared disaster over personal casualty gains. The new law is effective for disasters declared in taxable years beginning after Dec. 31, 2007, and occurring before Jan. 1, 2010. Information on disaster declarations and the areas they encompass may be found at the Federal Emergency Management Agency (FEMA) Web site.

The new law also changes the amount by which all individual taxpayers must reduce their personal casualty losses from each casualty from $100 to $500. This change is effective for taxable years beginning after Dec. 31, 2008. The reduction amount returns to $100 for taxable years beginning after Dec. 31, 2009.   

For more information on these tax law changes, see Publication 547, Casualties, Disasters, and Thefts.

Section 712 provides that these changes to the law do not apply to the casualty losses in the Midwestern disaster areas declared during the period beginning on May 20, 2008, and ending on July 31, 2008. See Publication 4492-B for more information on the Midwestern disaster areas.

Section 707: Expensing of Qualified Disaster Expenses

Section 707 of the National Disaster Relief Act allows taxpayers to elect to currently deduct qualified disaster expenses in the tax year paid or incurred. Qualified disaster expenses consist of expenditures paid or incurred in connection with a trade or business or with business-related property that otherwise must be capitalized and that are:

  • For the abatement or control of hazardous substances that were released on account of a federally declared disaster;
  • Debris removal or demolition of structures on real property damaged or destroyed by a federally declared disaster; or
  • For the repair of business-related property damaged by a federally declared disaster. 

As previously explained, a federally declared disaster is any disaster subsequently determined by the President to warrant assistance by the federal government under the Stafford Act. This provision is effective for amounts paid or incurred after Dec. 31, 2007, in connection with disasters declared after that date and federally declared disasters occurring before Jan. 1, 2010. 

Section 712 provides that these changes to the law do not apply to the casualty losses in the Midwestern disaster areas declared during the period beginning on May 20, 2008, and ending on July 31, 2008

Section 708: Net Operating Losses Attributable to Federally Declared Disasters

In general, a net operating loss is carried back two years and carried forward 20. Section 708 of the National Disaster Relief Act allows taxpayers to carry back a qualified disaster loss five years. A qualified disaster loss is the lesser of the taxpayer’s net operating loss for the taxable year or the sum of the following:

  • The taxpayer’s losses allowable under section 165 of the Internal Revenue Code for the taxable year attributable to a federally declared disaster occurring before Jan. 1, 2010, and occurring in a disaster area; and
  • The taxpayer’s deduction for the taxable year for qualified disaster expenses allowable under section 198A(a) of the Internal Revenue Code (or the amount that would have been allowable if the taxpayer deducted qualified disaster expenses). 

A qualified disaster loss is treated a net operating loss that is separate from the taxpayer’s regular NOL. 

Section 708 also includes a provision that allows taxpayers to elect to disregard the five-year carryback rule for their qualified disaster loss. . 

Finally, Section 708 provides an exception to the general rule that a taxpayer may use an alternative minimum tax (AMT) net operating loss deduction to offset only 90 percent of the taxpayer’s alternative minimum taxable income. Section 708 provides that the 90-percent limit does not apply to the portion of the AMT net operating loss deduction attributable to a qualified disaster loss. 

These rules apply to disasters declared in taxable years beginning after Dec. 31, 2007.  

Section 712 provides that these changes to the law do not apply to the Midwestern disaster areas declared during the period beginning on May 20, 2008, and ending on July 31, 2008.

Section 709: Waiver of Certain Mortgage Revenue Bond Requirements Following Federally Declared Disasters

Section 709 of the National Disaster Relief Act adds new paragraph 12 to section 143(k) of the Internal Revenue Code, which waives certain mortgage revenue bond requirements otherwise applicable where an affected taxpayer’s principal residence is destroyed or damaged as a result of a federally declared disaster. An earlier law, the Housing Assistance Tax Act of 2008 enacted on June 30, 2008, also added a different §143(k)(12) to the Code. So currently there are two §143(k)(12)s in the Code.

New Code section 143(k)(12)(A) provides that, at the election of the taxpayer, if a person’s principal residence is destroyed –– the home is rendered unsafe for use as a result of a federally declared disaster occurring between Dec. 31, 2007 and Jan. 1, 2010, or the home is demolished or relocated because of an order issued as a result of such federally declared disaster occurring during such timeframe –– then for two years following the date of such disaster, the three-year requirement of section 143(d)(1) does not apply and the purchase price requirement is relaxed. Accordingly, such person may receive a mortgage loan financed with the proceeds of tax exempt qualified mortgage bonds regardless of whether he owned his principal residence within three years of receiving such mortgage loan, and such mortgage loan may be for the acquisition of a home which costs 110 percent of the average area purchase price. 

