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Irs E File 2011

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Irs E File 2011

Irs e file 2011 Publication 596 - Main Content Table of Contents Chapter 1—Rules for EveryoneRule 1—Adjusted Gross Income (AGI) Limits Rule 2—You Must Have a Valid Social Security Number (SSN) Rule 3—Your Filing Status Cannot Be Married Filing Separately Rule 4—You Must Be a U. Irs e file 2011 S. Irs e file 2011 Citizen or Resident Alien All Year Rule 5—You Cannot File Form 2555 or Form 2555-EZ Rule 6—Your Investment Income Must Be $3,300 or Less Rule 7—You Must Have Earned Income Chapter 2—Rules If You Have a Qualifying ChildRule 8—Your Child Must Meet the Relationship, Age, Residency, and Joint Return Tests Rule 9—Your Qualifying Child Cannot Be Used by More Than One Person To Claim the EIC Rule 10—You Cannot Be a Qualifying Child of Another Taxpayer Chapter 3—Rules If You Do Not Have a Qualifying ChildRule 11—You Must Be at Least Age 25 but Under Age 65 Rule 12—You Cannot Be the Dependent of Another Person Rule 13—You Cannot Be a Qualifying Child of Another Taxpayer Rule 14—You Must Have Lived in the United States More Than Half of the Year Chapter 4—Figuring and Claiming the EICRule 15—Earned Income Limits IRS Will Figure the EIC for You How To Figure the EIC Yourself Schedule EIC Chapter 5—Disallowance of the EICForm 8862 Are You Prohibited From Claiming the EIC for a Period of Years? Chapter 6—Detailed ExamplesExample 1—Sharon Rose Example 2—Cynthia and Jerry Grey Chapter 1—Rules for Everyone This chapter discusses Rules 1 through 7. Irs e file 2011 You must meet all seven rules to qualify for the earned income credit. Irs e file 2011 If you do not meet all seven rules, you cannot get the credit and you do not need to read the rest of the publication. Irs e file 2011 If you meet all seven rules in this chapter, then read either chapter 2 or chapter 3 (whichever applies) for more rules you must meet. Irs e file 2011 Rule 1—Adjusted Gross Income (AGI) Limits Your adjusted gross income (AGI) must be less than: $46,227 ($51,567 for married filing jointly) if you have three or more qualifying children, $43,038 ($48,378 for married filing jointly) if you have two qualifying children, $37,870 ($43,210 for married filing jointly) if you have one qualifying child, or $14,340 ($19,680 for married filing jointly) if you do not have a qualifying child. Irs e file 2011 Adjusted gross income (AGI). Irs e file 2011   AGI is the amount on line 4 of Form 1040EZ, line 22 of Form 1040A, or line 38 of Form 1040. Irs e file 2011   If your AGI is equal to or more than the applicable limit listed above, you cannot claim the EIC. Irs e file 2011 You do not need to read the rest of this publication. Irs e file 2011 Example—AGI is more than limit. Irs e file 2011 Your AGI is $38,550, you are single, and you have one qualifying child. Irs e file 2011 You cannot claim the EIC because your AGI is not less than $37,870. Irs e file 2011 However, if your filing status was married filing jointly, you might be able to claim the EIC because your AGI is less than $43,210. Irs e file 2011 Community property. Irs e file 2011   If you are married, but qualify to file as head of household under special rules for married taxpayers living apart (see Rule 3), and live in a state that has community property laws, your AGI includes that portion of both your and your spouse's wages that you are required to include in gross income. Irs e file 2011 This is different from the community property rules that apply under Rule 7. Irs e file 2011 Rule 2—You Must Have a Valid Social Security Number (SSN) To claim the EIC, you (and your spouse, if filing a joint return) must have a valid SSN issued by the Social Security Administration (SSA). Irs e file 2011 Any qualifying child listed on Schedule EIC also must have a valid SSN. Irs e file 2011 (See Rule 8 if you have a qualifying child. Irs e file 2011 ) If your social security card (or your spouse's, if filing a joint return) says “Not valid for employment” and your SSN was issued so that you (or your spouse) could get a federally funded benefit, you cannot get the EIC. Irs e file 2011 An example of a federally funded benefit is Medicaid. Irs e file 2011 If you have a card with the legend “Not valid for employment” and your immigration status has changed so that you are now a U. Irs e file 2011 S. Irs e file 2011 citizen or permanent resident, ask the SSA for a new social security card without the legend. Irs e file 2011 If you get the new card after you have already filed your return, you can file an amended return on Form 1040X, Amended U. Irs e file 2011 S. Irs e file 2011 Individual Income Tax Return, to claim the EIC. Irs e file 2011 U. Irs e file 2011 S. Irs e file 2011 citizen. Irs e file 2011   If you were a U. Irs e file 2011 S. Irs e file 2011 citizen when you received your SSN, you have a valid SSN. Irs e file 2011 Valid for work only with INS authorization or DHS authorization. Irs e file 2011   If your social security card reads “Valid for work only with INS authorization” or “Valid for work only with DHS authorization,” you have a valid SSN, but only if that authorization is still valid. Irs e file 2011 SSN missing or incorrect. Irs e file 2011   If an SSN for you or your spouse is missing from your tax return or is incorrect, you may not get the EIC. Irs e file 2011 Other taxpayer identification number. Irs e file 2011   You cannot get the EIC if, instead of an SSN, you (or your spouse, if filing a joint return) have an individual taxpayer identification number (ITIN). Irs e file 2011 ITINs are issued by the Internal Revenue Service to noncitizens who cannot get an SSN. Irs e file 2011 No SSN. Irs e file 2011   If you do not have a valid SSN, put “No” next to line 64a (Form 1040), line 38a (Form 1040A), or line 8a (Form 1040EZ). Irs e file 2011 You cannot claim the EIC. Irs e file 2011 Getting an SSN. Irs e file 2011   If you (or your spouse, if filing a joint return) do not have an SSN, you can apply for one by filing Form SS-5 with the SSA. Irs e file 2011 You can get Form SS-5 online at www. Irs e file 2011 socialsecurity. Irs e file 2011 gov, from your local SSA office, or by calling the SSA at 1-800-772-1213. Irs e file 2011 Filing deadline approaching and still no SSN. Irs e file 2011   If the filing deadline is approaching and you still do not have an SSN, you have two choices. Irs e file 2011 Request an automatic 6-month extension of time to file your return. Irs e file 2011 You can get this extension by filing Form 4868, Application for Automatic Extension of Time to File U. Irs e file 2011 S. Irs e file 2011 Individual Income Tax Return. Irs e file 2011 For more information, see the instructions for Form 4868. Irs e file 2011 File the return on time without claiming the EIC. Irs e file 2011 After receiving the SSN, file an amended return, Form 1040X, claiming the EIC. Irs e file 2011 Attach a filled-in Schedule EIC, Earned Income Credit, if you have a qualifying child. Irs e file 2011 Rule 3—Your Filing Status Cannot Be “Married Filing Separately” If you are married, you usually must file a joint return to claim the EIC. Irs e file 2011 Your filing status cannot be “Married filing separately. Irs e file 2011 ” Spouse did not live with you. Irs e file 2011   If you are married and your spouse did not live in your home at any time during the last 6 months of the year, you may be able to file as head of household, instead of married filing separately. Irs e file 2011 In that case, you may be able to claim the EIC. Irs e file 2011 For detailed information about filing as head of household, see Publication 501, Exemptions, Standard Deduction, and Filing Information. Irs e file 2011 Rule 4—You Must Be a U. Irs e file 2011 S. Irs e file 2011 Citizen or Resident Alien All Year If you (or your spouse, if married) were a nonresident alien for any part of the year, you cannot claim the earned income credit unless your filing status is married filing jointly. Irs e file 2011 You can use that filing status only if one spouse is a U. Irs e file 2011 S. Irs e file 2011 citizen or resident alien and you choose to treat the nonresident spouse as a U. Irs e file 2011 S. Irs e file 2011 resident. Irs e file 2011 If you make this choice, you and your spouse are taxed on your worldwide income. Irs e file 2011 If you need more information on making this choice, get Publication 519, U. Irs e file 2011 S. Irs e file 2011 Tax Guide for Aliens. Irs e file 2011 If you (or your spouse, if married) were a nonresident alien for any part of the year and your filing status is not married filing jointly, enter “No” on the dotted line next to line 64a (Form 1040) or in the space to the left of line 38a (Form 1040A). Irs e file 2011 Rule 5—You Cannot File Form 2555 or Form 2555-EZ You cannot claim the earned income credit if you file Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion. Irs e file 2011 You file these forms to exclude income earned in foreign countries from your gross income, or to deduct or exclude a foreign housing amount. Irs e file 2011 U. Irs e file 2011 S. Irs e file 2011 possessions are not foreign countries. Irs e file 2011 See Publication 54, Tax Guide for U. Irs e file 2011 S. Irs e file 2011 Citizens and Resident Aliens Abroad, for more detailed information. Irs e file 2011 Rule 6—Your Investment Income Must Be $3,300 or Less You cannot claim the earned income credit unless your investment income is $3,300 or less. Irs e file 2011 If your investment income is more than $3,300, you cannot claim the credit. Irs e file 2011 Form 1040EZ. Irs e file 2011   If you file Form 1040EZ, your investment income is the total of the amount on line 2 and the amount of any tax-exempt interest you wrote to the right of the words “Form 1040EZ” on line 2. Irs e file 2011 Form 1040A. Irs e file 2011   If you file Form 1040A, your investment income is the total of the amounts on lines 8a (taxable interest), 8b (tax-exempt interest), 9a (ordinary dividends), and 10 (capital gain distributions) on that form. Irs e file 2011 Form 1040. Irs e file 2011   If you file Form 1040, use Worksheet 1 in this chapter to figure your investment income. Irs e file 2011    Worksheet 1. Irs e file 2011 Investment Income If You Are Filing Form 1040 Use this worksheet to figure investment income for the earned income credit when you file Form 1040. Irs e file 2011 Interest and Dividends         1. Irs e file 2011 Enter any amount from Form 1040, line 8a 1. Irs e file 2011   2. Irs e file 2011 Enter any amount from Form 1040, line 8b, plus any amount on Form 8814, line 1b 2. Irs e file 2011   3. Irs e file 2011 Enter any amount from Form 1040, line 9a 3. Irs e file 2011   4. Irs e file 2011 Enter the amount from Form 1040, line 21, that is from Form 8814 if you are filing that form to report your child's interest and dividend income on your return. Irs e file 2011 (If your child received an Alaska Permanent Fund dividend, use Worksheet 2 in this chapter to figure the amount to enter on this line. Irs e file 2011 ) 4. Irs e file 2011   Capital Gain Net Income         5. Irs e file 2011 Enter the amount from Form 1040, line 13. Irs e file 2011 If the amount on that line is a loss, enter -0- 5. Irs e file 2011       6. Irs e file 2011 Enter any gain from Form 4797, Sales of Business Property, line 7. Irs e file 2011 If the amount on that line is a loss, enter -0-. Irs e file 2011 (But, if you completed lines 8 and 9 of Form 4797, enter the amount from line 9 instead. Irs e file 2011 ) 6. Irs e file 2011       7. Irs e file 2011 Substract line 6 of this worksheet from line 5 of this worksheet. Irs e file 2011 (If the result is less than zero, enter -0-. Irs e file 2011 ) 7. Irs e file 2011   Royalties and Rental Income From Personal Property         8. Irs e file 2011 Enter any royalty income from Schedule E, line 23b, plus any income from the rental of personal property shown on Form 1040, line 21 8. Irs e file 2011       9. Irs e file 2011 Enter any expenses from Schedule E, line 20, related to royalty income, plus any expenses from the rental of personal property deducted on Form 1040, line 36 9. Irs e file 2011       10. Irs e file 2011 Subtract the amount on line 9 of this worksheet from the amount on line 8. Irs e file 2011 (If the result is less than zero, enter -0-. Irs e file 2011 ) 10. Irs e file 2011   Passive Activities         11. Irs e file 2011 Enter the total of any net income from passive activities (such as income included on Schedule E, line 26, 29a (col. Irs e file 2011 (g)), 34a (col. Irs e file 2011 (d)), or 40). Irs e file 2011 (See instructions below for lines 11 and 12. Irs e file 2011 ) 11. Irs e file 2011       12. Irs e file 2011 Enter the total of any losses from passive activities (such as losses included on Schedule E, line 26, 29b (col. Irs e file 2011 (f)), 34b (col. Irs e file 2011 (c)), or 40). Irs e file 2011 (See instructions below for lines 11 and 12. Irs e file 2011 ) 12. Irs e file 2011       13. Irs e file 2011 Combine the amounts on lines 11 and 12 of this worksheet. Irs e file 2011 (If the result is less than zero, enter -0-. Irs e file 2011 ) 13. Irs e file 2011   14. Irs e file 2011 Add the amounts on lines 1, 2, 3, 4, 7, 10, and 13. Irs e file 2011 Enter the total. Irs e file 2011 This is your investment income 14. Irs e file 2011   15. Irs e file 2011 Is the amount on line 14 more than $3,300? ❑ Yes. Irs e file 2011 You cannot take the credit. Irs e file 2011  ❑ No. Irs e file 2011 Go to Step 3 of the Form 1040 instructions for lines 64a and 64b to find out if you can take the credit (unless you are using this publication to find out if you can take the credit; in that case, go to Rule 7, next). Irs e file 2011       Instructions for lines 11 and 12. Irs e file 2011 In figuring the amount to enter on lines 11 and 12, do not take into account any royalty income (or loss) included on line 26 of Schedule E or any amount included in your earned income. Irs e file 2011 To find out if the income on line 26 or line 40 of Schedule E is from a passive activity, see the Schedule E instructions. Irs e file 2011 If any of the rental real estate income (or loss) included on Schedule E, line 26, is not from a passive activity, print “NPA” and the amount of that income (or loss) on the dotted line next to line 26. Irs e file 2011 Worksheet 2. Irs e file 2011 Worksheet for Line 4 of Worksheet 1 Complete this worksheet only if Form 8814 includes an Alaska Permanent Fund dividend. Irs e file 2011 Note. Irs e file 2011 Fill out a separate Worksheet 2 for each Form 8814. Irs e file 2011     1. Irs e file 2011 Enter the amount from Form 8814, line 2a 1. Irs e file 2011   2. Irs e file 2011 Enter the amount from Form 8814, line 2b 2. Irs e file 2011   3. Irs e file 2011 Subtract line 2 from line 1 3. Irs e file 2011   4. Irs e file 2011 Enter the amount from Form 8814, line 1a 4. Irs e file 2011   5. Irs e file 2011 Add lines 3 and 4 5. Irs e file 2011   6. Irs e file 2011 Enter the amount of the child's Alaska Permanent Fund dividend 6. Irs e file 2011   7. Irs e file 2011 Divide line 6 by line 5. Irs e file 2011 Enter the result as a decimal (rounded to at least three places) 7. Irs e file 2011   8. Irs e file 2011 Enter the amount from Form 8814, line 12 8. Irs e file 2011   9. Irs e file 2011 Multiply line 7 by line 8 9. Irs e file 2011   10. Irs e file 2011 Subtract line 9 from line 8. Irs e file 2011 Enter the result on line 4 of Worksheet 1 10. Irs e file 2011     (If filing more than one Form 8814, enter on line 4 of Worksheet 1 the total of the amounts on line 10 of all Worksheets 2. Irs e file 2011 )     Example—completing Worksheet 2. Irs e file 2011 Your 10-year-old child has taxable interest income of $400, an Alaska Permanent Fund dividend of $1,000, and ordinary dividends of $1,100, of which $500 are qualified dividends. Irs e file 2011 You choose to report this income on your return. Irs e file 2011 You enter $400 on line 1a of Form 8814, $2,100 ($1,000 + $1,100) on line 2a, and $500 on line 2b. Irs e file 2011 After completing lines 4 through 11, you enter $400 on line 12 of Form 8814 and line 21 of Form 1040. Irs e file 2011 On Worksheet 2, you enter $2,100 on line 1, $500 on line 2, $1,600 on line 3, $400 on line 4, $2,000 on line 5, $1,000 on line 6, 0. Irs e file 2011 500 on line 7, $400 on line 8, $200 on line 9, and $200 on line 10. Irs e file 2011 You then enter $200 on line 4 of Worksheet 1. Irs e file 2011 Rule 7—You Must Have Earned Income This credit is called the “earned income” credit because, to qualify, you must work and have earned income. Irs e file 2011 If you are married and file a joint return, you meet this rule if at least one spouse works and has earned income. Irs e file 2011 If you are an employee, earned income includes all the taxable income you get from your employer. Irs e file 2011 Rule 15 has information that will help you figure the amount of your earned income. Irs e file 2011 If you are self-employed or a statutory employee, you will figure your earned income on EIC Worksheet B in the Form 1040 instructions. Irs e file 2011 Earned Income Earned income includes all of the following types of income. Irs e file 2011 Wages, salaries, tips, and other taxable employee pay. Irs e file 2011 Employee pay is earned income only if it is taxable. Irs e file 2011 Nontaxable employee pay, such as certain dependent care benefits and adoption benefits, is not earned income. Irs e file 2011 But there is an exception for nontaxable combat pay, which you can choose to include in earned income, as explained later in this chapter. Irs e file 2011 Net earnings from self-employment. Irs e file 2011 Gross income received as a statutory employee. Irs e file 2011 Wages, salaries, and tips. Irs e file 2011    Wages, salaries, and tips you receive for working are reported to you on Form W-2, in box 1. Irs e file 2011 You should report these on line 1 (Form 1040EZ) or line 7 (Forms 1040A and 1040). Irs e file 2011 Nontaxable combat pay election. Irs e file 2011   You can elect to include your nontaxable combat pay in earned income for the earned income credit. Irs e file 2011 The amount of your nontaxable combat pay should be shown on your Form W-2, in box 12, with code Q. Irs e file 2011 