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Irs efile 1. Irs efile   Investment Income Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: General InformationSSN for joint account. Irs efile Custodian account for your child. Irs efile Penalty for failure to supply SSN. Irs efile Certification. Irs efile Underreported interest and dividends. Irs efile How to stop backup withholding due to underreporting. Irs efile How to stop backup withholding due to an incorrect identification number. Irs efile Reporting backup withholding. Irs efile Nonresident aliens. Irs efile Penalties. Irs efile Savings account with parent as trustee. Irs efile Interest IncomeInterest not reported on Form 1099-INT. Irs efile Nominees. Irs efile Incorrect amount. Irs efile Information reporting requirement. Irs efile Taxable Interest — General Below-Market Loans U. Irs efile S. Irs efile Savings Bonds U. Irs efile S. Irs efile Treasury Bills, Notes, and Bonds Bonds Sold Between Interest Dates Insurance State or Local Government Obligations Discount on Debt InstrumentsOriginal Issue Discount (OID) Market Discount Bonds Discount on Short-Term Obligations Election To Report All Interest as OID When To Report Interest IncomeConstructive receipt. Irs efile How To Report Interest IncomeSchedule B (Form 1040A or 1040). Irs efile Worksheet for savings bonds distributed from a retirement or profit-sharing plan. Irs efile File Form 1099-INT with the IRS. Irs efile Dividends and Other DistributionsDividends not reported on Form 1099-DIV. Irs efile Nominees. Irs efile Ordinary Dividends Capital Gain Distributions Nondividend Distributions Liquidating Distributions Distributions of Stock and Stock Rights Other Distributions How To Report Dividend IncomeElection. Irs efile Independent contractor. Irs efile Investment interest deducted. Irs efile Exception 1. Irs efile Exception 2. Irs efile Undistributed capital gains. Irs efile File Form 1099-DIV with the IRS. Irs efile Stripped Preferred Stock REMICs, FASITs, and Other CDOsREMICs Collateralized Debt Obligations (CDOs) FASITs S CorporationsLimit on losses and deductions. Irs efile Passive activity losses. Irs efile Form 8582. Irs efile Investment ClubsInvestments in name of member. Irs efile Tax Treatment of the Club Topics - This chapter discusses: Interest Income , Discount on Debt Instruments , When To Report Interest Income , How To Report Interest Income , Dividends and Other Distributions , How To Report Dividend Income , Stripped Preferred Stock , Real estate mortgage investment conduits (REMICs), financial asset securitization investment trusts (FASITs), and other collateralized debt obligations (CDOs) , S Corporations , and Investment Clubs . Irs efile Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 537 Installment Sales 590 Individual Retirement Arrangements (IRAs) 925 Passive Activity and At-Risk Rules 1212 Guide to Original Issue Discount (OID) Instruments Form (and Instructions) Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends Schedule D (Form 1040) Capital Gains and Losses 1040 U. Irs efile S. Irs efile Individual Income Tax Return 1040A U. Irs efile S. Irs efile Individual Income Tax Return 1040EZ Income Tax Return for Single and Joint Filers With No Dependents 1099 General Instructions for Certain Information Returns 2439 Notice to Shareholder of Undistributed Long-Term Capital Gains 3115 Application for Change in Accounting Method 6251 Alternative Minimum Tax — Individuals 8582 Passive Activity Loss Limitations 8615 Tax for Certain Children Who Have Unearned Income 8814 Parents' Election To Report Child's Interest and Dividends 8815 Exclusion of Interest From Series EE and I U. Irs efile S. Irs efile Savings Bonds Issued After 1989 8818 Optional Form To Record Redemption of Series EE and I U. Irs efile S. Irs efile Savings Bonds Issued After 1989 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets 8960 Net Investment Income Tax—Individuals, Estates, and Trusts See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Irs efile General Information A few items of general interest are covered here. Irs efile Recordkeeping. Irs efile You should keep a list showing sources and investment income amounts you receive during the year. Irs efile Also keep the forms you receive showing your investment income (Forms 1099-INT, Interest Income, and 1099-DIV, Dividends and Distributions, for example) as an important part of your records. Irs efile Net investment income tax (NIIT). Irs efile   Beginning in 2013, you may be subject to the NIIT. Irs efile The NIIT is a 3. Irs efile 8% tax on the lesser of your net investment income or the amount of your modified adjusted gross income (MAGI) that is over a threshold amount based on your filing status. Irs efile    Filing Status Threshold Amount Married filing jointly $250,000 Married filing separately $125,000 Single $200,000 Head of household (with