New Code section 143(k)(12)(B) provides that, at the election of the taxpayer, if a person’s principal residence is damaged as a result of a federally declared disaster occurring after Dec. 31, 2007, and before Jan. 1, 2010, any loan taken by such person to repair or reconstruct such residence in an amount equal to the lesser of the cost of such repair or reconstruction or $150,000 may be treated as a qualified rehabilitation loan and thus may be financed using the proceeds of tax-exempt qualified mortgage bonds. An election, once made, cannot be revoked unless permission is granted by the Secretary. 

Section 709 further provides that a taxpayer who makes a section 143(k)(12) election  may not also elect to apply the special rules for residences located in disaster areas found in Code section 143(k)(11). The special rules found in Code section 143(k)(11) allow taxpayers to use the proceeds of tax exempt qualified mortgage bonds issued between May 1, 2008, and Jan. 1, 2010, to finance mortgage loans for residences located in disaster areas for two years from the date of the applicable disaster declaration without regard to the three-year requirement by treating the residence as if it were a targeted area residence for purposes of the purchase price requirement and the income requirements. This provision, unlike § 143(k)(12), does not limit the financing only to those taxpayers whose homes were damaged by the disaster.

Section 712 provides that these changes to the law do not apply to the Midwestern disaster areas declared during the period beginning on May 20, 2008, and ending on July 31, 2008.

Section 710: Special Depreciation Allowance for Qualified Disaster Property

Section 710 of the National Disaster Relief Act provides a special 50 percent depreciation allowance for purchases of qualified disaster assistance property. It allows taxpayers to deduct 50 percent of the cost of qualified disaster assistance property in addition to the regular depreciation allowance that is normally available.

This new special “bonus depreciation” allowance applies to most types of tangible personal property and computer software acquired on or after the date on which the federally declared disaster occurs, and placed in service on or before Dec. 31 of the third year following the date on which the federally declared disaster occurs. In addition, the new bonus depreciation allowance applies to most nonresidential real property and residential rental property acquired on or after the date on which the federally declared disaster occurs, and placed in service on or before Dec. 31 of the fourth year following the date on which the federally declared disaster occurs.

To qualify for the new bonus depreciation allowance, 80 percent or more of the use of the property must be in the disaster area and in the active conduct of a trade or business by the taxpayer in that disaster area. Also, the property owner must rehabilitate property damaged, or replace property destroyed or condemned, as a result of the federally declared disaster and must be similar in nature to, and located in the same county as, the property being rehabilitated or replaced.

Section 711: Increased Expensing for Qualified Disaster Assistance Property

In general, a taxpayer may elect to expense up to a certain amount or dollar limit of section 179 property placed in service during the tax year. However, this dollar limit is reduced, but not below zero, if the cost of section 179 property placed in service during that year exceeds a certain amount, or reduced dollar limit. For 2008, the dollar limit is $250,000 and the reduced dollar limit is $800,000.

Section 711 of the National Disaster Relief Act increases the limits that businesses can expense for qualified section 179 disaster assistance property. Generally, the new law increases the dollar limit that is normally available for a particular tax year by the lesser of $100,000, or the cost of qualified section 179 disaster assistance property placed in service during that year. Also, the new law generally increases the reduced dollar limit that is normally available for a particular year by the lesser of $600,000, or the cost of qualified section 179 disaster assistance property placed in service during that year.    

Qualified section 179 disaster assistance property is section 179 property that is qualified disaster assistance property for purposes of the new bonus depreciation allowance provided under section 710 of the National Disaster Relief Act. Section 179 property is most types of tangible personal property and off-the-shelf computer software.

The new law did not change the amount that a taxpayer can elect to expense for certain sport utility vehicles and certain other vehicles placed in service during the tax year.  Accordingly, a taxpayer cannot elect to expense more than $25,000 of the cost of these types of vehicles.

Section 712: Coordination with Heartland Disaster Relief

Section 712 of the National Disaster Relief Act explains that certain provisions contained in the National Disaster Relief Act do not apply to the Midwestern Disaster Areas. For information specific to the Midwestern Disaster Areas, see Publication 4492-B.