Electing to include nontaxable combat pay in earned income may increase or decrease your EIC. Irs e file 2011 For details, see Nontaxable combat pay in chapter 4. Irs e file 2011 Net earnings from self-employment. Irs e file 2011   You may have net earnings from self-employment if: You own your own business, or You are a minister or member of a religious order. Irs e file 2011 Minister's housing. Irs e file 2011   The rental value of a home or a housing allowance provided to a minister as part of the minister's pay generally is not subject to income tax but is included in net earnings from self-employment. Irs e file 2011 For that reason, it is included in earned income for the EIC (except in the cases described in Approved Form 4361 or Form 4029 , below). Irs e file 2011 Statutory employee. Irs e file 2011   You are a statutory employee if you receive a Form W-2 on which the “Statutory employee” box (box 13) is checked. Irs e file 2011 You report your income and expenses as a statutory employee on Schedule C or C-EZ (Form 1040). Irs e file 2011 Strike benefits. Irs e file 2011   Strike benefits paid by a union to its members are earned income. Irs e file 2011 Approved Form 4361 or Form 4029 This section is for persons who have an approved: Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners, or Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits. Irs e file 2011 Each approved form exempts certain income from social security taxes. Irs e file 2011 Each form is discussed here in terms of what is or is not earned income for the EIC. Irs e file 2011 Form 4361. Irs e file 2011   Whether or not you have an approved Form 4361, amounts you received for performing ministerial duties as an employee count as earned income. Irs e file 2011 This includes wages, salaries, tips, and other taxable employee compensation. Irs e file 2011 A nontaxable housing allowance or the nontaxable rental value of a home is not earned income. Irs e file 2011 Also, amounts you received for performing ministerial duties, but not as an employee, do not count as earned income. Irs e file 2011 Examples include fees for performing marriages and honoraria for delivering speeches. Irs e file 2011 Form 4029. Irs e file 2011   Whether or not you have an approved Form 4029, all wages, salaries, tips, and other taxable employee compensation count as earned income. Irs e file 2011 However, amounts you received as a self-employed individual do not count as earned income. Irs e file 2011 Also, in figuring earned income, do not subtract losses on Schedule C, C-EZ, or F from wages on line 7 of Form 1040. Irs e file 2011 Disability Benefits If you retired on disability, taxable benefits you receive under your employer's disability retirement plan are considered earned income until you reach minimum retirement age. Irs e file 2011 Minimum retirement age generally is the earliest age at which you could have received a pension or annuity if you were not disabled. Irs e file 2011 You must report your taxable disability payments on line 7 of either Form 1040 or Form 1040A until you reach minimum retirement age. Irs e file 2011 Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension and are not considered earned income. Irs e file 2011 Report taxable pension payments on Form 1040, lines 16a and 16b, or Form 1040A, lines 12a and 12b. Irs e file 2011 Disability insurance payments. Irs e file 2011   Payments you received from a disability insurance policy that you paid the premiums for are not earned income. Irs e file 2011 It does not matter whether you have reached minimum retirement age. Irs e file 2011 If this policy is through your employer, the amount may be shown in box 12 of your Form W-2 with code “J. Irs e file 2011 ” Income That Is Not Earned Income Examples of items that are not earned income include interest and dividends, pensions and annuities, social security and railroad retirement benefits (including disability benefits), alimony and child support, welfare benefits, workers' compensation benefits, unemployment compensation (insurance), nontaxable foster care payments, and veterans' benefits, including VA rehabilitation payments. Irs e file 2011 Do not include any of these items in your earned income. Irs e file 2011 Earnings while an inmate. Irs e file 2011   Amounts received for work performed while an inmate in a penal institution are not earned income when figuring the earned income credit. Irs e file 2011 This includes amounts for work performed while in a work release program or while in a halfway house. Irs e file 2011 Workfare payments. Irs e file 2011   Nontaxable workfare payments are not earned income for the EIC. Irs e file 2011 These are cash payments certain people receive from a state or local agency that administers public assistance programs funded under the federal Temporary Assistance for Needy Families (TANF) program in return for certain work activities such as (1) work experience activities (including remodeling or repairing public housing) if sufficient private sector employment is not available, or (2) community service program activities. Irs e file 2011 Community property. Irs e file 2011   If you are married, but qualify to file as head of household under special rules for married taxpayers living apart (see Rule 3), and live in a state that has community property laws, your earned income for the EIC does not include any amount earned by your spouse that is treated as belonging to you under those laws. Irs e file 2011 That amount is not earned income for the EIC, even though you must include it in your gross income on your income tax return. Irs e file 2011 Your earned income includes the entire amount you earned, even if part of it is treated as belonging to your spouse under your state's community property laws. Irs e file 2011 Nevada, Washington, and California domestic partners. Irs e file 2011   If you are a registered domestic partner in Nevada, Washington, or California, the same rules apply. Irs e file 2011 Your earned income for the EIC does not include any amount earned by your partner. Irs e file 2011 Your earned income includes the entire amount you earned. Irs e file 2011 For details, see Publication 555. Irs e file 2011 Conservation Reserve Program (CRP) payments. Irs e file 2011   If you were receiving social security retirement benefits or social security disability benefits at the time you received any CRP payments, your CRP payments are not earned income for the EIC. Irs e file 2011 Nontaxable military pay. Irs e file 2011   Nontaxable pay for members of the Armed Forces is not considered earned income for the EIC. Irs e file 2011 Examples of nontaxable military pay are combat pay, the Basic Allowance for Housing (BAH), and the Basic Allowance for Subsistence (BAS). Irs e file 2011 See Publication 3, Armed Forces' Tax Guide, for more information. Irs e file 2011    Combat pay. Irs e file 2011 You can elect to include your nontaxable combat pay in earned income for the EIC. Irs e file 2011 See Nontaxable combat pay in chapter 4. Irs e file 2011 Chapter 2—Rules If You Have a Qualifying Child If you have met all the rules in chapter 1, use this chapter to see if you have a qualifying child. Irs e file 2011 This chapter discusses Rules 8 through 10. Irs e file 2011 You must meet all three of those rules, in addition to the rules in chapters 1 and 4, to qualify for the earned income credit with a qualifying child. Irs e file 2011 You must file Form 1040 or Form 1040A to claim the EIC with a qualifying child. Irs e file 2011 (You cannot file Form 1040EZ. Irs e file 2011 ) You also must complete Schedule EIC and attach it to your return. Irs e file 2011 If you meet all the rules in chapter 1 and this chapter, read chapter 4 to find out what to do next. Irs e file 2011 No qualifying child. Irs e file 2011   If you do not meet Rule 8, you do not have a qualifying child. Irs e file 2011 Read chapter 3 to find out if you can get the earned income credit without a qualifying child. Irs e file 2011 Rule 8—Your Child Must Meet the Relationship, Age, Residency, and Joint Return Tests Your child is a qualifying child if your child meets four tests. Irs e file 2011 The fours tests are: Relationship, Age, Residency, and Joint return. Irs e file 2011 The four tests are illustrated in Figure 1. Irs e file 2011 The paragraphs that follow contain more information about each test. Irs e file 2011 Relationship Test To be your qualifying child, a child must be your: Son, daughter, stepchild, foster child, or a descendant of any of them (for example, your grandchild), or Brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them (for example, your niece or nephew). Irs e file 2011 The following definitions clarify the relationship test. Irs e file 2011 Adopted child. Irs e file 2011   An adopted child is always treated as your own child. Irs e file 2011 The term “adopted child” includes a child who was lawfully placed with you for legal adoption. Irs e file 2011 Foster child. Irs e file 2011   For the EIC, a person is your foster child if the child is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction. Irs e file 2011 (An authorized placement agency includes a state or local government agency. Irs e file 2011 It also includes a tax-exempt organization licensed by a state. Irs e file 2011 In addition, it includes an Indian tribal government or an organization authorized by an Indian tribal government to place Indian children. Irs e file 2011 ) Example. Irs e file 2011 Debbie, who is 12 years old, was placed in your care 2 years ago by an authorized agency responsible for placing children in foster homes. Irs e file 2011 Debbie is your foster child. Irs e file 2011 Figure 1. Irs e file 2011 Tests for Qualifying Child Please click here for the text description of the image. Irs e file 2011 Conditions for Qualifying Child Age Test Your child must be: Under age 19 at the end of 2013 and younger than you (or your spouse, if filing jointly), Under age 24 at the end of 2013, a student, and younger than you (or your spouse, if filing jointly, or Permanently and totally disabled at any time during 2013, regardless of age. Irs e file 2011 The following examples and definitions clarify the age test. Irs e file 2011 Example 1—child not under age 19. Irs e file 2011 Your son turned 19 on December 10. Irs e file 2011 Unless he was permanently and totally disabled or a student, he is not a qualifying child because, at the end of the year, he was not under age 19. Irs e file 2011 Example 2—child not younger than you or your spouse. Irs e file 2011 Your 23-year-old brother, who is a full-time student and unmarried, lives with you and your spouse. Irs e file 2011 He is not disabled. Irs e file 2011 Both you and your spouse are 21 years old, and you file a joint return. Irs e file 2011 Your brother is not your qualifying child because he is not younger than you or your spouse. Irs e file 2011 Example 3—child younger than your spouse but not younger than you. Irs e file 2011 The facts are the same as in Example 2 except that your spouse is 25 years old. Irs e file 2011 Because your brother is younger than your spouse, he is your qualifying child, even though he is not younger than you. Irs e file 2011 Student defined. Irs e file 2011   To qualify as a student, your child must be, during some part of each of any 5 calendar months during the calendar year: A full-time student at a school that has a regular teaching staff, course of study, and regular student body at the school, or A student taking a full-time, on-farm training course given by a school described in (1), or a state, county, or local government. Irs e file 2011   The 5 calendar months need not be consecutive. Irs e file 2011   A full-time student is a student who is enrolled for the number of hours or courses the school considers to be full-time attendance. Irs e file 2011 School defined. Irs e file 2011   A school can be an elementary school, junior or senior high school, college, university, or technical, trade, or mechanical school. Irs e file 2011 However, on-the-job training courses, correspondence schools, and schools offering courses only through the Internet do not count as schools for the EIC. Irs e file 2011 Vocational high school students. Irs e file 2011   Students who work in co-op jobs in private industry as a part of a school's regular course of classroom and practical training are considered full-time students. Irs e file 2011 Permanently and totally disabled. Irs e file 2011   Your child is permanently and totally disabled if both of the following apply. Irs e file 2011 He or she cannot engage in any substantial gainful activity because of a physical or mental condition. Irs e file 2011 A doctor determines the condition has lasted or can be expected to last continuously for at least a year or can lead to death. Irs e file 2011 Residency Test Your child must have lived with you in the United States for more than half of 2013. Irs e file 2011 The following definitions clarify the residency test. Irs e file 2011 United States. Irs e file 2011   This means the 50 states and the District of Columbia. Irs e file 2011 It does not include Puerto Rico or U. Irs e file 2011 S. Irs e file 2011 possessions such as Guam. Irs e file 2011 Homeless shelter. Irs e file 2011   Your home can be any location where you regularly live. Irs e file 2011 You do not need a traditional home. Irs e file 2011 For example, if your child lived with you for more than half the year in one or more homeless shelters, your child meets the residency test. Irs e file 2011 Military personnel stationed outside the United States. Irs e file 2011   U. Irs e file 2011 S. Irs e file 2011 military personnel stationed outside the United States on extended active duty are considered to live in the United States during that duty period for purposes of the EIC. Irs e file 2011 Extended active duty. Irs e file 2011   Extended active duty means you are called or ordered to duty for an indefinite period or for a period of more than 90 days. Irs e file 2011 Once you begin serving your extended active duty, you are still considered to have been on extended active duty even if you do not serve more than 90 days. Irs e file 2011 Birth or death of child. Irs e file 2011    child who was born or died in 2013 is treated as having lived with you for more than half of 2013 if your home was the child's home for more than half the time he or she was alive in 2013. Irs e file 2011 Temporary absences. Irs e file 2011   Count time that you or your child is away from home on a temporary absence due to a special circumstance as time the child lived with you. Irs e file 2011 Examples of a special circumstance include illness, school attendance, business, vacation, military service, and detention in a juvenile facility. Irs e file 2011 Kidnapped child. Irs e file 2011   A kidnapped child is treated as living with you for more than half of the year if the child lived with you for more than half the part of the year before the date of the kidnapping. Irs e file 2011 The child must be presumed by law enforcement authorities to have been kidnapped by someone who is not a member of your family or the child's family. Irs e file 2011 This treatment applies for all years until the child is returned. Irs e file 2011 However, the last year this treatment can apply is the earlier of: The year there is a determination that the child is dead, or The year the child would have reached age 18. Irs e file 2011   If your qualifying child has been kidnapped and meets these requirements, enter “KC,” instead of a number, on line 6 of Schedule EIC. Irs e file 2011 Joint Return Test To meet this test, the child cannot file a joint return for the year. Irs e file 2011 Exception. Irs e file 2011   An exception to the joint return test applies if your child and his or her spouse file a joint return only to claim a refund of income tax withheld or estimated tax paid. Irs e file 2011 Example 1—child files joint return. Irs e file 2011 You supported your 18-year-old daughter, and she lived with you all year while her husband was in the Armed Forces. Irs e file 2011 He earned $25,000 for the year. Irs e file 2011 The couple files a joint return. Irs e file 2011 Because your daughter and her husband file a joint return, she is not your qualifying child. Irs e file 2011 Example 2—child files joint return to get refund of tax withheld. Irs e file 2011 Your 18-year-old son and his 17-year-old wife had $800 of wages from part-time jobs and no other income. Irs e file 2011 They do not have a child. Irs e file 2011 Neither is required to file a tax return. Irs e file 2011 Taxes were taken out of their pay, so they file a joint return only to get a refund of the withheld taxes. Irs e file 2011 The exception to the joint return test applies, so your son may be your qualifying child if all the other tests are met. Irs e file 2011 Example 3—child files joint return to claim American opportunity credit. Irs e file 2011 The facts are the same as in Example 2 except no taxes were taken out of your son's pay. Irs e file 2011 He and his wife are not required to file a tax return, but they file a joint return to claim an American opportunity credit of $124 and get a refund of that amount. Irs e file 2011 Because claiming the American opportunity credit is their reason for filing the return, they are not filing it only to claim a refund of income tax withheld or estimated tax paid. Irs e file 2011 The exception to the joint return test does not apply, so your son is not your qualifying child. Irs e file 2011 Married child. Irs e file 2011   Even if your child does not file a joint return, if your child was married at the end of the year, he or she cannot be your qualifying child unless: You can claim an exemption for the child, or The reason you cannot claim an exemption for the child is that you let the child's other parent claim the exemption under the Special rule for divorced or separated parents (or parents who live apart) described later. Irs e file 2011    Social security number. Irs e file 2011 Your qualifying child must have a valid social security number (SSN), unless the child was born and died in 2013 and you attach to your return a copy of the child's birth certificate, death certificate, or hospital