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Irs 1040ez Instructions 2012

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Irs 1040ez Instructions 2012

Irs 1040ez instructions 2012 8. Irs 1040ez instructions 2012   Qualified Tuition Program (QTP) Table of Contents Introduction What Is a Qualified Tuition ProgramDesignated beneficiary. Irs 1040ez instructions 2012 Half-time student. Irs 1040ez instructions 2012 How Much Can You Contribute Are Distributions TaxableFiguring the Taxable Portion of a Distribution Additional Tax on Taxable Distributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Introduction Qualified tuition programs (QTPs) are also called “529 plans. Irs 1040ez instructions 2012 ” States may establish and maintain programs that allow you to either prepay or contribute to an account for paying a student's qualified education expenses at a postsecondary institution. Irs 1040ez instructions 2012 Eligible educational institutions may establish and maintain programs that allow you to prepay a student's qualified education expenses. Irs 1040ez instructions 2012 If you prepay tuition, the student (designated beneficiary) will be entitled to a waiver or a payment of qualified education expenses. Irs 1040ez instructions 2012 You cannot deduct either payments or contributions to a QTP. Irs 1040ez instructions 2012 For information on a specific QTP, you will need to contact the state agency or eligible educational institution that established and maintains it. Irs 1040ez instructions 2012 What is the tax benefit of a QTP. Irs 1040ez instructions 2012   No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses. Irs 1040ez instructions 2012 See Are Distributions Taxable , later, for more information. Irs 1040ez instructions 2012    Even if a QTP is used to finance a student's education, the student or the student's parents still may be eligible to claim the American opportunity credit or the lifetime learning credit. Irs 1040ez instructions 2012 See Coordination With American Opportunity and Lifetime Learning Credits, later. Irs 1040ez instructions 2012 What Is a Qualified Tuition Program A qualified tuition program is a program set up to allow you to either prepay, or contribute to an account established for paying, a student's qualified education expenses at an eligible educational institution. Irs 1040ez instructions 2012 QTPs can be established and maintained by states (or agencies or instrumentalities of a state) and eligible educational institutions. Irs 1040ez instructions 2012 The program must meet certain requirements. Irs 1040ez instructions 2012 Your state government or the eligible educational institution in which you are interested can tell you whether or not they participate in a QTP. Irs 1040ez instructions 2012 Qualified education expenses. Irs 1040ez instructions 2012   These are expenses related to enrollment or attendance at an Eligible educational institution (defined later). Irs 1040ez instructions 2012 As shown in the following list, to be qualified, some of the expenses must be required by the institution and some must be incurred by students who are enrolled at least half-time. Irs 1040ez instructions 2012 See Half-time student , later. Irs 1040ez instructions 2012 The following expenses must be required for enrollment or attendance of a Designated beneficiary (defined later) at an eligible educational institution. Irs 1040ez instructions 2012 Tuition and fees. Irs 1040ez instructions 2012 Books, supplies, and equipment. Irs 1040ez instructions 2012 Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible educational institution. Irs 1040ez instructions 2012 Expenses for room and board must be incurred by students who are enrolled at least half-time. Irs 1040ez instructions 2012 The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Irs 1040ez instructions 2012 The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Irs 1040ez instructions 2012 The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. Irs 1040ez instructions 2012 You will need to contact the eligible educational institution for qualified room and board costs. Irs 1040ez instructions 2012    For tax years after 2010, the purchase of computer technology or equipment is only a qualified education expense if the computer technology or equipment is required for enrollment or attendance at an eligible institution. Irs 1040ez instructions 2012 Designated beneficiary. Irs 1040ez instructions 2012   The designated beneficiary is generally the student (or future student) for whom the QTP is intended to provide benefits. Irs 1040ez instructions 2012 The designated beneficiary can be changed after participation in the QTP begins. Irs 1040ez instructions 2012 If a state or local government or certain tax-exempt organizations purchase an interest in a QTP as part of a scholarship program, the designated beneficiary is the person who receives the interest as a scholarship. Irs 1040ez instructions 2012 Half-time student. Irs 1040ez instructions 2012   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic workload for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. Irs 1040ez instructions 2012 Eligible educational institution. Irs 1040ez instructions 2012   For purposes of a QTP, this is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Irs 1040ez instructions 2012 S. Irs 1040ez instructions 2012 Department of Education. Irs 1040ez instructions 2012 It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Irs 1040ez instructions 2012 The educational institution should be able to tell you if it is an