Reporting Losses from a Federally Declared Disaster Occurring in 2010

The National Disaster Relief Act of 2008, Subtitle B or Title VII of the Emergency Economic Stabilization Act of 2008, provided enhanced tax relief for victims of federally declared disasters occurring after Dec. 31, 2007, and before Jan. 1, 2010. Those provisions are not effective for disasters occurring after Dec. 31, 2009. Legislation extending the provisions to disasters occurring before Jan. 1, 2011, has been proposed but has not yet been signed into law.

Because the enhanced casualty loss provisions are not effective for federally declared disasters occurring after Dec. 31, 2009, taxpayers affected by federally declared disasters in 2010 may take the loss into account for tax year 2009. See Page 12 of the 2009 version of Publication 547 for information on elections to deduct disaster losses in the year preceding the disaster year, including the time limits on making such elections.

This means, if you are an affected taxpayer with respect to a federally declared disaster occurring after Dec. 31, 2009, you may claim the loss on your 2009 income tax return. Claiming a loss on your 2009 return will allow you to take advantage of the National Disaster Relief Act provisions effective for tax year 2009. 

Page Last Reviewed or Updated: 20-Mar-2014

The Irs 1040 Forms

Irs 1040 forms 10. Irs 1040 forms   Business Bad Debts Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Definition of Business Bad DebtAccrual method. Irs 1040 forms Cash method. Irs 1040 forms Debt acquired from a decedent. Irs 1040 forms Liquidation. Irs 1040 forms Types of Business Bad Debts When a Debt Becomes Worthless How To Claim a Business Bad DebtSpecific Charge-Off Method Nonaccrual-Experience Method Recovery of a Bad DebtNet operating loss (NOL) carryover. Irs 1040 forms Introduction You have a bad debt if you cannot collect money owed to you. Irs 1040 forms A bad debt is either a business bad debt or a nonbusiness bad debt. Irs 1040 forms This chapter discusses only business bad debts. Irs 1040 forms Generally, a business bad debt is one that comes from operating your trade or business. Irs 1040 forms You can deduct business bad debts on Schedule C (Form 1040) or your applicable business income tax return. Irs 1040 forms All other bad debts are nonbusiness bad debts and are deductible only as short-term capital losses. Irs 1040 forms For more information on nonbusiness bad debts, see Publication 550. Irs 1040 forms Topics - This chapter discusses: Definition of business bad debt When a debt becomes worthless How to claim a business bad debt Recovery of a bad debt Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 556 Examination of Returns, Appeal Rights, and Claims for Refund Form (and Instructions) Schedule C (Form 1040) Profit or Loss From Business 1040X Amended U. Irs 1040 forms S. Irs 1040 forms Individual Income Tax Return 1045 Application for Tentative Refund 1139 Corporation Application for Tentative Refund 3115 Application for Change in Accounting Method See chapter 12 for information about getting publications and forms. Irs 1040 forms Definition of Business Bad Debt A business bad debt is a loss from the worthlessness of a debt that was either: Created or acquired in your trade or business, or Closely related to your trade or business when it became partly or totally worthless. Irs 1040 forms A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. Irs 1040 forms Bad debts of a corporation (other than an S corporation) are always business bad debts. Irs 1040 forms Credit sales. Irs 1040 forms   Business bad debts are mainly the result of credit sales to customers. Irs 1040 forms Goods that have been sold, but not yet paid for, and services that have been performed, but not yet paid for, are recorded in your books as either accounts receivable or notes receivable. Irs 1040 forms After a reasonable period of time, if you have tried to collect the amount due, but are unable to do so, the uncollectible part becomes a business bad debt. Irs 1040 forms   Accounts or notes receivable valued at fair market value (FMV) when received are deductible only at that value, even though the FMV may be less than the face value. Irs 1040 forms If you purchased an account receivable for less than its face value, and the receivable subsequently becomes worthless, the most you are allowed to deduct is the amount you paid to acquire it. Irs 1040 forms    You can claim a business bad debt deduction only if the amount owed to you was previously included in gross income. Irs 1040 forms This applies to amounts owed to you from all sources of taxable income, including sales, services, rents, and interest. Irs 1040 forms Accrual method. Irs 1040 forms   If you use the accrual method of accounting, you generally report income as you earn it. Irs 1040 forms You can only claim a bad debt deduction for an uncollectible receivable if you have previously included the