records showing a live birth. Irs e file 2011 You cannot claim the EIC on the basis of a qualifying child if: The qualifying child's SSN is missing from your tax return or is incorrect, The qualifying child's social security card says “Not valid for employment” and was issued for use in getting a federally funded benefit, or Instead of an SSN, the qualifying child has: An individual taxpayer identification number (ITIN), which is issued to a noncitizen who cannot get an SSN, or An adoption taxpayer identification number (ATIN), issued to adopting parents who cannot get an SSN for the child being adopted until the adoption is final. Irs e file 2011   If you have more than one qualifying child and only one has a valid SSN, you can use only that child to claim the EIC. Irs e file 2011 For more information about SSNs, see Rule 2. Irs e file 2011 Rule 9—Your Qualifying Child Cannot Be Used by More Than One Person To Claim the EIC Sometimes a child meets the tests to be a qualifying child of more than one person. Irs e file 2011 However, only one of these persons can actually treat the child as a qualifying child. Irs e file 2011 Only that person can use the child as a qualifying child to take all of the following tax benefits (provided the person is eligible for each benefit). Irs e file 2011 The exemption for the child. Irs e file 2011 The child tax credit. Irs e file 2011 Head of household filing status. Irs e file 2011 The credit for child and dependent care expenses. Irs e file 2011 The exclusion for dependent care benefits. Irs e file 2011 The EIC. Irs e file 2011 The other person cannot take any of these benefits based on this qualifying child. Irs e file 2011 In other words, you and the other person cannot agree to divide these tax benefits between you. Irs e file 2011 The other person cannot take any of these tax benefits unless he or she has a different qualifying child. Irs e file 2011 The tiebreaker rules, which follow, explain who, if anyone, can claim the EIC when more than one person has the same qualifying child. Irs e file 2011 However, the tiebreaker rules do not apply if the other person is your spouse and you file a joint return. Irs e file 2011 Tiebreaker rules. Irs e file 2011   To determine which person can treat the child as a qualifying child to claim the six tax benefits just listed, the following tiebreaker rules apply. Irs e file 2011 If only one of the persons is the child's parent, the child is treated as the qualifying child of the parent. Irs e file 2011 If the parents file a joint return together and can claim the child as a qualifying child, the child is treated as the qualifying child of the parents. Irs e file 2011 If the parents do not file a joint return together but both parents claim the child as a qualifying child, the IRS will treat the child as the qualifying child of the parent with whom the child lived for the longer period of time during the year. Irs e file 2011 If the child lived with each parent for the same amount of time, the IRS will treat the child as the qualifying child of the parent who had the higher adjusted gross income (AGI) for the year. Irs e file 2011 If no parent can claim the child as a qualifying child, the child is treated as the qualifying child of the person who had the highest AGI for the year. Irs e file 2011 If a parent can claim the child as a qualifying child but no parent does so claim the child, the child is treated as the qualifying child of the person who had the highest AGI for the year, but only if that person's AGI is higher than the highest AGI of any of the child's parents who can claim the child. Irs e file 2011 If the child's parents file a joint return with each other, this rule can be applied by treating the parents' total AGI as divided evenly between them. Irs e file 2011 See Example 8. Irs e file 2011   Subject to these tiebreaker rules, you and the other person may be able to choose which of you claims the child as a qualifying child. Irs e file 2011 See Examples 1 through 13. Irs e file 2011   If you cannot claim the EIC because your qualifying child is treated under the tiebreaker rules as the qualifying child of another person for 2013, you may be able to take the EIC using a different qualifying child, but you cannot take the EIC using the rules in chapter 3 for people who do not have a qualifying child. Irs e file 2011 If the other person cannot claim the EIC. Irs e file 2011   If you and someone else have the same qualifying child but the other person cannot claim the EIC because he or she is not eligible or his or her earned income or AGI is too high, you may be able to treat the child as a qualifying child. Irs e file 2011 See Examples 6 and 7. Irs e file 2011 But you cannot treat the child as a qualifying child to claim the EIC if the other person uses the child to claim any of the other six tax benefits listed earlier in this chapter. Irs e file 2011 Examples. Irs e file 2011    The following examples may help you in determining whether you can claim the EIC when you and someone else have the same qualifying child. Irs e file 2011 Example 1—child lived with parent and grandparent. Irs e file 2011 You and your 2-year-old son Jimmy lived with your mother all year. Irs e file 2011 You are 25 years old, unmarried, and your AGI is $9,000. Irs e file 2011 Your only income was $9,000 from a part-time job. Irs e file 2011 Your mother's only income was $20,000 from her job, and her AGI is $20,000. Irs e file 2011 Jimmy's father did not live with you or Jimmy. Irs e file 2011 The special rule explained later for divorced or separated parents (or parents who live apart) does not apply. Irs e file 2011 Jimmy is a qualifying child of both you and your mother because he meets the relationship, age, residency, and joint return tests for both you and your mother. Irs e file 2011 However, only one of you can treat him as a qualifying child to claim the EIC (and the other tax benefits listed earlier in this chapter for which that person qualifies). Irs e file 2011 He is not a qualifying child of anyone else, including his father. Irs e file 2011 If you do not claim Jimmy as a qualifying child for the EIC or any of the other tax benefits listed earlier, your mother can treat him as a qualifying child to claim the EIC (and any of the other tax benefits listed earlier for which she qualifies). Irs e file 2011 Example 2—parent has higher AGI than grandparent. Irs e file 2011 The facts are the same as in Example 1 except your AGI is $25,000. Irs e file 2011 Because your mother's AGI is not higher than yours, she cannot claim Jimmy as a qualifying child. Irs e file 2011 Only you can claim him. Irs e file 2011 Example 3—two persons claim same child. Irs e file 2011 The facts are the same as in Example 1 except that you and your mother both claim Jimmy as a qualifying child. Irs e file 2011 In this case, you as the child's parent will be the only one allowed to claim Jimmy as a qualifying child for the EIC and the other tax benefits listed earlier for which you qualify. Irs e file 2011 The IRS will disallow your mother's claim to the EIC and any of the other tax benefits listed earlier unless she has another qualifying child. Irs e file 2011 Example 4—qualifying children split between two persons. Irs e file 2011 The facts are the same as in Example 1 except that you also have two other young children who are qualifying children of both you and your mother. Irs e file 2011 Only one of you can claim each child. Irs e file 2011 However, if your mother's AGI is higher than yours, you can allow your mother to claim one or more of the children. Irs e file 2011 For example, if you claim one child, your mother can claim the other two. Irs e file 2011 Example 5—taxpayer who is a qualifying child. Irs e file 2011 The facts are the same as in Example 1 except that you are only 18 years old. Irs e file 2011 This means you are a qualifying child of your mother. Irs e file 2011 Because of Rule 10, discussed next, you cannot claim the EIC and cannot claim your son as a qualifying child. Irs e file 2011 Only your mother may be able to treat Jimmy as a qualifying child to claim the EIC. Irs e file 2011 If your mother meets all the other requirements for claiming the EIC and you do not claim Jimmy as a qualifying child for any of the other tax benefits listed earlier, your mother can claim both you and Jimmy as qualifying children for the EIC. Irs e file 2011 Example 6—grandparent with too much earned income to claim EIC. Irs e file 2011 The facts are the same as in Example 1 except that your mother earned $50,000 from her job. Irs e file 2011 Because your mother's earned income is too high for her to claim the EIC, only you can claim the EIC using your son. Irs e file 2011 Example 7—parent with too much earned income to claim EIC. Irs e file 2011 The facts are the same as in Example 1 except that you earned $50,000 from your job and your AGI is $50,500. Irs e file 2011 Your earned income is too high for you to claim the EIC. Irs e file 2011 But your mother cannot claim the EIC either, because her AGI is not higher than yours. Irs e file 2011 Example 8—child lived with both parents and grandparent. Irs e file 2011 The facts are the same as in Example 1 except that you and Jimmy's father are married to each other, live with Jimmy and your mother, and have AGI of $30,000 on a joint return. Irs e file 2011 If you and your husband do not claim Jimmy as a qualifying child for the EIC or any of the other tax benefits listed earlier, your mother can claim him instead. Irs e file 2011 Even though the AGI on your joint return, $30,000, is more than your mother's AGI of $20,000, for this purpose half of the joint AGI can be treated as yours and half as your husband's. Irs e file 2011 In other words, each parent's AGI can be treated as $15,000. Irs e file 2011 Example 9—separated parents. Irs e file 2011 You, your husband, and your 10-year-old son Joey lived together until August 1, 2013, when your husband moved out of the household. Irs e file 2011 In August and September, Joey lived with you. Irs e file 2011 For the rest of the year, Joey lived with your husband, who is Joey's father. Irs e file 2011 Joey is a qualifying child of both you and your husband because he lived with each of you for more than half the year and because he met the relationship, age, and joint return tests for both of you. Irs e file 2011 At the end of the year, you and your husband still were not divorced, legally separated, or separated under a written separation agreement, so the Special rule for divorced or separated parents (or parents who live apart) does not apply. Irs e file 2011 You and your husband will file separate returns. Irs e file 2011 Your husband agrees to let you treat Joey as a qualifying child. Irs e file 2011 This means, if your husband does not claim Joey as a qualifying child for any of the tax benefits listed earlier, you can claim him as a qualifying child for any tax benefit listed earlier for which you qualify. Irs e file 2011 However, your filing status is married filing separately, so you cannot claim the EIC or the credit for child and dependent care expenses. Irs e file 2011 See Rule 3. Irs e file 2011 Example 10—separated parents claim same child. Irs e file 2011 The facts are the same as in Example 9 except that you and your husband both claim Joey as a qualifying child. Irs e file 2011 In this case, only your husband will be allowed to treat Joey as a qualifying child. Irs e file 2011 This is because, during 2013, the boy lived with him longer than with you. Irs e file 2011 You cannot claim the EIC (either with or without a qualifying child). Irs e file 2011 However, your husband's filing status is married filing separately, so he cannot claim the EIC or the credit for child and dependent care expenses. Irs e file 2011 See Rule 3. Irs e file 2011 Example 11—unmarried parents. Irs e file 2011 You, your 5-year-old son, and your son's father lived together all year. Irs e file 2011 You and your son's father are not married. Irs e file 2011 Your son is a qualifying child of both you and his father because he meets the relationship, age, residency, and joint return tests for both you and his father. Irs e file 2011 Your earned income and AGI are $12,000, and your son's father's earned income and AGI are $14,000. Irs e file 2011 Neither of you had any other income. Irs e file 2011 Your son's father agrees to let you treat the child as a qualifying child. Irs e file 2011 This means, if your son's father does not claim your son as a qualifying child for the EIC or any of the other tax benefits listed earlier, you can claim him as a qualifying child for the EIC and any of the other tax benefits listed earlier for which you qualify. Irs e file 2011 Example 12—unmarried parents claim same child. Irs e file 2011 The facts are the same as in Example 11 except that you and your son's father both claim your son as a qualifying child. Irs e file 2011 In this case, only your son's father will be allowed to treat your son as a qualifying child. Irs e file 2011 This is because his AGI, $14,000, is more than your AGI, $12,000. Irs e file 2011 You cannot claim the EIC (either with or without a qualifying child). Irs e file 2011 Example 13—child did not live with a parent. Irs e file 2011 You and your 7-year-old niece, your sister's child, lived with your mother all year. Irs e file 2011 You are 25 years old, and your AGI is $9,300. Irs e file 2011 Your only income was from a part-time job. Irs e file 2011 Your mother's AGI is $15,000. Irs e file 2011 Her only income was from her job. Irs e file 2011 Your niece's parents file jointly, have an AGI of less than $9,000, and do not live with you or their child. Irs e file 2011 Your niece is a qualifying child of both you and your mother because she meets the relationship, age, residency, and joint return tests for both you and your mother. Irs e file 2011 However, only your mother can treat her as a qualifying child. Irs e file 2011 This is because your mother's AGI, $15,000, is more than your AGI, $9,300. Irs e file 2011 Special rule for divorced or separated parents (or parents who live apart). Irs e file 2011   A child will be treated as the qualifying child of his or her noncustodial parent (for purposes of claiming an exemption and the child tax credit, but not for the EIC) if all of the following statements are true. Irs e file 2011 The parents: Are divorced or legally separated under a decree of divorce or separate maintenance, Are separated under a written separation agreement, or Lived apart at all time during the last 6 months of 2013, whether or not they are or were married. Irs e file 2011 The child received over half of his or her support for the year from the parents. Irs e file 2011 The child is in the custody of one or both parents for more than half of 2013. Irs e file 2011 Either of the following statements is true. Irs e file 2011 The custodial parent signs Form 8332 or a substantially similar statement that he or she will not claim the child as a dependent for the year, and the noncustodial parent attaches the form or statement to his or her return. Irs e file 2011 If the divorce decree or separation agreement went into effect after 1984 and before 2009, the noncustodial parent may be able to attach certain pages from the decree or agreement instead of Form 8332. Irs e file 2011 A pre-1985 decree of divorce or separate maintenance or written separation agreement that applies to 2013 provides that the noncustodial parent can claim the child as a dependent, and the noncustodial parent provides at least $600 for support of the child during 2013. Irs e file 2011 For details, see Publication 501. Irs e file 2011 Also see Applying Rule 9 to divorced or separated parents (or parents who live apart), next. Irs e file 2011 Applying Rule 9 to divorced or separated parents (or parents who live apart). Irs e file 2011   If a child is treated as the qualifying child of the noncustodial parent under the special rule just described for children of divorced or separated parents (or parents who live apart), only the noncustodial parent can claim an exemption and the child tax credit for the child. Irs e file 2011 However, the custodial parent, if eligible, or another eligible taxpayer can claim the child as a qualifying child for the EIC and other tax benefits listed earlier in this chapter. Irs e file 2011 If the child is the qualifying child of more than one person for these benefits, then the tiebreaker rules determine which person can treat the child as a qualifying child. Irs e file 2011 Example 1. Irs e file 2011 You and your 5-year-old son lived all year with your mother, who paid the entire cost of keeping up the home. Irs e file 2011 Your AGI is $10,000. Irs e file 2011 Your mother’s AGI is $25,000. Irs e file 2011 Your son's father did not live with you or your son. Irs e file 2011 Under the Special rule for divorced or separated parents (or parents who live apart), your son is treated as the qualifying child of his father, who can claim an exemption and the child tax credit for the child. Irs e file 2011 However, your son's father cannot claim your son as a qualifying child for head of household filing status, the credit for child and dependent care expenses, the exclusion for dependent care benefits, or the EIC. Irs e file 2011 You and your mother did not have any child care expenses or dependent care benefits. Irs e file 2011 If you do not claim your son as a qualifying child, your mother can claim him as a qualifying child for the EIC and head of household filing status, if she qualifies for these tax benefits. Irs e file 2011 Example 2. Irs e file 2011 The facts are the same as in Example 1 except that your AGI is $25,000 and your mother's AGI is $21,000. Irs e file 2011 Your mother cannot claim your son as a qualifying child for any purpose because her AGI is not higher than yours. Irs e file 2011 Example 3. Irs e file 2011 The facts are the same as in Example 1 except that you and your mother both claim your son as a qualifying child for the EIC. Irs e file 2011 Your mother also claims him as a qualifying child for head of household filing status. Irs e file 2011 You as the child's parent will be the only one allowed to claim your son as a qualifying child