eligible educational institution. Irs 1040ez instructions 2012   Certain educational institutions located outside the United States also participate in the U. Irs 1040ez instructions 2012 S. Irs 1040ez instructions 2012 Department of Education's Federal Student Aid (FSA) programs. Irs 1040ez instructions 2012   How Much Can You Contribute Contributions to a QTP on behalf of any beneficiary cannot be more than the amount necessary to provide for the qualified education expenses of the beneficiary. Irs 1040ez instructions 2012 There are no income restrictions on the individual contributors. Irs 1040ez instructions 2012 You can contribute to both a QTP and a Coverdell ESA in the same year for the same designated beneficiary. Irs 1040ez instructions 2012   Are Distributions Taxable The part of a distribution representing the amount paid or contributed to a QTP does not have to be included in income. Irs 1040ez instructions 2012 This is a return of the investment in the plan. Irs 1040ez instructions 2012 The designated beneficiary generally does not have to include in income any earnings distributed from a QTP if the total distribution is less than or equal to adjusted qualified education expenses (defined under Figuring the Taxable Portion of a Distribution , later). Irs 1040ez instructions 2012 Earnings and return of investment. Irs 1040ez instructions 2012    You will receive a Form 1099-Q, from each of the programs from which you received a QTP distribution in 2013. Irs 1040ez instructions 2012 The amount of your gross distribution (box 1) shown on each form will be divided between your earnings (box 2) and your basis, or return of investment (box 3). Irs 1040ez instructions 2012 Form 1099-Q should be sent to you by January 31, 2014. Irs 1040ez instructions 2012 Figuring the Taxable Portion of a Distribution To determine if total distributions for the year are more or less than the amount of qualified education expenses, you must compare the total of all QTP distributions for the tax year to the adjusted qualified education expenses. Irs 1040ez instructions 2012 Adjusted qualified education expenses. Irs 1040ez instructions 2012   This amount is the total qualified education expenses reduced by any tax-free educational assistance. Irs 1040ez instructions 2012 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), Veterans' educational assistance (see Veterans' Benefits 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 ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Irs 1040ez instructions 2012 Taxable earnings. Irs 1040ez instructions 2012   Use the following steps to figure the taxable part. Irs 1040ez instructions 2012 Multiply the total distributed earnings shown in box 2 of Form 1099-Q by a fraction. Irs 1040ez instructions 2012 The numerator is the adjusted qualified education expenses paid during the year and the denominator is the total amount distributed during the year. Irs 1040ez instructions 2012 Subtract the amount figured in (1) from the total distributed earnings. Irs 1040ez instructions 2012 The result is the amount the beneficiary must include in income. Irs 1040ez instructions 2012 Report it on Form 1040 or Form 1040NR, line 21. Irs 1040ez instructions 2012 Example 1. Irs 1040ez instructions 2012 In 2007, Sara Clarke's parents opened a savings account for her with a QTP maintained by their state government. Irs 1040ez instructions 2012 Over the years they contributed $18,000 to the account. Irs 1040ez instructions 2012 The total balance in the account was $27,000 on the date the distribution was made. Irs 1040ez instructions 2012 In the summer of 2013, Sara enrolled in college and had $8,300 of qualified education expenses for the rest of the year. Irs 1040ez instructions 2012 She paid her college expenses from the following sources. Irs 1040ez instructions 2012   Gift from parents $1,600     Partial tuition scholarship (tax-free) 3,100     QTP distribution 5,300           Before Sara can determine the taxable part of her QTP distribution, she must reduce her total qualified education expenses by any tax-free educational assistance. Irs 1040ez instructions 2012   Total qualified education expenses $8,300     Minus: Tax-free educational assistance −3,100     Equals: Adjusted qualified  education expenses (AQEE) $5,200   Since the remaining expenses ($5,200) are less than the QTP distribution, part of the earnings will be taxable. Irs 1040ez instructions 2012 Sara's Form 1099-Q shows that $950 of the QTP distribution is earnings. Irs 1040ez instructions 2012 Sara figures the taxable part of the distributed earnings as follows. Irs 1040ez instructions 2012   1. Irs 1040ez instructions 2012 $950 (earnings) × $5,200 AQEE  $5,300 distribution           =$932 (tax-free earnings)     2. Irs 1040ez instructions 2012 $950 (earnings)−$932 (tax-free earnings)     =$18 (taxable earnings)  Sara must include $18 in income (Form 1040, line 21) as distributed QTP earnings not used for adjusted qualified education expenses. Irs 1040ez instructions 2012 Coordination With American Opportunity and Lifetime Learning Credits An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. Irs 1040ez instructions 2012 This means that after the beneficiary reduces qualified education expenses by tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit. Irs 1040ez instructions 2012 Example 2. Irs 1040ez instructions 2012 Assume the same facts as in Example 1 , except that Sara's parents claimed an American opportunity credit of $2,500 (based on $4,000 expenses). Irs 1040ez instructions 2012   Total qualified education