uncollectible amount in income. Irs 1040 forms   If you qualify, you can use the nonaccrual-experience method of accounting discussed later. Irs 1040 forms Under this method, you do not have to accrue income that, based on your experience, you do not expect to collect. Irs 1040 forms Cash method. Irs 1040 forms   If you use the cash method of accounting, you generally report income when you receive payment. Irs 1040 forms You cannot claim a bad debt deduction for amounts owed to you because you never included those amounts in income. Irs 1040 forms For example, a cash basis architect cannot claim a bad debt deduction if a client fails to pay the bill because the architect's fee was never included in income. Irs 1040 forms Debts from a former business. Irs 1040 forms   If you sell your business but retain its receivables, these debts are business debts because they arose out of your trade or business. Irs 1040 forms If any of these receivables subsequently become worthless, the loss is still a business bad debt. Irs 1040 forms Debt acquired from a decedent. Irs 1040 forms   The character of a loss from debts of a business acquired from a decedent is determined in the same way as debts acquired on the purchase of a business. Irs 1040 forms The executor of the decedent's estate treats any loss from the debts as a business bad debt if the debts were closely related to the decedent's trade or business when they became worthless. Irs 1040 forms Otherwise, a loss from these debts becomes a nonbusiness bad debt for the decedent's estate. Irs 1040 forms Liquidation. Irs 1040 forms   If you liquidate your business and some of the accounts receivable that you retain become worthless, they become business bad debts. Irs 1040 forms Types of Business Bad Debts Business bad debts may result from the following. Irs 1040 forms Loans to clients and suppliers. Irs 1040 forms   If you loan money to a client, supplier, employee, or distributor for a business reason and you are unable to collect the loan after attempting to do so, you have a business bad debt. Irs 1040 forms Debts owed by political parties. Irs 1040 forms   If a political party (or other organization that accepts contributions or spends money to influence elections) owes you money and the debt becomes worthless, you can claim a bad debt deduction only if all of the following requirements are met. Irs 1040 forms You use the accrual method of accounting. Irs 1040 forms The debt arose from the sale of goods or services in the ordinary course of your trade or business. Irs 1040 forms More than 30% of your receivables accrued in the year of the sale were from sales to political parties. Irs 1040 forms You made substantial and continuing efforts to collect on the debt. Irs 1040 forms Loan or capital contribution. Irs 1040 forms   You cannot claim a bad debt deduction for a loan you made to a corporation if, based on the facts and circumstances, the loan is actually a contribution to capital. Irs 1040 forms Debts of an insolvent partner. Irs 1040 forms   If your business partnership breaks up and one of your former partners becomes insolvent, you may have to pay more than your pro rata share of the partnership's debts. Irs 1040 forms If you pay any part of the insolvent partner's share of the debts, you can claim a bad debt deduction for the amount you paid that is attributable to the insolvent partner's share. Irs 1040 forms Business loan guarantee. Irs 1040 forms   If you guarantee a debt that subsequently becomes worthless, the debt can qualify as a business bad debt if all the following requirements are met. Irs 1040 forms You made the guarantee in the course of your trade or business. Irs 1040 forms You have a legal duty to pay the debt. Irs 1040 forms You made the guarantee before the debt became worthless. Irs 1040 forms You meet this requirement if you reasonably expected you would not have to pay the debt without full reimbursement from the borrower. Irs 1040 forms You received reasonable consideration for making the guarantee. Irs 1040 forms You meet this requirement if you made the guarantee in accord with normal business practice or for a good faith business purpose. Irs 1040 forms Example. Irs 1040 forms Jane Zayne owns the Zayne Dress Company. Irs 1040 forms She guaranteed payment of a $20,000 note for Elegant Fashions, a dress outlet. Irs 1040 forms Elegant Fashions is one of Zayne's largest clients. Irs 1040 forms Elegant Fashions later defaulted on the loan. Irs 1040 forms As a result, Ms. Irs 1040 forms Zayne paid the remaining balance of the loan in full to the bank. Irs 1040 forms She can claim a business bad debt deduction only for the amount she paid, since her guarantee was made in the course of her trade or business for a good faith business purpose. Irs 1040 forms She was motivated by the desire to retain one of her better clients and keep a sales outlet. Irs 1040 forms Deductible in the year paid. Irs 1040 forms   If you make a