qualifying person) $200,000 Qualifying Widow(er) with dependent child $250,000    For more information, see Form 8960 and Instructions for Form 8960. Irs efile Tax on unearned income of certain children. Irs efile   Part of a child's 2013 unearned income may be taxed at the parent's tax rate. Irs efile This may happen if all of the following are true. Irs efile The child had more than $2,000 of unearned income. Irs efile The child is required to file a tax return. Irs efile The child was: Under age 18 at the end of 2013, Age 18 at the end of 2013 and did not have earned income that was more than half of the child's support, or A full-time student over age 18 and under age 24 at the end of 2013 and did not have earned income that was more than half of the child's support. Irs efile At least one of the child's parents was alive at the end of 2013. Irs efile The child does not file a joint return for 2013. Irs efile A child born on January 1, 1996, is considered to be age 18 at the end of 2013; a child born on January 1, 1995, is considered to be age 19 at the end of 2013; a child born on January 1, 1990, is considered to be age 24 at the end of 2013. Irs efile   If all of these statements are true, Form 8615 must be completed and attached to the child's tax return. Irs efile If any of these statements is not true, Form 8615 is not required and the child's income is taxed at his or her own tax rate. Irs efile    However, the parent can choose to include the child's interest and dividends on the parent's return if certain requirements are met. Irs efile Use Form 8814 for this purpose. Irs efile   For more information about the tax on unearned income of children and the parents' election, see Publication 929, Tax Rules for Children and Dependents. Irs efile Beneficiary of an estate or trust. Irs efile   Interest, dividends, and other investment income you receive as a beneficiary of an estate or trust is generally taxable income. Irs efile You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. Irs efile , from the fiduciary. Irs efile Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040. Irs efile Social security number (SSN). Irs efile   You must give your name and SSN or individual tax identification number (ITIN) to any person required by federal tax law to make a return, statement, or other document that relates to you. Irs efile This includes payers of interest and dividends. Irs efile If you do not give your SSN or ITIN to the payer of interest, you may have to pay a penalty. Irs efile SSN for joint account. Irs efile   If the funds in a joint account belong to one person, list that person's name first on the account and give that person's SSN to the payer. Irs efile (For information on who owns the funds in a joint account, see Joint accounts , later. Irs efile ) If the joint account contains combined funds, give the SSN of the person whose name is listed first on the account. Irs efile This is because only one name and SSN can be shown on Form 1099. Irs efile   These rules apply both to joint ownership by a married couple and to joint ownership by other individuals. Irs efile For example, if you open a joint savings account with your child using funds belonging to the child, list the child's name first on the account and give the child's SSN. Irs efile Custodian account for your child. Irs efile   If your child is the actual owner of an account that is recorded in your name as custodian for the child, give the child's SSN to the payer. Irs efile For example, you must give your child's SSN to the payer of dividends on stock owned by your child, even though the dividends are paid to you as custodian. Irs efile Penalty for failure to supply SSN. Irs efile   You will be subject to a penalty if, when required, you fail to: Include your SSN on any return, statement, or other document, Give your SSN to another person who must include it on any return, statement, or other document, or Include the SSN of another person on any return, statement, or other document. Irs efile The penalty is $50 for each failure up to a maximum penalty of $100,000 for any calendar year. Irs efile   You will not be subject to this penalty if you can show that your failure to provide the SSN was due to reasonable cause and not to willful neglect. Irs efile   If you fail to supply an SSN, you may also be subject to backup withholding. Irs efile Backup withholding. Irs efile   Your investment income is generally not subject to regular withholding. Irs efile However, it may be subject to backup withholding to ensure that income tax is collected on the income. Irs efile Under backup withholding, the bank, broker, or other payer of interest, original issue discount (OID), dividends, cash patronage dividends, or royalties must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate. Irs efile   Backup withholding applies if: You do not give the payer your identification