expenses $8,300     Minus: Tax-free educational assistance −3,100     Minus: Expenses taken into account  in figuring American opportunity credit −4,000     Equals: Adjusted qualified  education expenses (AQEE) $1,200           The taxable part of the distribution is figured as follows. Irs 1040ez instructions 2012   1. Irs 1040ez instructions 2012 $950 (earnings) × $1,200 AQEE  $5,300 distribution           =$215 (tax-free earnings)     2. Irs 1040ez instructions 2012 $950 (earnings)−$215 (tax-free earnings)     =$735 (taxable earnings)       Sara must include $735 in income (Form 1040, line 21). Irs 1040ez instructions 2012 This represents distributed earnings not used for adjusted qualified education expenses. Irs 1040ez instructions 2012 Coordination With Coverdell ESA Distributions If a designated beneficiary receives distributions from both a QTP and a Coverdell ESA in the same year, and the total of these distributions is more than the beneficiary's adjusted qualified higher education expenses, the expenses must be allocated between the distributions. Irs 1040ez instructions 2012 For purposes of this allocation, disregard any qualified elementary and secondary education expenses. Irs 1040ez instructions 2012 Example 3. Irs 1040ez instructions 2012 Assume the same facts as in Example 2 , except that instead of receiving a $5,300 distribution from her QTP, Sara received $4,600 from that account and $700 from her Coverdell ESA. Irs 1040ez instructions 2012 In this case, Sara must allocate her $1,200 of adjusted qualified higher education expenses (AQHEE) between the two distributions. Irs 1040ez instructions 2012   $1,200 AQHEE × $700 ESA distribution  $5,300 total distribution = $158 AQHEE (ESA)     $1,200 AQHEE × $4,600 QTP distribution  $5,300 total distribution = $1,042 AQHEE (QTP)   Sara then figures the taxable portion of her Coverdell ESA distribution based on qualified higher education expenses of $158, and the taxable portion of her QTP distribution based on the other $1,042. Irs 1040ez instructions 2012 Note. Irs 1040ez instructions 2012 If you are required to allocate your expenses between Coverdell ESA and QTP distributions, and you have adjusted qualified elementary and secondary education expenses, see the examples in chapter 7, Coverdell Education Savings Account under Coordination With Qualified Tuition Program (QTP) Distributions . Irs 1040ez instructions 2012 Coordination With Tuition and Fees Deduction. Irs 1040ez instructions 2012   A tuition and fees deduction can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. Irs 1040ez instructions 2012 Losses on QTP Investments If you have a loss on your investment in a QTP account, you may be able to take the loss on your income tax return. Irs 1040ez instructions 2012 You can take the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Irs 1040ez instructions 2012 Your basis is the total amount of contributions to that QTP account. Irs 1040ez instructions 2012 You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. Irs 1040ez instructions 2012 If you have distributions from more than one QTP account during a year, you must combine the information (amount of distribution, basis, etc. Irs 1040ez instructions 2012 ) from all such accounts in order to determine your taxable earnings for the year. Irs 1040ez instructions 2012 By doing this, the loss from one QTP account reduces the distributed earnings (if any) from any other QTP accounts. Irs 1040ez instructions 2012 Example 1. Irs 1040ez instructions 2012 In 2013, Taylor received a final distribution of $1,000 from QTP #1. Irs 1040ez instructions 2012 His unrecovered basis in that account before the distribution was $3,000. Irs 1040ez instructions 2012 If Taylor itemizes his deductions, he can claim the $2,000 loss on Schedule A (Form 1040). Irs 1040ez instructions 2012 Example 2. Irs 1040ez instructions 2012 Assume the same facts as in Example 1 , except that Taylor also had a distribution of $9,000 from QTP #2, giving him total distributions for 2013 of $10,000. Irs 1040ez instructions 2012 His total basis in these distributions was $4,500 ($3,000 for QTP #1 and $1,500 for QTP #2). Irs 1040ez instructions 2012 Taylor's adjusted qualified education expenses for 2013 totaled $6,000. Irs 1040ez instructions 2012 In order to figure his taxable earnings, Taylor combines the two accounts and determines his taxable earnings as follows. Irs 1040ez instructions 2012   1. Irs 1040ez instructions 2012 $10,000 (total distribution)−$4,500 (basis portion of distribution)     = $5,500 (earnings included in distribution)   2. Irs 1040ez instructions 2012 $5,500 (earnings) x $6,000 AQEE  $10,000 distribution           =$3,300 (tax-free earnings)     3. Irs 1040ez instructions 2012 $5,500 (earnings)−$3,300 (tax-free earnings)     =$2,200 (taxable earnings)                 Taylor must include $2,200 in income on Form 1040, line 21. Irs 1040ez instructions 2012 Because Taylor's accounts must be combined, he cannot deduct his $2,000 loss (QTP #1) on Schedule A (Form 1040). Irs 1040ez instructions 2012 Instead, the $2,000 loss reduces the total earnings that were distributed, thereby reducing his taxable earnings. Irs 1040ez instructions 2012 Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. Irs 1040ez instructions 2012 Exceptions. Irs 1040ez instructions 2012   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. Irs 1040ez instructions 2012 Made because the designated beneficiary is disabled. Irs 1040ez instructions 2012 A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. Irs 1040ez instructions 