payment on a loan you guaranteed, you can deduct it in the year paid, unless you have rights against the borrower. Irs 1040 forms Rights against a borrower. Irs 1040 forms   When you make payment on a loan you guaranteed, you may have the right to take the place of the lender. Irs 1040 forms The debt is then owed to you. Irs 1040 forms If you have this right, or some other right to demand payment from the borrower, you cannot claim a bad debt deduction until these rights become partly or totally worthless. Irs 1040 forms Joint debtor. Irs 1040 forms   If two or more debtors jointly owe you money, your inability to collect from one does not enable you to deduct a proportionate amount as a bad debt. Irs 1040 forms Sale of mortgaged property. Irs 1040 forms   If mortgaged or pledged property is sold for less than the debt, the unpaid, uncollectible balance of the debt is a bad debt. Irs 1040 forms When a Debt Becomes Worthless A debt becomes worthless when there is no longer any chance the amount owed will be paid. Irs 1040 forms This may occur when the debt is due or prior to that date. Irs 1040 forms To demonstrate worthlessness, you must only show that you have taken reasonable steps to collect the debt but were unable to do so. Irs 1040 forms It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. Irs 1040 forms Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. Irs 1040 forms Property received for debt. Irs 1040 forms   If you receive property in partial settlement of a debt, reduce the debt by the property's FMV, which becomes the property's basis. Irs 1040 forms You can deduct the remaining debt as a bad debt if and when it becomes worthless. Irs 1040 forms   If you later sell the property for more than its basis, any gain on the sale is due to the appreciation of the property. Irs 1040 forms It is not a recovery of a bad debt. Irs 1040 forms For information on the sale of an asset, see Publication 544. Irs 1040 forms How To Claim a Business Bad Debt There are two methods to claim a business bad debt. Irs 1040 forms The specific charge-off method. Irs 1040 forms The nonaccrual-experience method. Irs 1040 forms Generally, you must use the specific charge-off method. Irs 1040 forms However, you may use the nonaccrual-experience method if you meet the requirements discussed later under Nonaccrual-Experience Method . Irs 1040 forms Specific Charge-Off Method If you use the specific charge-off method, you can deduct specific business bad debts that become either partly or totally worthless during the tax year. Irs 1040 forms However, with respect to partly worthless bad debts, your deduction is limited to the amount you charged off on your books during the year. Irs 1040 forms Partly worthless debts. Irs 1040 forms   You can deduct specific bad debts that become partly uncollectible during the tax year. Irs 1040 forms Your tax deduction is limited to the amount you charge off on your books during the year. Irs 1040 forms You do not have to charge off and deduct your partly worthless debts annually. Irs 1040 forms You can delay the charge off until a later year. Irs 1040 forms However, you cannot deduct any part of a debt after the year it becomes totally worthless. Irs 1040 forms Significantly modified debt. Irs 1040 forms   An exception to the charge-off rule exists for debt which has been significantly modified and on which the holder recognized gain. Irs 1040 forms For more information, see Regulations section 1. Irs 1040 forms 166-3(a)(3). Irs 1040 forms Deduction disallowed. Irs 1040 forms   Generally, you can claim a partial bad debt deduction only in the year you make the charge-off on your books. Irs 1040 forms If, under audit, the IRS does not allow your deduction and the debt becomes partly worthless in a later tax year, you can deduct the amount you charged off in that year plus the disallowed amount charged off in the earlier year. Irs 1040 forms The charge-off in the earlier year, unless reversed on your books, fulfills the charge-off requirement for the later year. Irs 1040 forms Totally worthless debts. Irs 1040 forms   If a debt becomes totally worthless in the current tax year, you can deduct the entire amount, less any amount deducted in an earlier tax year when the debt was only partly worthless. Irs 1040 forms   You do not have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. Irs 1040 forms However, you may want to do so. Irs 1040 forms If you do not and the IRS later rules the debt is only partly worthless, you will not be allowed a deduction for the debt in that tax year because a deduction of a partly worthless bad debt is limited to the amount actually charged off. Irs 1040 forms See Partly worthless debts, earlier. Irs 1040 forms Filing a claim for refund. Irs 1040 forms   If you did not deduct a bad debt on your original return for the year it became worthless, you can file a claim for a credit or refund. Irs 1040 forms If the bad debt was totally worthless, you