number (either a social security number or an employer identification number) in the required manner, The IRS notifies the payer that you gave an incorrect identification number, The IRS notifies the payer that you are subject to backup withholding on interest or dividends because you have underreported interest or dividends on your income tax return, or You are required, but fail, to certify that you are not subject to backup withholding for the reason described in (3). Irs efile Certification. Irs efile   For new accounts paying interest or dividends, you must certify under penalties of perjury that your SSN is correct and that you are not subject to backup withholding. Irs efile Your payer will give you a Form W-9, Request for Taxpayer Identification Number and Certification, or similar form, to make this certification. Irs efile If you fail to make this certification, backup withholding may begin immediately on your new account or investment. Irs efile Underreported interest and dividends. Irs efile   You will be considered to have underreported your interest and dividends if the IRS has determined for a tax year that: You failed to include any part of a reportable interest or dividend payment required to be shown on your return, or You were required to file a return and to include a reportable interest or dividend payment on that return, but you failed to file the return. Irs efile How to stop backup withholding due to underreporting. Irs efile   If you have been notified that you underreported interest or dividends, you can request a determination from the IRS to prevent backup withholding from starting or to stop backup withholding once it has begun. Irs efile You must show that at least one of the following situations applies. Irs efile No underreporting occurred. Irs efile You have a bona fide dispute with the IRS about whether underreporting occurred. Irs efile Backup withholding will cause or is causing an undue hardship, and it is unlikely that you will underreport interest and dividends in the future. Irs efile You have corrected the underreporting by filing a return if you did not previously file one and by paying all taxes, penalties, and interest due for any underreported interest or dividend payments. Irs efile   If the IRS determines that backup withholding should stop, it will provide you with a certification and will notify the payers who were sent notices earlier. Irs efile How to stop backup withholding due to an incorrect identification number. Irs efile   If you have been notified by a payer that you are subject to backup withholding because you have provided an incorrect SSN or employer identification number, you can stop it by following the instructions the payer gives you. Irs efile Reporting backup withholding. Irs efile   If backup withholding is deducted from your interest or dividend income or other reportable payment, the bank or other business must give you an information return for the year (for example, a Form 1099-INT) indicating the amount withheld. Irs efile The information return will show any backup withholding as “Federal income tax withheld. Irs efile ” Nonresident aliens. Irs efile    Generally, payments made to nonresident aliens are not subject to backup withholding. Irs efile You can use Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to certify exempt status. Irs efile However, this does not exempt you from the 30% (or lower treaty) withholding rate that may apply to your investment income. Irs efile For information on the 30% rate, see Publication 519, U. Irs efile S. Irs efile Tax Guide for Aliens. Irs efile Penalties. Irs efile   There are civil and criminal penalties for giving false information to avoid backup withholding. Irs efile The civil penalty is $500. Irs efile The criminal penalty, upon conviction, is a fine of up to $1,000, or imprisonment of up to 1 year, or both. Irs efile Where to report investment income. Irs efile   Table 1-1 gives an overview of the forms and schedules to use to report some common types of investment income. Irs efile But see the rest of this publication for detailed information about reporting investment income. Irs efile Joint accounts. Irs efile   If two or more persons hold property (such as a savings account, bond, or stock) as joint tenants, tenants by the entirety, or tenants in common, each person's share of any interest or dividends from the property is determined by local law. Irs efile Community property states. Irs efile   If you are married and receive a distribution that is community income, one-half of the distribution is generally considered to be received by each spouse. Irs efile If you file separate returns, you must each report one-half of any taxable distribution. Irs efile See Publication 555, Community Property, for more information on community income. Irs efile   If the distribution is not considered community property