2012 A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. Irs 1040ez instructions 2012 Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Irs 1040ez instructions 2012 Made on account of the attendance of the designated beneficiary at a U. Irs 1040ez instructions 2012 S. Irs 1040ez instructions 2012 military academy (such as the USNA at Annapolis). Irs 1040ez instructions 2012 This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. Irs 1040ez instructions 2012 S. Irs 1040ez instructions 2012 Code) attributable to such attendance. Irs 1040ez instructions 2012 Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier. Irs 1040ez instructions 2012 ) Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. Irs 1040ez instructions 2012 Figuring the additional tax. Irs 1040ez instructions 2012    Use Part II of Form 5329, to figure any additional tax. Irs 1040ez instructions 2012 Report the amount on Form 1040, line 58, or Form 1040NR, line 56. Irs 1040ez instructions 2012 Rollovers and Other Transfers Assets can be rolled over or transferred from one QTP to another. Irs 1040ez instructions 2012 In addition, the designated beneficiary can be changed without transferring accounts. Irs 1040ez instructions 2012 Rollovers Any amount distributed from a QTP is not taxable if it is rolled over to another QTP for the benefit of the same beneficiary or for the benefit of a member of the beneficiary's family (including the beneficiary's spouse). Irs 1040ez instructions 2012 An amount is rolled over if it is paid to another QTP within 60 days after the date of the distribution. Irs 1040ez instructions 2012 Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. Irs 1040ez instructions 2012 These are not taxable distributions. Irs 1040ez instructions 2012 Members of the beneficiary's family. Irs 1040ez instructions 2012   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. Irs 1040ez instructions 2012 Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. Irs 1040ez instructions 2012 Brother, sister, stepbrother, or stepsister. Irs 1040ez instructions 2012 Father or mother or ancestor of either. Irs 1040ez instructions 2012 Stepfather or stepmother. Irs 1040ez instructions 2012 Son or daughter of a brother or sister. Irs 1040ez instructions 2012 Brother or sister of father or mother. Irs 1040ez instructions 2012 Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Irs 1040ez instructions 2012 The spouse of any individual listed above. Irs 1040ez instructions 2012 First cousin. Irs 1040ez instructions 2012 Example. Irs 1040ez instructions 2012 When Aaron graduated from college last year he had $5,000 left in his QTP. Irs 1040ez instructions 2012 He wanted to give this money to his younger brother, who was in junior high school. Irs 1040ez instructions 2012 In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his brother's QTP within 60 days of the distribution. Irs 1040ez instructions 2012 If the rollover is to another QTP for the same beneficiary, only one rollover is allowed within 12 months of a previous transfer to any QTP for that designated beneficiary. Irs 1040ez instructions 2012 Changing the Designated Beneficiary There are no income tax consequences if the designated beneficiary of an account is changed to a member of the beneficiary's family. Irs 1040ez instructions 2012 See Members of the beneficiary's family , earlier. Irs 1040ez instructions 2012 Example. Irs 1040ez instructions 2012 Assume the same situation as in the last example. Irs 1040ez instructions 2012 Instead of closing his QTP and paying the distribution into his brother's QTP, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his brother. Irs 1040ez instructions 2012 Prev  Up  Next   Home   More Online Publications
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The Irs 1040ez Instructions 2012

Irs 1040ez instructions 2012 1. Irs 1040ez instructions 2012   Rental Income and Expenses (If No Personal Use of Dwelling) Table of Contents Rental IncomeWhen To Report Types of Income Rental ExpensesWhen To Deduct Types of Expenses This chapter discusses the various types of rental income and expenses for a residential rental activity with no personal use of the dwelling. Irs 1040ez instructions 2012 Generally, each year you will report all income and deduct all out-of-pocket expenses in full. Irs 1040ez instructions 2012 The deduction to recover the cost of your rental property—depreciation—is taken over a prescribed number of years, and is discussed in chapter 2, Depreciation of Rental Property. Irs 1040ez instructions 2012 If your rental income is from property you also use personally or rent to someone at less than a fair rental price, first read the information in chapter 5 , Personal Use of Dwelling Unit (Including Vacation Home). Irs 1040ez instructions 2012 Rental Income In most cases, you must include in your gross income all amounts you receive as rent. Irs 1040ez instructions 2012 Rental income is any payment you receive for the use or occupation of property. Irs 1040ez instructions 2012 In addition to amounts you receive as normal rental payments, there are other amounts that may be rental income. Irs 1040ez instructions 2012 When To Report When you report rental income on your tax return generally depends on whether you are a cash basis taxpayer or use an accrual method. Irs 1040ez instructions 2012 Most individual taxpayers use the cash method. Irs 1040ez instructions 2012 Cash method. Irs 1040ez instructions 2012   You are a cash basis taxpayer if you report income on your return in the year you actually or constructively