must file the claim by the later of the following dates. Irs 1040 forms 7 years from the date your original return was due (not including extensions). Irs 1040 forms 2 years from the date you paid the tax. Irs 1040 forms   If the claim is for a partly worthless bad debt, you must file the claim by the later of the following dates. Irs 1040 forms 3 years from the date you filed your original return. Irs 1040 forms 2 years from the date you paid the tax. Irs 1040 forms You may have longer to file the claim if you were unable to manage your financial affairs due to a physical or mental impairment. Irs 1040 forms Such an impairment requires proof of existence. Irs 1040 forms   For details and more information about filing a claim, see Publication 556. Irs 1040 forms Use one of the following forms to file a claim. Irs 1040 forms For more information, see the instructions for the applicable form. Irs 1040 forms Table 10-1. Irs 1040 forms Forms Used To File a Claim IF you filed as a. Irs 1040 forms . Irs 1040 forms . Irs 1040 forms THEN file. Irs 1040 forms . Irs 1040 forms . Irs 1040 forms Sole proprietor or farmer Form 1040X Corporation Form 1120X S corporation Form 1120S and check box H(4) Partnership Form 1065X if filing on paper or  Form 1065 and check box G(5) if filing electronically Nonaccrual-Experience Method If you use an accrual method of accounting and qualify under the rules explained in this section, you can use the nonaccrual-experience method for bad debts. Irs 1040 forms Under this method, you do not accrue service related income you expect to be uncollectible. Irs 1040 forms Because the expected uncollectible amounts are not included in income, these amounts are not later deducted from income. Irs 1040 forms Generally, you can use the nonaccrual-experience method for accounts receivable for services you performed only if: The services are provided in the fields of accounting, actuarial science, architecture, consulting, engineering, health, law, or the performing arts, or You meet the $5 million gross receipts test for all prior years. Irs 1040 forms Service related income. Irs 1040 forms   You can use the nonaccrual-experience method only for amounts earned by performing services. Irs 1040 forms You cannot use this method for amounts owed to you from activities such as lending money, selling goods, or acquiring receivables or other rights to receive payment. Irs 1040 forms Gross receipts test. Irs 1040 forms   To find out if you meet the $5 million gross receipts test for all prior years, you must figure the average annual gross receipts for each prior year. Irs 1040 forms If your average annual gross receipts for any year exceeds $5 million, you cannot use the non-accural experience method. Irs 1040 forms   The average annual gross receipts for any year is the average of gross receipts from the year in question and the 2 previous years. Irs 1040 forms For example, if you were figuring the average annual gross receipts for 2013, you would average your gross receipts for 2011, 2012, and 2013. Irs 1040 forms Interest or penalty charged. Irs 1040 forms   Generally, you cannot use the nonaccrual-experience method for amounts due on which you charge interest or a late payment penalty. Irs 1040 forms However, do not treat a discount offered for early payment as the charging of interest or a penalty if both the following apply. Irs 1040 forms You otherwise accrue the full amount due as gross income at the time you provide the services. Irs 1040 forms You treat the discount allowed for early payment as an adjustment to gross income in the year of payment. Irs 1040 forms Change in accounting method. Irs 1040 forms   Generally, you must obtain consent to change to a nonaccrual-experience method (other than one of the safe harbor methods) or to change from one method to another. Irs 1040 forms See Form 3115 and the Instructions for Form 3115 for more information. Irs 1040 forms Recovery of a Bad Debt If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. Irs 1040 forms The amount you include is limited to the amount you actually deducted. Irs 1040 forms However, you can exclude the amount deducted that did not reduce your tax. Irs 1040 forms Report the recovery as “Other income” on the appropriate business form or schedule. Irs 1040 forms See Recoveries in Publication 525 for more information. Irs 1040 forms Net operating loss (NOL) carryover. Irs 1040 forms   If a bad debt deduction increases an NOL carryover that has not expired before the beginning of the tax year in which the recovery takes place, you treat the deduction as having reduced your tax. Irs 1040 forms A bad debt deduction that contributes to a NOL helps lower taxes in the year to which you carry the NOL. Irs 1040 forms For more information about NOLs, see Publication 536. Irs 1040 forms Also, see the Instructions for Form 1045, and the Instructions for Form 1139. Irs 1040 forms Prev  Up  Next   Home   More Online Publications