for the EIC. Irs e file 2011 The IRS will disallow your mother's claim to the EIC and head of household filing status unless she has another qualifying child. Irs e file 2011 Rule 10—You Cannot Be a Qualifying Child of Another Taxpayer You are a qualifying child of another taxpayer (your parent, guardian, foster parent, etc. Irs e file 2011 ) if all of the following statements are true. Irs e file 2011 You are that person's son, daughter, stepchild, foster child, or a descendant of any of them. Irs e file 2011 Or, you are that person's brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them. Irs e file 2011 You were: Under age 19 at the end of the year and younger than that person (or that person's spouse, if the person files jointly), Under age 24 at the end of the year, a student, and younger than that person (or that person's spouse, if the person files jointly), or Permanently and totally disabled, regardless of age. Irs e file 2011 You lived with that person in the United States for more than half of the year. Irs e file 2011 You are not filing a joint return for the year (or are filing a joint return only to claim a refund of withheld income tax or estimated tax paid). Irs e file 2011 For more details about the tests to be a qualifying child, see Rule 8. Irs e file 2011 If you are a qualifying child of another taxpayer, you cannot claim the EIC. Irs e file 2011 This is true even if the person for whom you are a qualifying child does not claim the EIC or meet all of the rules to claim the EIC. Irs e file 2011 Put “No” beside line 64a (Form 1040) or line 38a (Form 1040A). Irs e file 2011 Example. Irs e file 2011 You and your daughter lived with your mother all year. Irs e file 2011 You are 22 years old, unmarried, and attended a trade school full time. Irs e file 2011 You had a part-time job and earned $5,700. Irs e file 2011 You had no other income. Irs e file 2011 Because you meet the relationship, age, residency, and joint return tests, you are a qualifying child of your mother. Irs e file 2011 She can claim the EIC if she meets all the other requirements. Irs e file 2011 Because you are your mother's qualifying child, you cannot claim the EIC. Irs e file 2011 This is so even if your mother cannot or does not claim the EIC. Irs e file 2011 Child of person not required to file a return. Irs e file 2011   You are not the qualifying child of another taxpayer (and so may qualify to claim the EIC) if the person for whom you met the relationship, age, residency, and joint return tests is not required to file an income tax return and either: Does not file an income tax return, or Files a return only to get a refund of income tax withheld or estimated tax paid. Irs e file 2011 Example 1—return not required. Irs e file 2011 The facts are the same as in the last example except your mother had no gross income, is not required to file a 2013 tax return, and does not file a 2013 tax return. Irs e file 2011 As a result, you are not your mother's qualifying child. Irs e file 2011 You can claim the EIC if you meet all the other requirements to do so. Irs e file 2011 Example 2—return filed to get refund of tax withheld. Irs e file 2011 The facts are the same as in Example 1 except your mother had wages of $1,500 and had income tax withheld from her wages. Irs e file 2011 She files a return only to get a refund of the income tax withheld and does not claim the EIC or any other tax credits or deductions. Irs e file 2011 As a result, you are not your mother's qualifying child. Irs e file 2011 You can claim the EIC if you meet all the other requirements to do so. Irs e file 2011 Example 3—return filed to get EIC. Irs e file 2011 The facts are the same as in Example 2 except your mother claimed the EIC on her return. Irs e file 2011 Since she filed the return to get the EIC, she is not filing it only to get a refund of income tax withheld. Irs e file 2011 As a result, you are your mother's qualifying child. Irs e file 2011 You cannot claim the EIC. Irs e file 2011 Chapter 3—Rules If You Do Not Have a Qualifying Child Use this chapter if you do not have a qualifying child and have met all the rules in chapter 1. Irs e file 2011 This chapter discusses Rules 11 through 14. Irs e file 2011 You must meet all four of those rules, in addition to the rules in chapters 1 and 4, to qualify for the earned income credit without a qualifying child. Irs e file 2011 You can file Form 1040, Form 1040A, or Form 1040EZ to claim the EIC without a qualifying child. Irs e file 2011 If you meet all the rules in chapter 1 and this chapter, read chapter 4 to find out what to do next. Irs e file 2011 If you have a qualifying child. Irs e file 2011   If you meet Rule 8, you have a qualifying child. Irs e file 2011 If you meet Rule 8 and do not claim the EIC with a qualifying child, you cannot claim the EIC without a qualifying child. Irs e file 2011 Rule 11—You Must Be at Least Age 25 but Under Age 65 You must be at least age 25 but under age 65 at the end of 2013. Irs e file 2011 If you are married filing a joint return, either you or your spouse must be at least age 25 but under age 65 at the end of 2013. Irs e file 2011 It does not matter which spouse meets the age test, as long as one of the spouses does. Irs e file 2011 You meet the age test if you were born after December 31, 1948, and before January 2, 1989. Irs e file 2011 If you are married filing a joint return, you meet the age test if either you or your spouse was born after December 31, 1948, and before January 2, 1989. Irs e file 2011 If neither you nor your spouse meets the age test, you cannot claim the EIC. Irs e file 2011 Put “No” next to line 64a (Form 1040), line 38a (Form 1040A), or line 8a (Form 1040EZ). Irs e file 2011 Death of spouse. Irs e file 2011   If you are filing a joint return with your spouse who died in 2013, you meet the age test if your spouse was at least age 25 but under age 65 at the time of death. Irs e file 2011 Example 1. Irs e file 2011 You are age 28 and unmarried. Irs e file 2011 You meet the age test. Irs e file 2011 Example 2—spouse meets age test. Irs e file 2011 You are married and filing a joint return. Irs e file 2011 You are age 23 and your spouse is age 27. Irs e file 2011 You meet the age test because your spouse is at least age 25 but under age 65. Irs e file 2011 Example 3—spouse dies in 2013. Irs e file 2011 You are married and filing a joint return with your spouse who died in August 2013. Irs e file 2011 You are age 67. Irs e file 2011 Your spouse would have become age 65 in November 2013. Irs e file 2011 Because your spouse was under age 65 when she died, you meet the age test. Irs e file 2011 Rule 12—You Cannot Be the Dependent of Another Person If you are not filing a joint return, you meet this rule if: You checked box 6a on Form 1040 or 1040A, or You did not check the “You” box on line 5 of Form 1040EZ, and you entered $10,000 on that line. Irs e file 2011 If you are filing a joint return, you meet this rule if: You checked both box 6a and box 6b on Form 1040 or 1040A, or You and your spouse did not check either the “You” box or the “Spouse” box on line 5 of Form 1040EZ, and you entered $20,000 on that line. Irs e file 2011 If you are not sure whether someone else can claim you as a dependent, get Publication 501 and read the rules for claiming a dependent. Irs e file 2011 If someone else can claim you as a dependent on his or her return, but does not, you still cannot claim the credit. Irs e file 2011 Example 1. Irs e file 2011 In 2013, you were age 25, single, and living at home with your parents. Irs e file 2011 You worked and were not a student. Irs e file 2011 You earned $7,500. Irs e file 2011 Your parents cannot claim you as a dependent. Irs e file 2011 When you file your return, you claim an exemption for yourself by not checking the You box on line 5 of your Form 1040EZ and by entering $10,000 on that line. Irs e file 2011 You meet this rule. Irs e file 2011 You can claim the EIC if you meet all the other requirements. Irs e file 2011 Example 2. Irs e file 2011 The facts are the same as in Example 1, except that you earned $2,000. Irs e file 2011 Your parents can claim you as a dependent but decide not to. Irs e file 2011 You do not meet this rule. Irs e file 2011 You cannot claim the credit because your parents could have claimed you as a dependent. Irs e file 2011 Joint returns. Irs e file 2011   You generally cannot be claimed as a dependent by another person if you are married and file a joint return. Irs e file 2011   However, another person may be able to claim you as a dependent if you and your spouse file a joint return merely to claim a refund of income tax withheld or estimated tax paid. Irs e file 2011 But neither you nor your spouse can be claimed as a dependent by another person if you claim the EIC on your joint return. Irs e file 2011 Example 1—return filed to get refund of tax withheld. Irs e file 2011 You are 26 years old. Irs e file 2011 You and your wife live with your parents and had $800 of wages from part-time jobs and no other income. Irs e file 2011 Neither you nor your wife is required to file a tax return. Irs e file 2011 You do not have a child. Irs e file 2011 Taxes were taken out of your pay so you file a joint return only to get a refund of the withheld taxes. Irs e file 2011 Your parents are not disqualified from claiming an exemption for you just because you filed a joint return. Irs e file 2011 They can claim exemptions for you and your wife if all the other tests to do so are met. Irs e file 2011 Example 2—return filed to get EIC. Irs e file 2011 The facts are the same as in Example 1except no taxes were taken out of your pay. Irs e file 2011 Also, you and your wife are not required to file a tax return, but you file a joint return to claim an EIC of $63 and get a refund of that amount. Irs e file 2011 Because claiming the EIC is your reason for filing the return, you are not filing it only to claim a refund of income tax withheld or estimated tax paid. Irs e file 2011 Your parents cannot claim an exemption for either you or your wife. Irs e file 2011 Rule 13—You Cannot Be a Qualifying Child of Another Taxpayer You are a qualifying child of another taxpayer (your parent, guardian, foster parent, etc. Irs e file 2011 ) if all of the following statements are true. Irs e file 2011 You are that person's son, daughter, stepchild, foster child, or a descendant of any of them. Irs e file 2011 Or, you are that person's brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them. Irs e file 2011 You were: Under age 19 at the end of the year and younger than that person (or that person's spouse, if the person files jointly), Under age 24 at the end of the year, a student, and younger than that person (or that person's spouse, if the person files jointly), or Permanently and totally disabled, regardless of age. Irs e file 2011 You lived with that person in the United States for more than half of the year. Irs e file 2011 You are not filing a joint return for the year (or are filing a joint return only to claim a refund of withheld income tax or estimated tax paid). Irs e file 2011 For more details about the tests to be a qualifying child, see Rule 8. Irs e file 2011 If you are a qualifying child of another taxpayer, you cannot claim the EIC. Irs e file 2011 This is true even if the person for whom you are a qualifying child does not claim the EIC or meet all of the rules to claim the EIC. Irs e file 2011 Put “No” next to line 64a (Form 1040), line 38a (Form 1040A), or line 8a (Form 1040EZ). Irs e file 2011 Example. Irs e file 2011 You lived with your mother all year. Irs e file 2011 You are age 26, unmarried, and permanently and totally disabled. Irs e file 2011 Your only income was from a community center where you went three days a week to answer telephones. Irs e file 2011 You earned $5,000 for the year and provided more than half of your own support. Irs e file 2011 Because you meet the relationship, age, residency, and joint return tests, you are a qualifying child of your mother for the EIC. Irs e file 2011 She can claim the EIC if she meets all the other requirements. Irs e file 2011 Because you are a qualifying child of your mother, you cannot claim the EIC. Irs e file 2011 This is so even if your mother cannot or does not claim the EIC. Irs e file 2011 Joint returns. Irs e file 2011   You generally cannot be a qualifying child of another taxpayer if you are married and file a joint return. Irs e file 2011   However, you may be a qualifying child of another taxpayer if you and your spouse file a joint return merely to claim a refund of income tax withheld or estimated tax paid. Irs e file 2011 But neither you nor your spouse can be a qualifying child of another taxpayer if you claim the EIC on your joint return. Irs e file 2011 Child of person not required to file a return. Irs e file 2011   You are not the qualifying child of another taxpayer (and so may qualify to claim the EIC) if the person for whom you meet the relationship, age, residency, and joint return tests is not required to file an income tax return and either: Does not file an income tax return, or Files a return only to get a refund of income tax withheld or estimated tax paid. Irs e file 2011 Example 1—return not required. Irs e file 2011 You lived all year with your father. Irs e file 2011 You are 27 years old, unmarried, permanently and totally disabled, and earned $13,000. Irs e file 2011 You have no other income, no children, and provided more than half of your own support. Irs e file 2011 Your father had no gross income, is not required to file a 2013 tax return, and does not file a 2013 tax return. Irs e file 2011 As a result, you are not your father's qualifying child. Irs e file 2011 You can claim the EIC if you meet all the other requirements to do so. Irs e file 2011 Example 2—return filed to get refund of tax withheld. Irs e file 2011 The facts are the same as in Example 1 except your father had wages of $1,500 and had income tax withheld from his wages. Irs e file 2011 He files a return only to get a refund of the income tax withheld and does not claim the EIC or any other tax credits or deductions. Irs e file 2011 As a result, you are not your father's qualifying child. Irs e file 2011 You can claim the EIC if you meet all the other requirements to do so. Irs e file 2011 Example 3—return filed to get EIC. Irs e file 2011 The facts are the same as in Example 2 except your father claimed the EIC on his return. Irs e file 2011 Since he filed the return to get the EIC, he is not filing it only to get a refund of income tax withheld. Irs e file 2011 As a result, you are your father's qualifying child. Irs e file 2011 You cannot claim the EIC. Irs e file 2011 Rule 14—You Must Have Lived in the United States More Than Half of the Year Your home (and your spouse's, if filing a joint return) must have been in the United States for more than half the year. Irs e file 2011 If it was not, put “No” next to line 64a (Form 1040), line 38a (Form 1040A), or line 8a (Form 1040EZ). Irs e file 2011 United States. Irs e file 2011   This means the 50 states and the District of Columbia. Irs e file 2011 It does not include Puerto Rico or U. Irs e file 2011 S. Irs e file 2011 possessions such as Guam. Irs e file 2011 Homeless shelter. Irs e file 2011   Your home can be any location where you regularly live. Irs e file 2011 You do not need a traditional home. Irs e file 2011 If you lived in one or more homeless shelters in the United States for more than half the year, you meet this rule. Irs e file 2011 Military personnel stationed outside the United States. Irs e file 2011   U. Irs e file 2011 S. Irs e file 2011 military personnel stationed outside the United States on extended active duty (defined in chapter 2) are considered to live in the United States during that duty period for purposes of the EIC. Irs e file 2011 Chapter 4—Figuring and Claiming the EIC You must meet one more rule to claim the EIC. Irs e file 2011 You need to know the amount of your earned income to see if you meet the rule in this chapter. Irs e file 2011 You also need to know that amount to figure your EIC. Irs e file 2011 Rule 15—Earned Income Limits Your earned income must be less than: $46,227 ($51,567 for married filing jointly) if you have three or more qualifying children, $43,038 ($48,378 for married filing jointly) if you have two qualifying children, $37,870 ($43,210 for married filing jointly) if you have one qualifying child, or $14,340 ($19,680 for married filing jointly) if you do not have a qualifying child. Irs e file 2011 Earned Income Earned income generally means wages, salaries, tips, other taxable employee pay, and net earnings from self-employment. Irs e file 2011 Employee pay is earned income only if it is taxable. Irs e file 2011 Nontaxable employee pay, such as certain dependent care benefits and adoption benefits, is not earned income. Irs e file 2011 But there is an exception for nontaxable combat pay, which you can choose to include in earned income. Irs e file 2011 Earned income is explained in detail in Rule 7 in chapter 1. Irs e file 2011 Figuring earned income. Irs e file 2011   If you are self-employed, a statutory employee, or a member of the clergy or a church employee who files Schedule SE (Form 1040), you will figure your earned income when you fill out Part 4 of EIC Worksheet B in the Form 1040 instructions. Irs e file 2011   Otherwise, figure your earned income by using the worksheet in Step 5 of the Form 1040 instructions for lines 64a and 64b or the Form 1040A instructions for lines 38a and 38b, or the worksheet in Step 2 of the Form 1040EZ instructions for lines 8a and 8b. Irs e file 2011   When using one of those worksheets to figure your earned income, you will start with the amount on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ). Irs e file 2011 You will then reduce that amount by any amount included on that line and described in the following list. Irs e file 2011 Scholarship or fellowship grants not reported on a Form W-2. Irs e file 2011 A scholarship or fellowship grant that was not reported to you on a Form W-2 is not considered earned income for the earned income credit. Irs e file 2011 Inmate's income. Irs e file 2011 Amounts received for work performed while an inmate in a penal institution are not earned income for the earned income credit. Irs e file 2011 This includes amounts received for work performed while in a work release program or while in a halfway house. Irs e file 2011 If you received any amount for work done while an inmate in a penal institution and that amount is included in the total on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ), put “PRI” and the amount on the dotted line next to line 7 (Form 1040), in the space to the left of the entry space for line 7 (Form 1040A), or in the space to the left of line 1 (Form 1040EZ). Irs e file 2011 Pension or annuity from deferred compensation plans. Irs e file 2011 A pension or annuity from a nonqualified deferred compensation plan or a nongovernmental section 457 plan is not considered earned income for the earned income credit. Irs e file 2011 If you received such an amount and it was included in the total on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ), put “DFC” and the amount on the dotted line next to line 7 (Form 1040), in the space to the left of the entry space for line 7 (Form 1040A), or in the space to the left of line 1 (Form 1040EZ). Irs e file 2011 This amount may be reported in box 11 of your Form W-2. Irs e file 2011 If you received such an amount but box 11 is blank, contact your employer for the amount received as a pension or an annuity. Irs e file 2011 Clergy. Irs e file 2011   If you are a member of the clergy who files Schedule SE and the amount on line 2 of that schedule includes an amount that was also re