receive it, regardless of when it was earned. Irs 1040ez instructions 2012 You constructively receive income when it is made available to you, for example, by being credited to your bank account. Irs 1040ez instructions 2012 Accrual method. Irs 1040ez instructions 2012    If you are an accrual basis taxpayer, you generally report income when you earn it, rather than when you receive it. Irs 1040ez instructions 2012 You generally deduct your expenses when you incur them, rather than when you pay them. Irs 1040ez instructions 2012 More information. Irs 1040ez instructions 2012   See Publication 538, Accounting Periods and Methods, for more information about when you constructively receive income and accrual methods of accounting. Irs 1040ez instructions 2012 Types of Income The following are common types of rental income. Irs 1040ez instructions 2012 Advance rent. Irs 1040ez instructions 2012   Advance rent is any amount you receive before the period that it covers. Irs 1040ez instructions 2012 Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. Irs 1040ez instructions 2012 Example. Irs 1040ez instructions 2012 On March 18, 2013, you signed a 10-year lease to rent your property. Irs 1040ez instructions 2012 During 2013, you received $9,600 for the first year's rent and $9,600 as rent for the last year of the lease. Irs 1040ez instructions 2012 You must include $19,200 in your rental income in the first year. Irs 1040ez instructions 2012 Canceling a lease. Irs 1040ez instructions 2012   If your tenant pays you to cancel a lease, the amount you receive is rent. Irs 1040ez instructions 2012 Include the payment in your income in the year you receive it regardless of your method of accounting. Irs 1040ez instructions 2012 Expenses paid by tenant. Irs 1040ez instructions 2012   If your tenant pays any of your expenses, those payments are rental income. Irs 1040ez instructions 2012 Because you must include this amount in income, you can also deduct the expenses if they are deductible rental expenses. Irs 1040ez instructions 2012 For more information, see Rental Expenses , later. Irs 1040ez instructions 2012 Example 1. Irs 1040ez instructions 2012 Your tenant pays the water and sewage bill for your rental property and deducts the amount from the normal rent payment. Irs 1040ez instructions 2012 Under the terms of the lease, your tenant does not have to pay this bill. Irs 1040ez instructions 2012 Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. Irs 1040ez instructions 2012 You can deduct the utility payment made by your tenant as a rental expense. Irs 1040ez instructions 2012 Example 2. Irs 1040ez instructions 2012 While you are out of town, the furnace in your rental property stops working. Irs 1040ez instructions 2012 Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Irs 1040ez instructions 2012 Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. Irs 1040ez instructions 2012 You can deduct the repair payment made by your tenant as a rental expense. Irs 1040ez instructions 2012 Property or services. Irs 1040ez instructions 2012   If you receive property or services as rent, instead of money, include the fair market value of the property or services in your rental income. Irs 1040ez instructions 2012   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. Irs 1040ez instructions 2012 Example. Irs 1040ez instructions 2012 Your tenant is a house painter. Irs 1040ez instructions 2012 He offers to paint your rental property instead of paying 2 months rent. Irs 1040ez instructions 2012 You accept his offer. Irs 1040ez instructions 2012 Include in your rental income the amount the tenant would have paid for 2 months rent. Irs 1040ez instructions 2012 You can deduct that same amount as a rental expense for painting your property. Irs 1040ez instructions 2012 Security deposits. Irs 1040ez instructions 2012   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. Irs 1040ez instructions 2012 But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. Irs 1040ez instructions 2012    If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Irs 1040ez instructions 2012 Include it in your income when you receive it. Irs 1040ez instructions 2012 Other Sources of Rental Income Lease with option to buy. Irs 1040ez instructions 2012   If the rental agreement gives your tenant the right to buy your rental property, the payments you receive under the agreement are generally rental income. Irs 1040ez instructions 2012 If your tenant exercises the right to buy the property, the payments you receive for the period after the date of sale are considered part of the selling price. Irs 1040ez instructions 2012 Part interest. Irs 1040ez instructions 2012   If you own a part interest in rental property, you must report your part of the rental income from the property. Irs 1040ez instructions 2012 Rental of property also used as your home. Irs 1040ez instructions 2012   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. Irs 1040ez instructions 2012 However, you can deduct on Schedule A (Form 1040), Itemized Deductions, the interest, taxes, and casualty and theft losses that are allowed for nonrental property. Irs 1040ez instructions 2012 See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Irs 1040ez instructions 2012 Rental Expenses In most cases, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income. Irs 1040ez instructions 2012 Personal use of rental property. Irs 1040ez instructions 2012   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Irs 1040ez instructions 2012 Also, your rental expense deductions may be