and you and your spouse file separate returns, each of you must report your separate taxable distributions. Irs efile Example. Irs efile You and your spouse have a joint money market account. Irs efile Under state law, half the income from the account belongs to you, and half belongs to your spouse. Irs efile If you file separate returns, you each report half the income. Irs efile Income from property given to a child. Irs efile   Property you give as a parent to your child under the Model Gifts of Securities to Minors Act, the Uniform Gifts to Minors Act, or any similar law becomes the child's property. Irs efile   Income from the property is taxable to the child, except that any part used to satisfy a legal obligation to support the child is taxable to the parent or guardian having that legal obligation. Irs efile Savings account with parent as trustee. Irs efile   Interest income from a savings account opened for a minor child, but placed in the name and subject to the order of the parents as trustees, is taxable to the child if, under the law of the state in which the child resides, both of the following are true. Irs efile The savings account legally belongs to the child. Irs efile The parents are not legally permitted to use any of the funds to support the child. Irs efile Table 1-1. Irs efile Where To Report Common Types of Investment Income (For detailed information about reporting investment income, see the rest of this publication, especially How To Report Interest Income and How To Report Dividend Income in chapter 1. Irs efile ) Type of Income If you file Form 1040, report on . Irs efile . Irs efile . Irs efile If you can file Form 1040A, report on . Irs efile . Irs efile . Irs efile If you can file Form 1040EZ, report on . Irs efile . Irs efile . Irs efile Tax-exempt interest (Form 1099-INT, box 8) Line 8b Line 8b Space to the left of line 2 (enter “TEI” and the amount) Taxable interest that totals $1,500 or less Line 8a (You may need to file Schedule B as well. Irs efile ) Line 8a (You may need to file Schedule B as well. Irs efile ) Line 2 Taxable interest that totals more than $1,500 Line 8a; also use Schedule B, line 1 Line 8a; also use Schedule B, line 1   Savings bond interest you will exclude because of higher education expenses Schedule B; also use Form 8815 Schedule B; also use Form 8815   Ordinary dividends that total $1,500 or less Line 9a (You may need to file Schedule B as well. Irs efile ) Line 9a (You may need to file Schedule B as well. Irs efile )   Ordinary dividends that total more than $1,500 Line 9a; also use Schedule B, line 5 Line 9a; also use Schedule B, line 5   Qualified dividends (if you do not have to file Schedule D) Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 2 Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 2   Qualified dividends (if you have to file Schedule D) Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet, line 2 You cannot use Form 1040A    You cannot use Form 1040EZ Capital gain distributions (if you do not have to file Schedule D) Line 13; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 3 Line 10; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 3   Capital gain distributions (if you have to file Schedule D) Schedule D, line 13; also use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet     Section 1250, 1202, or collectibles gain (Form 1099-DIV, box 2b, 2c, or 2d) Form 8949 and Schedule D     Nondividend distributions (Form 1099-DIV, box 3) Generally not reported*     Undistributed capital gains (Form 2439, boxes 1a - 1d) Schedule D     Gain or loss from sales of stocks or bonds Line 13; also use Form 8949, Schedule D, and the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet You cannot use Form 1040A   Gain or loss from exchanges of like-kind investment property Line 13; also use Schedule D, Form 8824, and the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet     *Report any amounts in excess of your basis in your mutual fund shares on Form 8949. Irs efile Use Part II if you held the shares more than 1 year. Irs efile Use Part I if you held your mutual fund shares 1 year or less. Irs efile For details on Form 8949, see Reporting Capital Gains and Losses in chapter 4, and the Instructions for Form 8949. Irs efile Accuracy-related penalty. Irs efile   An accuracy-related penalty of 20% can be charged for underpayments of tax due to negligence or disregard of rules or regulations or substantial understatement of tax. Irs efile For information on the penalty and any interest that applies, see Penalties in chapter 2. Irs efile Interest Income This section discusses the tax treatment of different types of interest income. Irs efile In general, any interest that you receive or that is credited to your account and can be withdrawn is taxable income. Irs efile (It does not have to be entered in your passbook. Irs efile ) Exceptions to this rule