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The Irs E File 2011

Irs e file 2011 4. Irs e file 2011   Sales and Trades of Investment Property Table of Contents IntroductionNominees. Irs e file 2011 Topics - This chapter discusses: Useful Items - You may want to see: What Is a Sale or Trade?Dividend versus sale or trade. Irs e file 2011 Worthless Securities Constructive Sales of Appreciated Financial Positions Section 1256 Contracts Marked to Market Basis of Investment PropertyCost Basis Basis Other Than Cost Adjusted Basis Stocks and Bonds How To Figure Gain or LossFair market value. Irs e file 2011 Debt paid off. Irs e file 2011 Payment of cash. Irs e file 2011 Special Rules for Mutual Funds Nontaxable TradesLike-Kind Exchanges Corporate Stocks Exchange of Shares In One Mutual Fund For Shares In Another Mutual Fund Insurance Policies and Annuities U. Irs e file 2011 S. Irs e file 2011 Treasury Notes or Bonds Transfers Between Spouses Related Party TransactionsGain on Sale or Trade of Depreciable Property Capital Gains and LossesCapital or Ordinary Gain or Loss Holding Period Nonbusiness Bad Debts Short Sales Wash Sales Options Straddles Sales of Stock to ESOPs or Certain Cooperatives Rollover of Gain From Publicly Traded Securities Gains on Qualified Small Business Stock Exclusion of Gain From DC Zone Assets Reporting Capital Gains and LossesException 1. Irs e file 2011 Exception 2. Irs e file 2011 Section 1256 contracts and straddles. Irs e file 2011 Market discount bonds. Irs e file 2011 File Form 1099-B or Form 1099-S with the IRS. Irs e file 2011 Capital Losses Capital Gain Tax Rates Special Rules for Traders in SecuritiesHow To Report Introduction This chapter explains the tax treatment of sales and trades of investment property. Irs e file 2011 Investment property. Irs e file 2011   This is property that produces investment income. Irs e file 2011 Examples include stocks, bonds, and Treasury bills and notes. Irs e file 2011 Property used in a trade or business is not investment property. Irs e file 2011 Form 1099-B. Irs e file 2011   If you sold property such as stocks, bonds, mutual funds, or certain commodities through a broker during the year, you should receive, for each sale, a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or substitute statement, from the broker. Irs e file 2011 You should receive the statement by February 15 of the next year. Irs e file 2011 It will show the gross proceeds from the sale. Irs e file 2011 The IRS will also get a copy of Form 1099-B from the broker. Irs e file 2011   Use Form 1099-B (or substitute statement received from your broker) to complete Form 8949. Irs e file 2011 If you sold a covered security in 2013, your broker will send you a Form 1099-B (or substitute statement) that shows your basis. Irs e file 2011 This will help you complete Form 8949. Irs e file 2011 Generally, a covered security is a security you acquired after 2010, with certain exceptions explained in the Instructions for Form 8949. Irs e file 2011    For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in this chapter. Irs e file 2011 Also see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040). Irs e file 2011 Nominees. Irs e file 2011   If someone receives gross proceeds as a nominee for you, that person will give you a Form 1099-B, which will show gross proceeds received on your behalf. Irs e file 2011   If you receive a Form 1099-B that includes gross proceeds belonging to another person, see Nominees , later under Reporting Capital Gains and Losses for more information. Irs e file 2011 Other property transactions. Irs e file 2011   Certain transfers of property are discussed in other IRS publications. Irs e file 2011 These include: Sale of your main home, discussed in Publication 523, Selling Your Home; Installment sales, covered in Publication 537; Various types of transactions involving business property, discussed in Publication 544, Sales and Other Dispositions of Assets; Transfers of property at death, covered in Publication 559; and Disposition of an interest in a passive activity, discussed in Publication 925. Irs e file 2011 Topics - This chapter discusses: What Is a Sale or Trade? , Basis of Investment Property , Adjusted Basis , How To Figure Gain or Loss , Nontaxable trades , Transfers Between Spouses , Related Party Transactions , Capital Gains and Losses , Reporting Capital Gains and Losses , and Special Rules for Traders in Securities . Irs e file 2011 Useful Items - You may want to see: Publication 551 Basis of Assets Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 6781 Gains and Losses From Section 1256 Contracts and Straddles 8582 Passive Activity Loss Limitations 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Irs e file 2011 What Is a Sale or Trade? This section explains what is a sale or trade. Irs e file 2011 It also explains certain transactions and events that are treated as sales or trades. Irs e file 2011 A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money. Irs e file 2011 A trade is a transfer of property for other property or services, and may be taxed in the same way as a sale. Irs e file 2011 Sale and purchase. Irs e file 2011   Ordinarily, a transaction is not a trade when you voluntarily sell property for cash and immediately buy similar property to replace it. Irs e file 2011 The sale and purchase are two separate transactions. Irs e file 2011 But see Like-Kind Exchanges under Nontaxable Trades, later. Irs e file 2011 Redemption of stock. Irs e file 2011   A redemption of stock is treated as a sale or trade and is subject to the capital gain or loss provisions unless the redemption is a dividend or other distribution on stock. Irs e file 2011 Dividend versus sale or trade. Irs e file 2011   Whether a redemption is treated as a sale, trade, dividend, or other distribution depends on the circumstances in each case. Irs e file 2011 Both direct and indirect ownership of stock will be considered. Irs e file 2011 The redemption is treated as a sale or trade of stock if: The redemption is not essentially equivalent to a dividend — see Dividends and Other Distributions in chapter 1, There is a substantially disproportionate redemption of stock, There is a complete redemption of all the stock of the corporation owned by the shareholder, or The redemption is a distribution in partial liquidation of a corporation. Irs e file 2011 Redemption or retirement of bonds. Irs e file 2011   A redemption or retirement of bonds or notes at their maturity generally is treated as a sale or trade. Irs e file 2011 See Stocks, stock rights, and bonds and Discounted Debt Instruments under Capital or Ordinary Gain or Loss, later. Irs e file 2011   In addition, a significant modification of a bond is treated as a trade of the original bond for a new bond. Irs e file 2011 For details, see Regulations section 1. Irs e file 2011 1001-3. Irs e file 2011 Surrender of stock. Irs e file 2011   A surrender of stock by a dominant shareholder who retains ownership of more than half of the corporation's voting shares is treated as a contribution to capital rather than as an immediate loss deductible from taxable income. Irs e file 2011 The surrendering shareholder must reallocate his or her basis in the surrendered shares to the shares he or she retains. Irs e file 2011 Trade of investment property for an annuity. Irs e file 2011   The transfer of investment property to a corporation, trust, fund, foundation, or other organization, in exchange for a fixed annuity contract that will make guaranteed annual payments to you for life, is a taxable trade. Irs e file 2011 If the present value of the annuity is more than your basis in the property traded, you have a taxable gain in the year of the trade. Irs e file 2011 Figure the present value of the annuity according to factors used by commercial insurance companies issuing annuities. Irs e file 2011 Transfer by inheritance. Irs e file 2011   The transfer of property of a decedent to the executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or other disposition. Irs e file 2011 No taxable gain or deductible loss results from the transfer. Irs e file 2011 Termination of certain rights and obligations. Irs e file 2011   The cancellation, lapse, expiration, or other termination of a right or obligation (other than a securities futures contract) with respect to property that is a capital asset (or that would be a capital asset if you acquired it) is treated as a sale. Irs e file 2011 Any gain or loss is treated as a capital gain or loss. Irs e file 2011   This rule does not apply to the retirement of a debt instrument. Irs e file 2011 See Redemption or retirement of bonds , earlier. Irs e file 2011 Worthless Securities Stocks, stock rights, and bonds (other than those held for sale by a securities dealer) that became completely worthless during the tax year are treated as though they were sold on the last day of the tax year. Irs e file 2011 This affects whether your capital loss is long term or short term. Irs e file 2011 See Holding Period , later. Irs e file 2011 Worthless securities also include securities that you abandon after March 12, 2008. Irs e file 2011 To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. Irs e file 2011 All the facts and circumstances determine whether the transaction is properly characterized as an abandonment or other type of transaction, such as an actual sale or exchange, contribution to capital, dividend, or gift. Irs e file 2011 If you are a cash basis taxpayer and make payments on a negotiable promissory note that you issued for stock that became worthless, you can deduct these payments as losses in the years you actually make the payments. Irs e file 2011 Do not deduct them in the year the stock became worthless. Irs e file 2011 How to report loss. Irs e file 2011   Report worthless securities in Form 8949, Part I or Part II, whichever applies. Irs e file 2011    Report your worthless securities transactions on Form 8949 with the correct box checked for these transactions. Irs e file 2011 See Form 8949 and the Instructions for Form 8949. Irs e file 2011 Filing a claim for refund. Irs e file 2011   If you do not claim a loss for a worthless security on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the loss. Irs e file 2011 You must use Form 1040X, Amended U. Irs e file 2011 S. Irs e file 2011 Individual Income Tax Return, to amend your return for the year the security became worthless. Irs e file 2011 You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. Irs e file 2011 (Claims not due to worthless securities or bad debts generally must be filed within 3 years from the date a return is filed, or 2 years from the date the tax is paid, whichever is later. Irs e file 2011 ) For more information about filing a claim, see Publication 556. Irs e file 2011 Constructive Sales of Appreciated Financial Positions You are treated as having made a constructive sale when you enter into certain transactions involving an appreciated financial position (defined later) in stock, a partnership interest, or certain debt instruments. Irs e file 2011 You must recognize gain as if the position were disposed of at its fair market value on the date of the constructive sale. Irs e file 2011 This gives you a new holding period for the position that begins on the date of the constructive sale. Irs e file 2011 Then, when you close the transaction, you reduce your gain (or increase your loss) by the gain recognized on the constructive sale. Irs e file 2011 Constructive sale. Irs e file 2011   You are treated as having made a constructive sale of an appreciated financial position if you: Enter into a short sale of the same or substantially identical property, Enter into an offsetting notional principal contract relating to the same or substantially identical property, Enter into a futures or forward contract to deliver the same or substantially identical property (including a forward contract that provides for cash settlement), or Acquire the same or substantially identical property (if the appreciated financial position is a short sale, an offsetting notional principal contract, or a futures or forward contract). Irs e file 2011   You are also treated as having made a constructive sale of an appreciated financial position if a person related to you enters into a transaction described above with a view toward avoiding the constructive sale treatment. Irs e file 2011 For this purpose, a related person is any related party described under Related Party Transactions , later in this chapter. Irs e file 2011 Exception for nonmarketable securities. Irs e file 2011   You are not treated as having made a constructive sale solely because you entered into a contract for sale of any stock, debt instrument, or partnership interest that is not a marketable security if it settles within 1 year of the date you enter into it. Irs e file 2011 Exception for certain closed transactions. Irs e file 2011   Do not treat a transaction as a constructive sale if all of the following are true. Irs e file 2011 You closed the transaction on or before the 30th day after the end of your tax year. Irs e file 2011 You held the appreciated financial position throughout the 60-day period beginning on the date you closed the transaction. Irs e file 2011 Your risk of loss was not reduced at any time during that 60-day period by holding certain other positions. Irs e file 2011   If a closed transaction is reestablished in a substantially similar position during the 60-day period beginning on the date the first transaction was closed, this exception still applies if the reestablished position is closed before the 30th day after the end of your tax year in which the first transaction was closed and, after that closing, (2) and (3) above are true. Irs e file 2011   This exception also applies to successive short sales of an entire appreciated financial position. Irs e file 2011 For more information, see Revenue Ruling 2003-1 in Internal Revenue Bulletin 2003-3. Irs e file 2011 This bulletin is available at www. Irs e file 2011 irs. Irs e file 2011 gov/pub/irs-irbs/irb03-03. Irs e file 2011 pdf. Irs e file 2011 Appreciated financial position. Irs e file 2011   This is any interest in stock, a partnership interest, or a debt instrument (including a futures or forward contract, a short sale, or an option) if disposing of the interest would result in a gain. Irs e file 2011 Exceptions. Irs e file 2011   An appreciated financial position does not include the following. Irs e file 2011 Any position from which all of the appreciation is accounted for under marked-to-market rules, including section 1256 contracts (described later under Section 1256 Contracts Marked to Market ). Irs e file 2011 Any position in a debt instrument if: The position unconditionally entitles the holder to receive a specified principal amount, The interest payments (or other similar amounts) with respect to the position are payable at a fixed rate or a variable rate described in Regulations section 1. Irs e file 2011 860G-1(a)(3), and The position is not convertible, either directly or indirectly, into stock of the issuer (or any related person). Irs e file 2011 Any hedge with respect to a position described in (2). Irs e file 2011 Certain trust instruments treated as stock. Irs e file 2011   For the constructive sale rules, an interest in an actively traded trust is treated as stock unless substantially all of the value of the property held by the trust is debt that qualifies for the exception to the definition of an appreciated financial position (explained in (2) above). Irs e file 2011 Sale of appreciated financial position. Irs e file 2011   A transaction treated as a constructive sale of an appreciated financial position is not treated as a constructive sale of any other appreciated financial position, as long as you continue to hold the original position. Irs e file 2011 However, if you hold another appreciated financial position and dispose of the original position before closing the transaction that resulted in the constructive sale, you are treated as if, at the same time, you constructively sold the other appreciated financial position. Irs e file 2011 Section 1256 Contracts Marked to Market If you hold a section 1256 contract at the end of the tax year, you generally must treat it as sold at its fair market value on the last business day of the tax year. Irs e file 2011 Section 1256 Contract A section 1256 contract is any: Regulated futures contract, Foreign currency contract, Nonequity option, Dealer equity option, or Dealer securities futures contract. Irs e file 2011 Exceptions. Irs e file 2011   A section 1256 contract does not include: Interest rate swaps, Currency swaps, Basis swaps, Interest rate caps, Interest rate floors, Commodity swaps, Equity swaps, Equity index swaps, Credit default swaps, or Similar agreements. Irs e file 2011 For more details, including definitions of these terms, see section 1256. Irs e file 2011 Regulated futures contract. Irs e file 2011   This is a contract that: Provides that amounts which must be deposited to, or can be withdrawn from, your margin account depend on daily market conditions (a system of marking to market), and Is traded on, or subject to the rules of, a qualified board of exchange. Irs e file 2011 A qualified board of exchange is a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, any board of trade or exchange approved by the Secretary of the Treasury, or a national securities exchange registered with the Securities and Exchange Commission. Irs e file 2011 Foreign currency contract. Irs e file 2011   This is a contract that: Requires delivery of a foreign currency that has positions traded through regulated futures contracts (or settlement of which depends on the value of that type of foreign currency), Is traded in the interbank market, and Is entered into at arm's length at a price determined by reference to the price in the interbank market. Irs e file 2011   Bank forward contracts with maturity dates longer than the maturities ordinarily available for regulated futures contracts are considered to meet the definition of a foreign currency contract if the above three conditions are satisfied. Irs e file 2011   Special rules apply to certain foreign currency transactions. Irs e file 2011 These transactions may result in ordinary gain or loss treatment. Irs e file 2011 For details, see Internal Revenue Code section 988 and Regulations sections 1. Irs e file 2011 988-1(a)(7) and 1. Irs e file 2011 988-3. Irs e file 2011 Nonequity option. Irs e file 2011   This is any listed option (defined later) that is not an equity option. Irs e file 2011 Nonequity options include debt options, commodity futures options, currency options, and broad-based stock index options. Irs e file 2011 A broad-based stock index is based on the value of a group of diversified stocks or securities (such as the Standard and Poor's 500 index). Irs e file 2011 Warrants based on a stock index that are economically, substantially identical in all material respects to options based on a stock index are treated as options based on a stock index. Irs e file 2011 Cash-settled options. Irs e file 2011   Cash-settled options based on a stock index and either traded on or subject to the rules of a qualified board of exchange are nonequity options if the Securities and Exchange Commission (SEC) determines that the stock index is broad based. Irs e file 2011   This rule does not apply to options established before the SEC determines that the stock index is broad based. Irs e file 2011 Listed option. Irs e file 2011   This is any option traded on, or subject to the rules of, a qualified board or exchange (as discussed earlier under Regulated futures contract). Irs e file 2011 A listed option, however, does not include an option that is a right to acquire stock from the issuer. Irs e file 2011 Dealer equity option. Irs e file 2011   This is any listed option that, for an options dealer: Is an equity option, Is bought or granted by that dealer in the normal course of the dealer's business activity of dealing in options, and Is listed on the qualified board of exchange where that dealer is registered. Irs e file 2011   An “options dealer” is any person registered with an appropriate national securities exchange as a market maker or specialist in listed options. Irs e file 2011 Equity option. Irs e file 2011   This is any option: To buy or sell stock, or That is valued directly or indirectly by reference to any stock or narrow-based security index. Irs e file 2011  Equity options include options on a group of stocks only if the group is a narrow-based stock index. Irs e file 2011 Dealer securities futures contract. Irs e file 2011   For any dealer in securities futures contracts or options on those contracts, this is a securities futures contract (or option on such a contract) that: Is entered into by the dealer (or, in the case of an option, is purchased or granted by the dealer) in the normal course of the dealer's activity of dealing in this type of contract (or option), and Is traded on a qualified board or exchange (as defined under Regulated futures contract , earlier). Irs e file 2011 A securities futures contract that is not a dealer securities futures contract is treated as described later under Securities Futures Contracts . Irs e file 2011 Marked-to-Market Rules A section 1256 contract that you hold at the end of the tax year will generally be treated as sold at its fair market value on the last business day of the tax year, and you must recognize any gain or loss that results. Irs e file 2011 That gain or loss is taken into account in figuring your gain or loss when you later dispose of the contract, as shown in the example under 60/40 rule, below. Irs e file 2011 Hedging exception. Irs e file 2011   The marked-to-market rules do not apply to hedging transactions. Irs e file 2011 See Hedging Transactions , later. Irs e file 2011 60/40 rule. Irs e file 2011   Under the marked-to-market system, 60% of your capital gain or loss will be treated as a long-term capital gain or loss, and 40% will be treated as a short-term capital gain or loss. Irs e file 2011 This is true regardless of how long you actually held the property. Irs e file 2011 Example. Irs e file 2011 On June 22, 2012, you bought a regulated futures contract for $50,000. Irs e file 2011 On December 31, 2012 (the last business day of your tax year), the fair market value of the contract was $57,000. Irs e file 2011 You recognized a $7,000 gain on your 2012 tax return, treated as 60% long-term and 40% short-term capital gain. Irs e file 2011 On February 1, 2013, you sold the contract for $56,000. Irs e file 2011 Because you recognized a $7,000 gain on your 2012 return, you recognize a $1,000 loss ($57,000 − $56,000) on your 2013 tax return, treated as 60% long-term and 40% short-term capital loss. Irs e file 2011 Limited partners or entrepreneurs. Irs e file 2011   The 60/40 rule does not apply to dealer equity options or dealer securities futures contracts that result in capital gain or loss allocable to limited partners or limited entrepreneurs (defined later under Hedging Transactions ). Irs e file 2011 Instead, these gains or losses are treated as short term. Irs e file 2011 Terminations and transfers. Irs e file 2011   The marked-to-market rules also apply if your obligation or rights under section 1256 contracts are terminated or transferred during the tax year. Irs e file 2011 In this case, use the fair market value of each section 1256 contract at the time of termination or transfer to determine the gain or loss. Irs e file 2011 Terminations or transfers may result from any offsetting, delivery, exercise, assignment, or lapse of your obligation or rights under section 1256 contracts. Irs e file 2011 Loss carryback election. Irs e file 2011   An individual having a net section 1256 contracts loss (defined later), generally can elect to carry this loss back 3 years instead of carrying it over to the next year. Irs e file 2011 See How To Report , later, for information about reporting this election on your return. Irs e file 2011   The loss carried back to any year under this election cannot be more than the net section 1256 contracts gain in that year. Irs e file 2011 In addition, the amount of loss carried back to an earlier tax year cannot increase or produce a net operating loss for that year. Irs e file 2011   The loss is carried to the earliest carryback year first, and any unabsorbed loss amount can then be carried to each of the next 2 tax years. Irs e file 2011 In each carryback year, treat 60% of the carryback amount as a long-term capital loss and 40% as a short-term capital loss from section 1256 contracts. Irs e file 2011   If only a portion of the net section 1256 contracts loss is absorbed by carrying the loss back, the unabsorbed portion can be carried forward, under the capital loss carryover rules, to the year following the loss. Irs e file 2011 (See Capital Losses under Reporting Capital Gains and Losses, later. Irs e file 2011 ) Figure your capital loss carryover as if, for the loss year, you had an additional short-term capital gain of 40% of the amount of net section 1256 contracts loss absorbed in the carryback years and an additional long-term capital gain of 60% of the absorbed loss. Irs e file 2011 In the carryover year, treat any capital loss carryover from losses on section 1256 contracts as if it were a loss from section 1256 contracts for that year. Irs e file 2011 Net section 1256 contracts loss. Irs e file 2011   This loss is the lesser of: The net capital loss for your tax year determined by taking into account only the gains and losses from section 1256 contracts, or The capital loss carryover to the next tax year determined without this election. Irs e file 2011 Net section 1256 contracts gain. Irs e file 2011   This gain is the lesser of: The capital gain net income for the carryback year determined by taking into account only gains and losses from section 1256 contracts, or The capital gain net income for that year. Irs e file 2011  Figure your net section 1256 contracts gain for any carryback year without regard to the net section 1256 contracts loss for the loss year or any later tax year. Irs e file 2011 Traders in section 1256 contracts. Irs e file 2011   Gain or loss from the trading of section 1256 contracts is capital gain or loss subject to the marked-to-market rules. Irs e file 2011 However, this does not apply to contracts held for purposes of hedging property if any loss from the property would be an ordinary loss. Irs e file 2011 Treatment of underlying property. Irs e file 2011   The determination of whether an individual's gain or loss from any property is ordinary or capital gain or loss is made without regard to the fact that the individual is actively engaged in dealing in or trading section 1256 contracts related to that property. Irs e file 2011 How To Report If you disposed of regulated futures or foreign currency contracts in 2013 (or had unrealized profit or loss on these contracts that were open at the end of 2012 or 2013), you should receive Form 1099-B, or substitute statement, from your broker. Irs e file 2011 Form 6781. Irs e file 2011   Use Part I of Form 6781 to report your gains and losses from all section 1256 contracts that are open at the end of the year or that were closed out during the year. Irs e file 2011 This includes the amount shown in box 10 of Form 1099-B. Irs e file 2011 Then enter the net amount of these gains and losses on Schedule D (Form 1040), line 4 or line 11, as appropriate. Irs e file 2011 Include a copy of Form 6781 with your income tax return. Irs e file 2011   If the Form 1099-B you receive includes a straddle or hedging transaction, defined later, it may be necessary to show certain adjustments on Form 6781. Irs e file 2011 Follow the Form 6781 instructions for completing Part I. Irs e file 2011 Loss carryback election. Irs e file 2011   To carry back your loss under the election procedures described earlier, file Form 1040X or Form 1045, Application for Tentative Refund, for the year to which you are carrying the loss with an amended Form 6781 and an amended Schedule D (Form 1040) attached. Irs e file 2011 Follow the instructions for completing Form 6781 for the loss year to make this election. Irs e file 2011 Hedging Transactions The marked-to-market rules, described earlier, do not apply to hedging transactions. Irs e file 2011 A transaction is a hedging transaction if both of the following conditions are met. Irs e file 2011 You entered into the transaction in the normal course of your trade or business primarily to manage the risk of: Price changes or currency fluctuations on ordinary property you hold (or will hold), or Interest rate or price changes, or currency fluctuations, on your current or future borrowings or ordinary obligations. Irs e file 2011 You clearly identified the transaction as being a hedging transaction before the close of the day on which you entered into it. Irs e file 2011 This hedging transaction exception does not apply to transactions entered into by or for any syndicate. Irs e file 2011 A syndicate is a partnership, S corporation, or other entity (other than a regular corporation) that allocates more than 35% of its losses to limited partners or limited entrepreneurs. Irs e file 2011 A limited entrepreneur is a person who has an interest in an enterprise (but not as a limited partner) and who does not actively participate in its management. Irs e file 2011 However, an interest is not considered held by a limited partner or entrepreneur if the interest holder actively participates (or did so for at least 5 full years) in the management of the entity, or is the spouse, child (including a legally adopted child), grandchild, or parent of an individual who actively participates in the management of the entity. Irs e file 2011 Hedging loss limit. Irs e file 2011   If you are a limited partner or entrepreneur in a syndicate, the amount of a hedging loss you can claim is limited. Irs e file 2011 A “hedging loss” is the amount by which the allowable deductions in a tax year that resulted from a hedging transaction (determined without regard to the limit) are more than the income received or accrued during the tax year from this transaction. Irs e file 2011   Any hedging loss allocated to you for the tax year is limited to your taxable income for that year from the trade or business in which the hedging transaction occurred. Irs e file 2011 Ignore any hedging transaction items in determining this taxable income. Irs e file 2011 If you have a hedging loss that is disallowed because of this limit, you can carry it over to the next tax year as a deduction resulting from a hedging transaction. Irs e file 2011   If the hedging transaction relates to property other than stock or securities, the limit on hedging losses applies if the limited partner or entrepreneur is an individual. Irs e file 2011   The limit on hedging losses does not apply to any hedging loss to the extent that it is more than all your unrecognized gains from hedging transactions at the end of the tax year that are from the trade or business in which the hedging transaction occurred. Irs e file 2011 The term “unrecognized gain” has the same meaning as defined under Loss Deferral Rules in Straddles, later. Irs e file 2011 Sale of property used in a hedge. Irs e file 2011   Once you identify personal property as being part of a hedging transaction, you must treat gain from its sale or exchange as ordinary income, not capital gain. Irs e file 2011 Self-Employment Income Gains and losses derived in the ordinary course of a commodity or option dealer's trading in section 1256 contracts and property related to these contracts are included in net earnings from self-employment. Irs e file 2011 See the Instructions for Schedule SE (Form 1040). Irs e file 2011 In addition, the rules relating to contributions to self-employment retirement plans apply. Irs e file 2011 For information on retirement plan contributions, see Publication 560 and Publication 590. Irs e file 2011 Basis of Investment Property Basis is a way of measuring your investment in property for tax purposes. Irs e file 2011 You must know the basis of your property to determine whether you have a gain or loss on its sale or other disposition. Irs e file 2011 Investment property you buy normally has an original basis equal to its cost. Irs e file 2011 If you get property in some way other than buying it, such as by gift or inheritance, its fair market value may be important in figuring the basis. Irs e file 2011 Cost Basis The basis of property you buy is usually its cost. Irs e file 2011 The cost is the amount you pay in cash, debt obligations, or other property or services. Irs e file 2011 Unstated interest. Irs e file 2011   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, minus the amount considered to be unstated interest. Irs e file 2011 You generally have unstated interest if your interest rate is less than the applicable federal rate. Irs e file 2011 For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Irs e file 2011 Basis Other Than Cost There are times when you must use a basis other than cost. Irs e file 2011 In these cases, you may need to know the property's fair market value or the adjusted basis of the previous owner. Irs e file 2011 Fair market value. Irs e file 2011   This is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. Irs e file 2011 Sales of similar property, around the same date, may be helpful in figuring fair market value. Irs e file 2011 Property Received for Services If you receive investment property for services, you must include the property's fair market value in income. Irs e file 2011 The amount you include in income then becomes your basis in the property. Irs e file 2011 If the services were performed for a price that was agreed to beforehand, this price will be accepted as the fair market value of the property if there is no evidence to the contrary. Irs e file 2011 Restricted property. Irs e file 2011   If you receive, as payment for services, property that is subject to certain restrictions, your basis in the property generally is its fair market value when it becomes substantially vested. Irs e file 2011 Property becomes substantially vested when it is transferable or is no longer subject to substantial risk of forfeiture, whichever happens first. Irs e file 2011 See Restricted Property in Publication 525 for more information. Irs e file 2011 Bargain purchases. Irs e file 2011   If you buy investment property at less than fair market value, as payment for services, you must include the difference in income. Irs e file 2011 Your basis in the property is the price you pay plus the amount you include in income. Irs e file 2011 Property Received in Taxable Trades If you received investment property in trade for other