limited. Irs 1040ez instructions 2012 See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Irs 1040ez instructions 2012 Part interest. Irs 1040ez instructions 2012   If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership. Irs 1040ez instructions 2012 Example. Irs 1040ez instructions 2012 Roger owns a one-half undivided interest in a rental house. Irs 1040ez instructions 2012 Last year he paid $968 for necessary repairs on the property. Irs 1040ez instructions 2012 Roger can deduct $484 (50% × $968) as a rental expense. Irs 1040ez instructions 2012 He is entitled to reimbursement for the remaining half from the co-owner. Irs 1040ez instructions 2012 When To Deduct You generally deduct your rental expenses in the year you pay them. Irs 1040ez instructions 2012 If you use the accrual method, see Publication 538 for more information. Irs 1040ez instructions 2012 Types of Expenses Listed below are the most common rental expenses. Irs 1040ez instructions 2012 Advertising. Irs 1040ez instructions 2012 Auto and travel expenses. Irs 1040ez instructions 2012 Cleaning and maintenance. Irs 1040ez instructions 2012 Commissions. Irs 1040ez instructions 2012 Depreciation. Irs 1040ez instructions 2012 Insurance. Irs 1040ez instructions 2012 Interest (other). Irs 1040ez instructions 2012 Legal and other professional fees. Irs 1040ez instructions 2012 Local transportation expenses. Irs 1040ez instructions 2012 Management fees. Irs 1040ez instructions 2012 Mortgage interest paid to banks, etc. Irs 1040ez instructions 2012 Points. Irs 1040ez instructions 2012 Rental payments. Irs 1040ez instructions 2012 Repairs. Irs 1040ez instructions 2012 Taxes. Irs 1040ez instructions 2012 Utilities. Irs 1040ez instructions 2012 Some of these expenses, as well as other less common ones, are discussed below. Irs 1040ez instructions 2012 Depreciation. Irs 1040ez instructions 2012   Depreciation is a capital expense. Irs 1040ez instructions 2012 It is the mechanism for recovering your cost in an income producing property and must be taken over the expected life of the property. Irs 1040ez instructions 2012   You can begin to depreciate rental property when it is ready and available for rent. Irs 1040ez instructions 2012 See Placed in Service under When Does Depreciation Begin and End in chapter 2. Irs 1040ez instructions 2012 Insurance premiums paid in advance. Irs 1040ez instructions 2012   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. Irs 1040ez instructions 2012 You cannot deduct the total premium in the year you pay it. Irs 1040ez instructions 2012 See chapter 6 of Publication 535 for information on deductible premiums. Irs 1040ez instructions 2012 Interest expense. Irs 1040ez instructions 2012   You can deduct mortgage interest you pay on your rental property. Irs 1040ez instructions 2012 When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Irs 1040ez instructions 2012 Chapter 4 of Publication 535 explains mortgage interest in detail. Irs 1040ez instructions 2012 Expenses paid to obtain a mortgage. Irs 1040ez instructions 2012   Certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. Irs 1040ez instructions 2012 These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property. Irs 1040ez instructions 2012 Form 1098, Mortgage Interest Statement. Irs 1040ez instructions 2012   If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098 or similar statement showing the interest you paid for the year. Irs 1040ez instructions 2012 If you and at least one other person (other than your spouse if you file a joint return) were liable for, and paid interest on, the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. Irs 1040ez instructions 2012 Attach a statement to your return showing the name and address of the other person. Irs 1040ez instructions 2012 On the dotted line next to line 13, enter “See attached. Irs 1040ez instructions 2012 ” Legal and other professional fees. Irs 1040ez instructions 2012   You can deduct, as a rental expense, legal and other professional expenses such as tax return preparation fees you paid to prepare Schedule E, Part I. Irs 1040ez instructions 2012 For example, on your 2013 Schedule E you can deduct fees paid in 2013 to prepare Part I of your 2012 Schedule E. Irs 1040ez instructions 2012 You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. Irs 1040ez instructions 2012 Local benefit taxes. Irs 1040ez instructions 2012   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. Irs 1040ez instructions 2012 These charges are nondepreciable capital expenditures and must be added to the basis of your property. Irs 1040ez instructions 2012 However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Irs 1040ez instructions 2012 Local transportation expenses. Irs 1040ez instructions 2012   You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. Irs 1040ez instructions 2012 However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. Irs 1040ez instructions 2012 See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Irs 1040ez instructions 2012   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. Irs 1040ez instructions 2012 For 2013, the standard mileage rate for business use is 56. Irs 1040ez instructions 2012 5 cents per mile. Irs 1040ez instructions 2012 For more information, see chapter 4 of Publication 463. Irs 1040ez instructions 2012    To deduct car expenses under either method, you must keep records that follow the rules in chapter 5 of Publication 463. Irs 1040ez instructions 2012 In addition, you must complete Form 4562, Part V, and attach it to your tax return. Irs 1040ez