are discussed later. Irs efile Form 1099-INT. Irs efile   Interest income is generally reported to you on Form 1099-INT, or a similar statement, by banks, savings and loans, and other payers of interest. Irs efile This form shows you the interest you received during the year. Irs efile Keep this form for your records. Irs efile You do not have to attach it to your tax return. Irs efile   Report on your tax return the total interest income you receive for the tax year. Irs efile Interest not reported on Form 1099-INT. Irs efile   Even if you do not receive Form 1099-INT, you must still report all of your interest income. Irs efile For example, you may receive distributive shares of interest from partnerships or S corporations. Irs efile This interest is reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Irs efile , and Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. Irs efile Nominees. Irs efile   Generally, if someone receives interest as a nominee for you, that person must give you a Form 1099-INT showing the interest received on your behalf. Irs efile   If you receive a Form 1099-INT that includes amounts belonging to another person, see the discussion on Nominee distributions , later, under How To Report Interest Income. Irs efile Incorrect amount. Irs efile   If you receive a Form 1099-INT that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. Irs efile The new Form 1099-INT you receive will be marked “Corrected. Irs efile ” Form 1099-OID. Irs efile   Reportable interest income also may be shown on Form 1099-OID, Original Issue Discount. Irs efile For more information about amounts shown on this form, see Original Issue Discount (OID) , later in this chapter. Irs efile Exempt-interest dividends. Irs efile   Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. Irs efile (However, see Information reporting requirement , next. Irs efile ) Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. Irs efile You do not reduce your basis for distributions that are exempt-interest dividends. Irs efile Information reporting requirement. Irs efile   Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file. Irs efile This is an information reporting requirement and does not change the exempt-interest dividends into taxable income. Irs efile See How To Report Interest Income , later. Irs efile Note. Irs efile Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. Irs efile The exempt-interest dividends subject to the alternative minimum tax are shown in box 11 of Form 1099-DIV. Irs efile See Form 6251 and its instructions for more information about this tax. Irs efile Private activity bonds are discussed later under State or Local Government Obligations. Irs efile Interest on VA dividends. Irs efile   Interest on insurance dividends left on deposit with the Department of Veterans Affairs (VA) is not taxable. Irs efile This includes interest paid on dividends on converted United States Government Life Insurance policies and on National Service Life Insurance policies. Irs efile Individual retirement arrangements (IRAs). Irs efile   Interest on a Roth IRA generally is not taxable. Irs efile Interest on a traditional IRA is tax deferred. Irs efile You generally do not include it in your income until you make withdrawals from the IRA. Irs efile See Publication 590 for more information. Irs efile Taxable Interest — General Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. Irs efile The following are some sources of taxable interest. Irs efile Dividends that are actually interest. Irs efile   Certain distributions commonly called dividends are actually interest. Irs efile You must report as interest so-called “dividends” on deposits or on share accounts in: Cooperative banks, Credit unions, Domestic building and loan associations, Domestic savings and loan associations, Federal savings and loan associations, and Mutual savings banks. Irs efile  The “dividends” will be shown as interest income on Form 1099-INT. Irs efile Money market funds. Irs efile   Money market funds are offered by nonbank financial institutions such as mutual funds and stock brokerage houses, and pay dividends. Irs efile Generally, amounts you receive from money market funds should be reported as dividends, not as interest. Irs efile Certificates of deposit and other deferred interest accounts. Irs efile   If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the account. Irs efile You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. Irs efile The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. Irs efile If interest is deferred for more than 1 year, see Original Issue Discount (OID) , later. Irs efile Interest subject to penalty for early withdrawal. Irs efile   If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. Irs efile You must report the total amount of interest paid or credited to your account during the year, without subtracting the