property, the basis of the new property is its fair market value at the time of the trade unless you received the property in a nontaxable trade. Irs e file 2011 Example. Irs e file 2011 You trade A Company stock for B Company stock having a fair market value of $1,200. Irs e file 2011 If the adjusted basis of the A Company stock is less than $1,200, you have a taxable gain on the trade. Irs e file 2011 If the adjusted basis of the A Company stock is more than $1,200, you have a deductible loss on the trade. Irs e file 2011 The basis of your B Company stock is $1,200. Irs e file 2011 If you later sell the B Company stock for $1,300, you will have a gain of $100. Irs e file 2011 Property Received in Nontaxable Trades If you have a nontaxable trade, you do not recognize gain or loss until you dispose of the property you received in the trade. Irs e file 2011 See Nontaxable Trades , later. Irs e file 2011 The basis of property you received in a nontaxable or partly nontaxable trade is generally the same as the adjusted basis of the property you gave up. Irs e file 2011 Increase this amount by any cash you paid, additional costs you had, and any gain recognized. Irs e file 2011 Reduce this amount by any cash or unlike property you received, any loss recognized, and any liability of yours that was assumed or treated as assumed. Irs e file 2011 Property Received From Your Spouse If property is transferred to you from your spouse (or former spouse, if the transfer is incident to your divorce), your basis is the same as your spouse's or former spouse's adjusted basis just before the transfer. Irs e file 2011 See Transfers Between Spouses , later. Irs e file 2011 Recordkeeping. Irs e file 2011 The transferor must give you the records necessary to determine the adjusted basis and holding period of the property as of the date of the transfer. Irs e file 2011 Property Received as a Gift To figure your basis in property that you received as a gift, you must know its adjusted basis to the donor just before it was given to you, its fair market value at the time it was given to you, the amount of any gift tax paid on it, and the date it was given to you. Irs e file 2011 Fair market value less than donor's adjusted basis. Irs e file 2011   If the fair market value of the property at the time of the gift was less than the donor's adjusted basis just before the gift, your basis for gain on its sale or other disposition is the same as the donor's adjusted basis plus or minus any required adjustments to basis during the period you hold the property. Irs e file 2011 Your basis for loss is its fair market value at the time of the gift plus or minus any required adjustments to basis during the period you hold the property. Irs e file 2011 No gain or loss. Irs e file 2011   If you use the basis for figuring a gain and the result is a loss, and then use the basis for figuring a loss and the result is a gain, you will have neither a gain nor a loss. Irs e file 2011 Example. Irs e file 2011 You receive a gift of investment property having an adjusted basis of $10,000 at the time of the gift. Irs e file 2011 The fair market value at the time of the gift is $9,000. Irs e file 2011 You later sell the property for $9,500. Irs e file 2011 You have neither gain nor loss. Irs e file 2011 Your basis for figuring gain is $10,000, and $9,500 minus $10,000 results in a $500 loss. Irs e file 2011 Your basis for figuring loss is $9,000, and $9,500 minus $9,000 results in a $500 gain. Irs e file 2011 Fair market value equal to or more than donor's adjusted basis. Irs e file 2011   If the fair market value of the property at the time of the gift was equal to or more than the donor's adjusted basis just before the gift, your basis for gain or loss on its sale or other disposition is the donor's adjusted basis plus or minus any required adjustments to basis during the period you hold the property. Irs e file 2011 Also, you may be allowed to add to the donor's adjusted basis all or part of any gift tax paid, depending on the date of the gift. Irs e file 2011 Gift received before 1977. Irs e file 2011   If you received property as a gift before 1977, your basis in the property is the donor's adjusted basis increased by the total gift tax paid on the gift. Irs e file 2011 However, your basis cannot be more than the fair market value of the gift at the time it was given to you. Irs e file 2011 Example 1. Irs e file 2011 You were given XYZ Company stock in 1976. Irs e file 2011 At the time of the gift, the stock had a fair market value of $21,000. Irs e file 2011 The donor's adjusted basis was $20,000. Irs e file 2011 The donor paid a gift tax of $500 on the gift. Irs e file 2011 Your basis for gain or loss is $20,500, the donor's adjusted basis plus the amount of gift tax paid. Irs e file 2011 Example 2. Irs e file 2011 The facts are the same as in Example 1 except that the gift tax paid was $1,500. Irs e file 2011 Your basis is $21,000, the donor's adjusted basis plus the gift tax paid, but limited to the fair market value of the stock at the time of the gift. Irs e file 2011 Gift received after 1976. Irs e file 2011   If you received property as a gift after 1976, your basis is the donor's adjusted basis increased by the part of the gift tax paid that was for the net increase in value of the gift. Irs e file 2011 You figure this part by multiplying the gift tax paid on the gift by a fraction. Irs e file 2011 The numerator (top part) is the net increase in value of the gift and the denominator (bottom part) is the amount of the gift. Irs e file 2011   The net increase in value of the gift is the fair market value of the gift minus the donor's adjusted basis. Irs e file 2011 The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Irs e file 2011 Example. Irs e file 2011 In 2013, you received a gift of property from your mother. Irs e file 2011 At the time of the gift, the property had a fair market value of $101,000 and an adjusted basis to her of $40,000. Irs e file 2011 The amount of the gift for gift tax purposes was $87,000 ($101,000 minus the $14,000 annual exclusion), and your mother paid a gift tax of $21,000. Irs e file 2011 You figure your basis in the following way: Fair market value $101,000 Minus: Adjusted basis 40,000 Net increase in value of gift $61,000 Gift tax paid $21,000 Multiplied by . Irs e file 2011 701 ($61,000 ÷ $87,000) . Irs e file 2011 701 Gift tax due to net increase in value $14,721 Plus: Adjusted basis of property to  your mother 40,000 Your basis in the property $54,721 Part sale, part gift. Irs e file 2011   If you get property in a transfer that is partly a sale and partly a gift, your basis is the larger of the amount you paid for the property or the transferor's adjusted basis in the property at the time of the transfer. Irs e file 2011 Add to that amount the amount of any gift tax paid on the gift, as described in the preceding discussion. Irs e file 2011 For figuring loss, your basis is limited to the property's fair market value at the time of the transfer. Irs e file 2011 Gift tax information. Irs e file 2011   For information on gift tax, see Publication 950, Introduction to Estate and Gift Taxes. Irs e file 2011 For information on figuring the amount of gift tax to add to your basis, see Property Received as a Gift in Publication 551. Irs e file 2011 Property Received as Inheritance Before or after 2010. Irs e file 2011   If you inherited property from a decedent who died before or after 2010, or who died in 2010 and the executor of the decedent's estate elected not to file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, your basis in that property generally is its fair market value (its appraised value on Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return) on: The date of the decedent's death, or The later alternate valuation date if the estate qualifies for, and elects to use, alternate valuation. Irs e file 2011 If no Form 706 was filed, use the appraised value on the date of death for state inheritance or transmission taxes. Irs e file 2011 For stocks and bonds, if no Form 706 was filed and there are no state inheritance or transmission taxes, see the Form 706 instructions for figuring the fair market value of the stocks and bonds on the date of the decedent's death. Irs e file 2011 Appreciated property you gave the decedent. Irs e file 2011   Your basis in certain appreciated property that you inherited is the decedent's adjusted basis in the property immediately before death rather than its fair market value. Irs e file 2011 This applies to appreciated property that you or your spouse gave the decedent as a gift during the 1-year period ending on the date of death. Irs e file 2011 Appreciated property is any property whose fair market value on the day you gave it to the decedent was more than its adjusted basis. Irs e file 2011 More information. Irs e file 2011   See Publication 551 for more information on the basis of inherited property, including community property, property held by a surviving tenant in a joint tenancy or tenancy by the entirety, a qualified joint interest, and a farm or closely held business. Irs e file 2011 Inherited in 2010 and executor elected to file Form 8939. Irs e file 2011   If you inherited property from a decedent who died in 2010 and the executor made the election to file Form 8939, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to figure your basis. Irs e file 2011 Adjusted Basis Before you can figure any gain or loss on a sale, exchange, or other disposition of property or figure allowable depreciation, depletion, or amortization, you usually must make certain adjustments (increases and decreases) to the basis of the property. Irs e file 2011 The result of these adjustments to the basis is the adjusted basis. Irs e file 2011 Adjustments to the basis of stocks and bonds are explained in the following discussion. Irs e file 2011 For information about other adjustments to basis, see Publication 551. Irs e file 2011 Stocks and Bonds The basis of stocks or bonds you own generally is the purchase price plus the costs of purchase, such as commissions and recording or transfer fees. Irs e file 2011 If you acquired stock or bonds other than by purchase, your basis is usually determined by fair market value or the previous owner's adjusted basis as discussed earlier under Basis Other Than Cost . Irs e file 2011 The basis of stock must be adjusted for certain events that occur after purchase. Irs e file 2011 For example, if you receive more stock from nontaxable stock dividends or stock splits, you must reduce the basis of your original stock. Irs e file 2011 You must also reduce your basis when you receive nondividend distributions (discussed in chapter 1). Irs e file 2011 These distributions, up to the amount of your basis, are a nontaxable return of capital. Irs e file 2011 The IRS partners with companies that offer Form 8949 and Schedule D (Form 1040) software that can import trades from many brokerage firms and accounting software to help you keep track of your adjusted basis in securities. Irs e file 2011 To find out more, go to www. Irs e file 2011 irs. Irs e file 2011 gov/Filing/Filing-Options. Irs e file 2011 Identifying stock or bonds sold. Irs e file 2011   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock or bonds. Irs e file 2011 Adequate identification. Irs e file 2011   You will make an adequate identification if you show that certificates representing shares of stock from a lot that you bought on a certain date or for a certain price were delivered to your broker or other agent. Irs e file 2011 Broker holds stock. Irs e file 2011   If you have left the stock certificates with your broker or other agent, you will make an adequate identification if you: Tell your broker or other agent the particular stock to be sold or transferred at the time of the sale or transfer, and Receive a written confirmation of this from your broker or other agent within a reasonable time. Irs e file 2011  Stock identified this way is the stock sold or transferred even if stock certificates from a different lot are delivered to the broker or other agent. Irs e file 2011 Single stock certificate. Irs e file 2011   If you bought stock in different lots at different times and you hold a single stock certificate for this stock, you will make an adequate identification if you: Tell your broker or other agent the particular stock to be sold or transferred when you deliver the certificate to your broker or other agent, and Receive a written confirmation of this from your broker or other agent within a reasonable time. Irs e file 2011   If you sell part of the stock represented by a single certificate directly to the buyer instead of through a broker, you will make an adequate identification if you keep a written record of the particular stock that you intend to sell. Irs e file 2011 Bonds. Irs e file 2011   These methods of identification also apply to bonds sold or transferred. Irs e file 2011 Identification not possible. Irs e file 2011   If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. Irs e file 2011 Except for certain mutual fund shares, discussed later, you cannot use the average price per share to figure gain or loss on the sale of the shares. Irs e file 2011 Example. Irs e file 2011 You bought 100 shares of stock of XYZ Corporation in 1998 for $10 a share. Irs e file 2011 In January 1999 you bought another 200 shares for $11 a share. Irs e file 2011 In July 1999 you gave your son 50 shares. Irs e file 2011 In December 2001 you bought 100 shares for $9 a share. Irs e file 2011 In April 2013 you sold 130 shares. Irs e file 2011 You cannot identify the shares you disposed of, so you must use the stock you acquired first to figure the basis. Irs e file 2011 The shares of stock you gave your son had a basis of $500 (50 × $10). Irs e file 2011 You figure the basis of the 130 shares of stock you sold in 2013 as follows: 50 shares (50 × $10) balance of stock bought in 1998 $ 500 80 shares (80 × $11) stock bought in January 1999 880 Total basis of stock sold in 2013 $1,380 Shares in a mutual fund or REIT. Irs e file 2011    The basis of shares in a mutual fund (or other regulated investment company) or a real estate investment trust (REIT) is generally figured in the same way as the basis of other stock and usually includes any commissions or load charges paid for the purchase. Irs e file 2011 Example. Irs e file 2011 You bought 100 shares of Fund A for $10 a share. Irs e file 2011 You paid a $50 commission to the broker for the purchase. Irs e file 2011 Your cost basis for each share is $10. Irs e file 2011 50 ($1,050 ÷ 100). Irs e file 2011 Commissions and load charges. Irs e file 2011   The fees and charges you pay to acquire or redeem shares of a mutual fund are not deductible. Irs e file 2011 You can usually add acquisition fees and charges to your cost of the shares and thereby increase your basis. Irs e file 2011 A fee paid to redeem the shares is usually a reduction in the redemption price (sales price). Irs e file 2011   You cannot add your entire acquisition fee or load charge to the cost of the mutual fund shares acquired if all of the following conditions apply. Irs e file 2011 You get a reinvestment right because of the purchase of the shares or the payment of the fee or charge. Irs e file 2011 You dispose of the shares within 90 days of the purchase date. Irs e file 2011 You acquire new shares in the same mutual fund or another mutual fund, for which the fee or charge is reduced or waived because of the reinvestment right you got when you acquired the original shares. Irs e file 2011   The amount of the original fee or charge in excess of the reduction in (3) is added to the cost of the original shares. Irs e file 2011 The rest of the original fee or charge is added to the cost basis of the new shares (unless all three conditions above also apply to the purchase of the new shares). Irs e file 2011 Choosing average basis for mutual fund shares. Irs e file 2011   You can choose to use the average basis of mutual fund shares if you acquired the identical shares at various times and prices, or you acquired the shares after 2010 in connection with a dividend reinvestment plan, and left them on deposit in an account kept by a custodian or agent. Irs e file 2011 The methods you can use to figure average basis are explained later. Irs e file 2011 Undistributed capital gains. Irs e file 2011   If you had to include in your income any undistributed capital gains of the mutual fund or REIT, increase your basis in the stock by the difference between the amount you included and the amount of tax paid for you by the fund or REIT. Irs e file 2011 See Undistributed capital gains of mutual funds and REITs under Capital Gain Distributions in chapter 1. Irs e file 2011 Reinvestment right. Irs e file 2011   This is the right to acquire mutual fund shares in the same or another mutual fund without paying a fee or load charge, or by paying a reduced fee or load charge. Irs e file 2011      The original cost basis of mutual fund shares you acquire by reinvesting your distributions is the amount of the distributions used to purchase each full or fractional share. Irs e file 2011 This rule applies even if the distribution is an exempt-interest dividend that you do not report as income. Irs e file 2011 Table 4-1. Irs e file 2011 This is a worksheet you can use to keep track of the adjusted basis of your mutual fund shares. Irs e file 2011 Enter the cost per share when you acquire new shares and any adjustments to their basis when the adjustment occurs. Irs e file 2011 This worksheet will help you figure the adjusted basis when you sell or redeem shares. Irs e file 2011 Table 4-1. Irs e file 2011 Mutual Fund Record Mutual Fund Acquired1 Adjustment to Basis Per Share Adjusted2 Basis Per Share Sold or redeemed Date Number of Shares Cost Per Share Date Number of Shares                                                                                                                                                                                                                                                                         1 Include share received from reinvestment of distributions. Irs e file 2011 2 Cost plus or minus adjustments. Irs