instructions 2012 Pre-rental expenses. Irs 1040ez instructions 2012   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Irs 1040ez instructions 2012 Rental of equipment. Irs 1040ez instructions 2012   You can deduct the rent you pay for equipment that you use for rental purposes. Irs 1040ez instructions 2012 However, in some cases, lease contracts are actually purchase contracts. Irs 1040ez instructions 2012 If so, you cannot deduct these payments. Irs 1040ez instructions 2012 You can recover the cost of purchased equipment through depreciation. Irs 1040ez instructions 2012 Rental of property. Irs 1040ez instructions 2012   You can deduct the rent you pay for property that you use for rental purposes. Irs 1040ez instructions 2012 If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. Irs 1040ez instructions 2012 Travel expenses. Irs 1040ez instructions 2012   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. Irs 1040ez instructions 2012 You must properly allocate your expenses between rental and nonrental activities. Irs 1040ez instructions 2012 You cannot deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. Irs 1040ez instructions 2012 The cost of improvements is recovered by taking depreciation. Irs 1040ez instructions 2012 For information on travel expenses, see chapter 1 of Publication 463. Irs 1040ez instructions 2012    To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Publication 463. Irs 1040ez instructions 2012 Uncollected rent. Irs 1040ez instructions 2012   If you are a cash basis taxpayer, do not deduct uncollected rent. Irs 1040ez instructions 2012 Because you have not included it in your income, it is not deductible. Irs 1040ez instructions 2012   If you use an accrual method, report income when you earn it. Irs 1040ez instructions 2012 If you are unable to collect the rent, you may be able to deduct it as a business bad debt. Irs 1040ez instructions 2012 See chapter 10 of Publication 535 for more information about business bad debts. Irs 1040ez instructions 2012 Vacant rental property. Irs 1040ez instructions 2012   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. Irs 1040ez instructions 2012 However, you cannot deduct any loss of rental income for the period the property is vacant. Irs 1040ez instructions 2012 Vacant while listed for sale. Irs 1040ez instructions 2012   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. Irs 1040ez instructions 2012 If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Irs 1040ez instructions 2012 Points The term “points” is often used to describe some of the charges paid, or treated as paid, by a borrower to take out a loan or a mortgage. Irs 1040ez instructions 2012 These charges are also called loan origination fees, maximum loan charges, or premium charges. Irs 1040ez instructions 2012 Any of these charges (points) that are solely for the use of money are interest. Irs 1040ez instructions 2012 Because points are prepaid interest, you generally cannot deduct the full amount in the year paid, but must deduct the interest over the term of the loan. Irs 1040ez instructions 2012 The method used to figure the amount of points you can deduct each year follows the original issue discount (OID) rules. Irs 1040ez instructions 2012 In this case, points are equivalent to OID, which is the difference between: The amount borrowed (redemption price at maturity, or principal) and The proceeds (issue price). Irs 1040ez instructions 2012 The first step is to determine whether your total OID (which you may have on bonds or other investments in addition to the mortgage loan), including the OID resulting from the points, is insignificant or de minimis. Irs 1040ez instructions 2012 If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct. Irs 1040ez instructions 2012 De minimis OID. Irs 1040ez instructions 2012   The OID is de minimis if it is less than one-fourth of 1% (. Irs 1040ez instructions 2012 0025) of the stated redemption price at maturity (principal amount of the loan) multiplied by the number of full years from the date of original issue to maturity (term of the loan). Irs 1040ez instructions 2012   If the OID is de minimis, you can choose one of the following ways to figure the amount of points you can deduct each year. Irs 1040ez instructions 2012 On a constant-yield basis over the term of the loan. Irs 1040ez instructions 2012 On a straight line basis over the term of the loan. Irs 1040ez instructions 2012 In proportion to stated interest payments. Irs 1040ez instructions 2012 In its entirety at maturity of the loan. Irs 1040ez instructions 2012 You make this choice by deducting the OID (points) in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Irs 1040ez instructions 2012 Example. Irs 1040ez instructions 2012 Carol Madison took out a $100,000 mortgage loan on January 1, 2013, to buy a house she will use as a rental during 2013. Irs 1040ez instructions 2012 The loan is to be repaid over 30 years. Irs 1040ez instructions 2012 During 2013, Carol paid $10,000 of mortgage interest (stated interest) to the lender. Irs 1040ez instructions 2012 When the loan was made, she paid $1,500 in points to the lender. Irs 1040ez instructions 2012 The points reduced the principal amount of the loan from $100,000 to $98,500, resulting in $1,500 of OID. Irs 1040ez instructions 2012 Carol determines that the points (OID) she paid are de minimis based on the following computation. Irs 1040ez instructions 2012 Redemption price at maturity (principal amount of the loan) $100,000 Multiplied by: The term of the  loan in complete years ×30 Multiplied