penalty. Irs efile See Penalty on early withdrawal of savings under How To Report Interest Income, later, for more information on how to report the interest and deduct the penalty. Irs efile Money borrowed to invest in certificate of deposit. Irs efile   The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. Irs efile You must report the total interest you earn on the certificate in your income. Irs efile If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income. Irs efile See Interest Expenses in chapter 3. Irs efile Example. Irs efile You deposited $5,000 with a bank and borrowed $5,000 from the bank to make up the $10,000 minimum deposit required to buy a 6-month certificate of deposit. Irs efile The certificate earned $575 at maturity in 2013, but you received only $265, which represented the $575 you earned minus $310 interest charged on your $5,000 loan. Irs efile The bank gives you a Form 1099-INT for 2013 showing the $575 interest you earned. Irs efile The bank also gives you a statement showing that you paid $310 interest for 2013. Irs efile You must include the $575 in your income. Irs efile If you itemize your deductions on Schedule A (Form 1040), Itemized Deductions, you can deduct $310, subject to the net investment income limit. Irs efile Gift for opening account. Irs efile   If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest. Irs efile   For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. Irs efile For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. Irs efile The value is determined by the cost to the financial institution. Irs efile Example. Irs efile You open a savings account at your local bank and deposit $800. Irs efile The account earns $20 interest. Irs efile You also receive a $15 calculator. Irs efile If no other interest is credited to your account during the year, the Form 1099-INT you receive will show $35 interest for the year. Irs efile You must report $35 interest income on your tax return. Irs efile Interest on insurance dividends. Irs efile   Interest on insurance dividends left on deposit with an insurance company that can be withdrawn annually is taxable to you in the year it is credited to your account. Irs efile However, if you can withdraw it only on the anniversary date of the policy (or other specified date), the interest is taxable in the year that date occurs. Irs efile Prepaid insurance premiums. Irs efile   Any increase in the value of prepaid insurance premiums, advance premiums, or premium deposit funds is interest if it is applied to the payment of premiums due on insurance policies or made available for you to withdraw. Irs efile U. Irs efile S. Irs efile obligations. Irs efile   Interest on U. Irs efile S. Irs efile obligations, such as U. Irs efile S. Irs efile Treasury bills, notes, and bonds, issued by any agency or instrumentality of the United States is taxable for federal income tax purposes. Irs efile Interest on tax refunds. Irs efile   Interest you receive on tax refunds is taxable income. Irs efile Interest on condemnation award. Irs efile   If the condemning authority pays you interest to compensate you for a delay in payment of an award, the interest is taxable. Irs efile Installment sale payments. Irs efile   If a contract for the sale or exchange of property provides for deferred payments, it also usually provides for interest payable with the deferred payments. Irs efile That interest is taxable when you receive it. Irs efile If little or no interest is provided for in a deferred payment contract, part of each payment may be treated as interest. Irs efile See Unstated Interest and Original Issue Discount (OID) in Publication 537. Irs efile Interest on annuity contract. Irs efile   Accumulated interest on an annuity contract you sell before its maturity date is taxable. Irs efile Usurious interest. Irs efile   Usurious interest is interest charged at an illegal rate. Irs efile This is taxable as interest unless state law automatically changes it to a payment on the principal. Irs efile Interest income on frozen deposits. Irs efile   Exclude from your gross income interest on frozen deposits. Irs efile A deposit is frozen if, at the end of the year, you cannot withdraw any part of the deposit because: The financial institution is bankrupt or insolvent, or The state in which the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt or insolvent. Irs efile   The amount of interest you must exclude is the interest that was credited on the frozen deposits minus the sum of: The net amount you withdrew from these deposits during the year, and The amount you could have withdrawn as of the end of the year (not reduced by any penalty for premature withdrawals of a time deposit). Irs efile If you receive a Form 1099-INT for interest income on deposits that were frozen at the end of 2013, see Frozen deposits under How To Report Interest Income for information about