e file 2011 Automatic investment service. Irs e file 2011   If you participate in an automatic investment service, your basis for each share of stock, including fractional shares, bought by the bank or other agent is the purchase price plus a share of the broker's commission. Irs e file 2011 Dividend reinvestment plans. Irs e file 2011   If you participate in a dividend reinvestment plan and receive stock from the corporation at a discount, your basis is the full fair market value of the stock on the dividend payment date. Irs e file 2011 You must include the amount of the discount in your income. Irs e file 2011 Public utilities. Irs e file 2011   If, before 1986, you excluded from income the value of stock you had received under a qualified public utility reinvestment plan, your basis in that stock is zero. Irs e file 2011 Stock dividends. Irs e file 2011   Stock dividends are distributions made by a corporation of its own stock. Irs e file 2011 Generally, stock dividends are not taxable to you. Irs e file 2011 However, see Distributions of Stock and Stock Rights under Dividends and Other Distributions in chapter 1 for some exceptions. Irs e file 2011 If the stock dividends are not taxable, you must divide your basis for the old stock between the old and new stock. Irs e file 2011 New and old stock identical. Irs e file 2011   If the new stock you received as a nontaxable dividend is identical to the old stock on which the dividend was declared, divide the adjusted basis of the old stock by the number of shares of old and new stock. Irs e file 2011 The result is your basis for each share of stock. Irs e file 2011 Example 1. Irs e file 2011 You owned one share of common stock that you bought for $45. Irs e file 2011 The corporation distributed two new shares of common stock for each share held. Irs e file 2011 You then had three shares of common stock. Irs e file 2011 Your basis in each share is $15 ($45 ÷ 3). Irs e file 2011 Example 2. Irs e file 2011 You owned two shares of common stock. Irs e file 2011 You bought one for $30 and the other for $45. Irs e file 2011 The corporation distributed two new shares of common stock for each share held. Irs e file 2011 You had six shares after the distribution—three with a basis of $10 each ($30 ÷ 3) and three with a basis of $15 each ($45 ÷ 3). Irs e file 2011 New and old stock not identical. Irs e file 2011   If the new stock you received as a nontaxable dividend is not identical to the old stock on which it was declared, the basis of the new stock is calculated differently. Irs e file 2011 Divide the adjusted basis of the old stock between the old and the new stock in the ratio of the fair market value of each lot of stock to the total fair market value of both lots on the date of distribution of the new stock. Irs e file 2011 Example. Irs e file 2011 You bought a share of common stock for $100. Irs e file 2011 Later, the corporation distributed a share of preferred stock for each share of common stock held. Irs e file 2011 At the date of distribution, your common stock had a fair market value of $150 and the preferred stock had a fair market value of $50. Irs e file 2011 You figure the basis of the old and new stock by dividing your $100 basis between them. Irs e file 2011 The basis of your common stock is $75 (($150 ÷ $200) × $100), and the basis of the new preferred stock is $25 (($50 ÷ $200) × $100). Irs e file 2011 Stock bought at various times. Irs e file 2011   Figure the basis of stock dividends received on stock you bought at various times and at different prices by allocating to each lot of stock the share of the stock dividends due to it. Irs e file 2011 Taxable stock dividends. Irs e file 2011   If your stock dividend is taxable when you receive it, the basis of your new stock is its fair market value on the date of distribution. Irs e file 2011 The basis of your old stock does not change. Irs e file 2011 Stock splits. Irs e file 2011   Figure the basis of stock splits in the same way as stock dividends if identical stock is distributed on the stock held. Irs e file 2011 Stock rights. Irs e file 2011   A stock right is a right to acquire a corporation's stock. Irs e file 2011 It may be exercised, it may be sold if it has a market value, or it may expire. Irs e file 2011 Stock rights are rarely taxable when you receive them. Irs e file 2011 See Distributions of Stock and Stock Rights under Dividends and Other Distributions in chapter 1. Irs e file 2011 Taxable stock rights. Irs e file 2011   If you receive stock rights that are taxable, the basis of the rights is their fair market value at the time of distribution. Irs e file 2011 The basis of the old stock does not change. Irs e file 2011 Nontaxable stock rights. Irs e file 2011   If you receive nontaxable stock rights and allow them to expire, they have no basis. Irs e file 2011   If you exercise or sell the nontaxable stock rights and if, at the time of distribution, the stock rights had a fair market value of 15% or more of the fair market value of the old stock, you must divide the adjusted basis of the old stock between the old stock and the stock rights. Irs e file 2011 Use a ratio of the fair market value of each to the total fair market value of both at the time of distribution. Irs e file 2011   If the fair market value of the stock rights was less than 15%, their basis is zero. Irs e file 2011 However, you can choose to divide the basis of the old stock between the old stock and the stock rights. Irs e file 2011 To make the choice, attach a statement to your return for the year in which you received the rights, stating that you choose to divide the basis of the stock. Irs e file 2011 Basis of new stock. Irs e file 2011   If you exercise the stock rights, the basis of the new stock is its cost plus the basis of the stock rights exercised. Irs e file 2011 Example. Irs e file 2011 You own 100 shares of ABC Company stock, which cost you $22 per share. Irs e file 2011 The ABC Company gave you 10 nontaxable stock rights that would allow you to buy 10 more shares at $26 per share. Irs e file 2011 At the time the stock rights were distributed, the stock had a market value of $30, not including the stock rights. Irs e file 2011 Each stock right had a market value of $3. Irs e file 2011 The market value of the stock rights was less than 15% of the market value of the stock, but you chose to divide the basis of your stock between the stock and the rights. Irs e file 2011 You figure the basis of the rights and the basis of the old stock as follows: 100 shares × $22 = $2,200, basis of old stock   100 shares × $30 = $3,000, market value of old stock   10 rights × $3 = $30, market value of rights   ($3,000 ÷ $3,030) × $2,200 = $2,178. Irs e file 2011 22, new basis of old stock   ($30 ÷ $3,030) × $2,200 = $21. Irs e file 2011 78, basis of rights   If you sell the rights, the basis for figuring gain or loss is $2. Irs e file 2011 18 ($21. Irs e file 2011 78 ÷ 10) per right. Irs e file 2011 If you exercise the rights, the basis of the stock you acquire is the price you pay ($26) plus the basis of the right exercised ($2. Irs e file 2011 18), or $28. Irs e file 2011 18 per share. Irs e file 2011 The remaining basis of the old stock is $21. Irs e file 2011 78 per share. Irs e file 2011 Investment property received in liquidation. Irs e file 2011   In general, if you receive investment property as a distribution in partial or complete liquidation of a corporation and if you recognize gain or loss when you acquire the property, your basis in the property is its fair market value at the time of the distribution. Irs e file 2011 S corporation stock. Irs e file 2011   You must increase your basis in stock of an S corporation by your pro rata share of the following items. Irs e file 2011 All income items of the S corporation, including tax-exempt income, that are separately stated and passed through to you as a shareholder. Irs e file 2011 The nonseparately stated income of the S corporation. Irs e file 2011 The amount of the deduction for depletion (other than oil and gas depletion) that is more than the basis of the property being depleted. Irs e file 2011   You must decrease your basis in stock of an S corporation by your pro rata share of the following items. Irs e file 2011 Distributions by the S corporation that were not included in your income. Irs e file 2011 All loss and deduction items of the S corporation that are separately stated and passed through to you. Irs e file 2011 Any nonseparately stated loss of the S corporation. Irs e file 2011 Any expense of the S corporation that is not deductible in figuring its taxable income and not properly chargeable to a capital account. Irs e file 2011 The amount of your deduction for depletion of oil and gas wells to the extent the deduction is not more than your share of the adjusted basis of the wells. Irs e file 2011 However, your basis in the stock cannot be reduced below zero. Irs e file 2011 Specialized small business investment company stock or partnership interest. Irs e file 2011   If you bought this stock or interest as replacement property for publicly traded securities you sold at a gain, you must reduce the basis of the stock or interest by the amount of any postponed gain on that sale. Irs e file 2011 See Rollover of Gain From Publicly Traded Securities , later. Irs e file 2011 Qualified small business stock. Irs e file 2011   If you bought this stock as replacement property for other qualified small business stock you sold at a gain, you must reduce the basis of this replacement stock by the amount of any postponed gain on the earlier sale. Irs e file 2011 See Gains on Qualified Small Business Stock , later. Irs e file 2011 Short sales. Irs e file 2011   If you cannot deduct payments you make to a lender in lieu of dividends on stock used in a short sale, the amount you pay to the lender is a capital expense, and you must add it to the basis of the stock used to close the short sale. Irs e file 2011   See Payments in lieu of dividends , later, for information about deducting payments in lieu of dividends. Irs e file 2011 Premiums on bonds. Irs e file 2011   If you buy a bond at a premium, the premium is treated as part of your basis in the bond. Irs e file 2011 If you choose to amortize the premium paid on a taxable bond, you must reduce the basis of the bond by the amortized part of the premium each year over the life of the bond. Irs e file 2011   Although you cannot deduct the premium on a tax-exempt bond, you must amortize it to determine your adjusted basis in the bond. Irs e file 2011 You must reduce the basis of the bond by the premium you amortized for the period you held the bond. Irs e file 2011   See Bond Premium Amortization in chapter 3 for more information. Irs e file 2011 Market discount on bonds. Irs e file 2011   If you include market discount on a bond in income currently, increase the basis of your bond by the amount of market discount you include in your income. Irs e file 2011 See Market Discount Bonds in chapter 1 for more information. Irs e file 2011 Bonds purchased at par value. Irs e file 2011   A bond purchased at par value (face amount) has no premium or discount. Irs e file 2011 When you sell or otherwise dispose of the bond, you figure the gain or loss by comparing the bond proceeds to the purchase price of the bond. Irs e file 2011 Example. Irs e file 2011 You purchased a bond several years ago for its par value of $10,000. Irs e file 2011 You sold the bond this year for $10,100. Irs e file 2011 You have a gain of $100. Irs e file 2011 However, if you had sold the bond for $9,900, you would have a loss of $100. Irs e file 2011 Acquisition discount on short-term obligations. Irs e file 2011   If you include acquisition discount on a short-term obligation in your income currently, increase the basis of the obligation by the amount of acquisition discount you include in your income. Irs e file 2011 See Discount on Short-Term Obligations in chapter 1 for more information. Irs e file 2011 Original issue discount (OID) on debt instruments. Irs e file 2011   Increase the basis of a debt instrument by the OID you include in your income. Irs e file 2011 See Original Issue Discount (OID) in chapter 1. Irs e file 2011 Discounted tax-exempt obligations. Irs e file 2011   OID on tax-exempt obligations is generally not taxable. Irs e file 2011 However, when you dispose of a tax-exempt obligation issued after September 3, 1982, that you acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. Irs e file 2011 The accrued OID is added to the basis of the obligation to determine your gain or loss. Irs e file 2011   For information on determining OID on a long-term obligation, see Debt Instruments Issued After July 1, 1982, and Before 1985 or Debt Instruments Issued After 1984, whichever applies, in Publication 1212 under Figuring OID on Long-Term Debt Instruments. Irs e file 2011   If the tax-exempt obligation has a maturity of 1 year or less, accrue OID under the rules for acquisition discount on short-term obligations. Irs e file 2011 See Discount on Short-Term Obligations in chapter 1. Irs e file 2011 Stripped tax-exempt obligation. Irs e file 2011   If you acquired a stripped tax-exempt bond or coupon after October 22, 1986, you must accrue OID on it to determine its adjusted basis when you dispose of it. Irs e file 2011 For stripped tax-exempt bonds or coupons acquired after June 10, 1987, part of this OID may be taxable. Irs e file 2011 You accrue the OID on these obligations in the manner described in chapter 1 under Stripped Bonds and Coupons . Irs e file 2011   Increase your basis in the stripped tax-exempt bond or coupon by the taxable and nontaxable accrued OID. Irs e file 2011 Also increase your basis by the interest that accrued (but was not paid and was not previously reflected in your basis) before the date you sold the bond or coupon. Irs e file 2011 In addition, for bonds acquired after June 10, 1987, add to your basis any accrued market discount not previously reflected in basis. Irs e file 2011 How To Figure Gain or Loss You figure gain or loss on a sale or trade of property by comparing the amount you realize with the adjusted basis of the property. Irs e file 2011 Gain. Irs e file 2011   If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain. Irs e file 2011 Loss. Irs e file 2011   If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss. Irs e file 2011 Amount realized. Irs e file 2011   The amount you realize from a sale or trade of property is everything you receive for the property minus your expenses of sale (such as redemption fees, sales commissions, sales charges, or exit fees). Irs e file 2011 Amount realized includes the money you receive plus the fair market value of any property or services you receive. Irs e file 2011   If you finance the buyer's purchase of your property and the debt instrument does not provide for adequate stated interest, the unstated interest that you must report as ordinary income will reduce the amount realized from the sale. Irs e file 2011 For more information, see Publication 537. Irs e file 2011   If a buyer of property issues a debt instrument to the seller of the property, the amount realized is determined by reference to the issue price of the debt instrument, which may or may not be the fair market value of the debt instrument. Irs e file 2011 See Regulations section 1. Irs e file 2011 1001-1(g). Irs e file 2011 However, if the debt instrument was previously issued by a third party (one not part of the sale transaction), the fair market value of the debt instrument is used to determine the amount realized. Irs e file 2011 Fair market value. Irs e file 2011   Fair market value is the price at which property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. Irs e file 2011 Example. Irs e file 2011 You trade A Company stock with an adjusted basis of $7,000 for B Company stock with a fair market value of $10,000, which is your amount realized. Irs e file 2011 Your gain is $3,000 ($10,000 – $7,000). Irs e file 2011 If you also receive a note for $6,000 that has an issue price of $6,000, your gain is $9,000 ($10,000 + $6,000 – $7,000). Irs e file 2011 Debt paid off. Irs e file 2011   A debt against the property, or against you, that is paid off as a part of the transaction or that is assumed by the buyer must be included in the amount realized. Irs e file 2011 This is true even if neither you nor the buyer is personally liable for the debt. Irs e file 2011 For example, if you sell or trade property that is subject to a nonrecourse loan, the amount you realize generally includes the full amount of the note assumed by the buyer even if the amount of the note is more than the fair market value of the property. Irs e file 2011 Example. Irs e file 2011 You sell stock that you had pledged as security for a bank loan of $8,000. Irs e file 2011 Your basis in the stock is $6,000. Irs e file 2011 The buyer pays off your bank loan and pays you $20,000 in cash. Irs e file 2011 The amount realized is $28,000 ($20,000 + $8,000). Irs e file 2011 Your gain is $22,000 ($28,000 – $6,000). Irs e file 2011 Payment of cash. Irs e file 2011   If you trade property and cash for other property, the amount you realize is the fair market value of the property you receive. Irs e file 2011 Determine your gain or loss by subtracting the cash you pay and the adjusted basis of the property you trade in from the amount you realize. Irs e file 2011 If the result is a positive number, it is a gain. Irs e file 2011 If the result is a negative number, it is a loss. Irs e file 2011 No gain or loss. Irs e file 2011   You may have to use a basis for figuring gain that is different from the basis used for figuring loss. Irs e file 2011 In this case, you may have neither a gain nor a loss. Irs e file 2011 See No gain or loss in the discussion on the basis of property you received as a gift under Basis Other Than Cost, earlier. Irs e file 2011 Special Rules for Mutual Funds To figure your gain or loss when you dispose of mutual fund shares, you need to determine which shares were sold and the basis of those shares. Irs e file 2011 If your shares in a mutual fund were acquired all on the same day and for the same price, figuring their basis is not difficu