by ×. Irs 1040ez instructions 2012 0025 De minimis amount $7,500 The points (OID) she paid ($1,500) are less than the de minimis amount ($7,500). Irs 1040ez instructions 2012 Therefore, Carol has de minimis OID and she can choose one of the four ways discussed earlier to figure the amount she can deduct each year. Irs 1040ez instructions 2012 Under the straight line method, she can deduct $50 each year for 30 years. Irs 1040ez instructions 2012 Constant-yield method. Irs 1040ez instructions 2012   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Irs 1040ez instructions 2012   You figure your deduction for the first year in the following manner. Irs 1040ez instructions 2012 Determine the issue price of the loan. Irs 1040ez instructions 2012 If you paid points on the loan, the issue price generally is the difference between the principal and the points. Irs 1040ez instructions 2012 Multiply the result in (1) by the yield to maturity (defined later). Irs 1040ez instructions 2012 Subtract any qualified stated interest payments (defined later) from the result in (2). Irs 1040ez instructions 2012 This is the OID you can deduct in the first year. Irs 1040ez instructions 2012 Yield to maturity (YTM). Irs 1040ez instructions 2012   This rate is generally shown in the literature you receive from your lender. Irs 1040ez instructions 2012 If you do not have this information, consult your lender or tax advisor. Irs 1040ez instructions 2012 In general, the YTM is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Irs 1040ez instructions 2012 Qualified stated interest (QSI). Irs 1040ez instructions 2012   In general, this is the stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a fixed rate. Irs 1040ez instructions 2012 Example—Year 1. Irs 1040ez instructions 2012 The facts are the same as in the previous example. Irs 1040ez instructions 2012 The yield to maturity on Carol's loan is 10. Irs 1040ez instructions 2012 2467%, compounded annually. Irs 1040ez instructions 2012 She figured the amount of points (OID) she could deduct in 2013 as follows. Irs 1040ez instructions 2012 Principal amount of the loan $100,000 Minus: Points (OID) –1,500 Issue price of the loan $98,500 Multiplied by: YTM × . Irs 1040ez instructions 2012 102467 Total 10,093 Minus: QSI –10,000 Points (OID) deductible in 2013 $93 To figure your deduction in any subsequent year, you start with the adjusted issue price. Irs 1040ez instructions 2012 To get the adjusted issue price, add to the issue price figured in Year 1 any OID previously deducted. Irs 1040ez instructions 2012 Then follow steps (2) and (3), earlier. Irs 1040ez instructions 2012 Example—Year 2. Irs 1040ez instructions 2012 Carol figured the deduction for 2014 as follows. Irs 1040ez instructions 2012 Issue price $98,500 Plus: Points (OID) deducted  in 2013 +93 Adjusted issue price $98,593 Multiplied by: YTM × . Irs 1040ez instructions 2012 102467 Total 10,103 Minus: QSI –10,000 Points (OID) deductible in 2014 $103 Loan or mortgage ends. Irs 1040ez instructions 2012    If your loan or mortgage ends, you may be able to deduct any remaining points (OID) in the tax year in which the loan or mortgage ends. Irs 1040ez instructions 2012 A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Irs 1040ez instructions 2012 However, if the refinancing is with the same lender, the remaining points (OID) generally are not deductible in the year in which the refinancing occurs, but may be deductible over the term of the new mortgage or loan. Irs 1040ez instructions 2012 Points when loan refinance is more than the previous outstanding balance. Irs 1040ez instructions 2012   When you refinance a rental property for more than the previous outstanding balance, the portion of the points allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Irs 1040ez instructions 2012 For example, if an individual refinanced a loan with a balance of $100,000, the amount of the new loan was $120,000, and the taxpayer used $20,000 to purchase a car, points allocable to the $20,000 would be treated as nondeductible personal interest. Irs 1040ez instructions 2012 Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. Irs 1040ez instructions 2012 Improvements. Irs 1040ez instructions 2012   You must capitalize any expense you pay to improve your rental property. Irs 1040ez instructions 2012 An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Irs 1040ez instructions 2012 Betterments. Irs 1040ez instructions 2012   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. Irs 1040ez instructions 2012 Restoration. Irs 1040ez instructions 2012   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. Irs 1040ez instructions 2012 Adaptation. Irs 1040ez instructions 2012   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. Irs 1040ez instructions 2012 Separate the costs of repairs and improvements, and keep accurate records. Irs 1040ez instructions 2012 You will need to know the cost of improvements when you sell or depreciate your property. Irs 1040ez instructions 2012 The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Irs 1040ez instructions 2012 Table 1-1. Irs 1040ez instructions 2012 Examples of Improvements Additions Bedroom Bathroom Deck Garage Porch Patio  Lawn & Grounds Landscaping Driveway Walkway Fence Retaining wall Sprinkler system Swimming pool Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system   Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances Kitchen modernization Flooring Wall-to-wall carpeting  Insulation Attic Walls, floor Pipes, duct work Prev  Up  Next   Home   More Online Publications