reporting this interest income exclusion on your tax return. Irs efile   The interest you exclude is treated as credited to your account in the following year. Irs efile You must include it in income in the year you can withdraw it. Irs efile Example. Irs efile $100 of interest was credited on your frozen deposit during the year. Irs efile You withdrew $80 but could not withdraw any more as of the end of the year. Irs efile You must include $80 in your income and exclude $20 from your income for the year. Irs efile You must include the $20 in your income for the year you can withdraw it. Irs efile Bonds traded flat. Irs efile    If you buy a bond at a discount when interest has been defaulted or when the interest has accrued but has not been paid, the transaction is described as trading a bond flat. Irs efile The defaulted or unpaid interest is not income and is not taxable as interest if paid later. Irs efile When you receive a payment of that interest, it is a return of capital that reduces the remaining cost basis of your bond. Irs efile Interest that accrues after the date of purchase, however, is taxable interest income for the year received or accrued. Irs efile See Bonds Sold Between Interest Dates , later in this chapter. Irs efile Below-Market Loans If you make a below-market gift or demand loan, you must report as interest income any forgone interest (defined later) from that loan. Irs efile The below-market loan rules and exceptions are described in this section. Irs efile For more information, see section 7872 of the Internal Revenue Code and its regulations. Irs efile If you receive a below-market loan, you may be able to deduct the forgone interest as well as any interest you actually paid, but not if it is personal interest. Irs efile Loans subject to the rules. Irs efile   The rules for below-market loans apply to: Gift loans, Pay-related loans, Corporation-shareholder loans, Tax avoidance loans, and Certain loans made to qualified continuing care facilities under a continuing care contract. Irs efile A pay-related loan is any below-market loan between an employer and an employee or between an independent contractor and a person for whom the contractor provides services. Irs efile A tax avoidance loan is any below-market loan where the avoidance of federal tax is one of the main purposes of the interest arrangement. Irs efile Forgone interest. Irs efile   For any period, forgone interest is: The amount of interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Irs efile Applicable federal rate. Irs efile   Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Irs efile Some IRS offices have these bulletins available for research. Irs efile See chapter 5, How To Get Tax Help , for other ways to get this information. Irs efile Rules for below-market loans. Irs efile   The rules that apply to a below-market loan depend on whether the loan is a gift loan, demand loan, or term loan. Irs efile Gift and demand loans. Irs efile   A gift loan is any below-market loan where the forgone interest is in the nature of a gift. Irs efile   A demand loan is a loan payable in full at any time upon demand by the lender. Irs efile A demand loan is a below-market loan if no interest is charged or if interest is charged at a rate below the applicable federal rate. Irs efile   A demand loan or gift loan that is a below-market loan is generally treated as an arm's-length transaction in which the lender is treated as having made: A loan to the borrower in exchange for a note that requires the payment of interest at the applicable federal rate, and An additional payment to the borrower in an amount equal to the forgone interest. Irs efile The borrower is generally treated as transferring the additional payment back to the lender as interest. Irs efile The lender must report that amount as interest income. Irs efile   The lender's additional payment to the borrower is treated as a gift, dividend, contribution to capital, pay for services, or other payment, depending on the substance of the transaction. Irs efile The borrower may have to report this payment as taxable income, depending on its classification. Irs efile These transfers are considered to occur annually, generally on December 31. Irs efile Term loans. Irs efile   A term loan is any loan that is not a demand loan. Irs efile A term loan is a below-market loan if the amount of the loan is more than the present value of all payments due under the loan. Irs efile   A lender who makes a below-market term loan other than a gift loan is treated as transferring an additional lump-sum cash payment to the borrower (as a dividend, contribution to capital, etc. Irs efile ) on the date the loan is made. Irs efile The amount of this payment is the amount of the loan minus the present value, at the applicable federal rate, of all payments due under the loan. Irs efile An equal amount is treated as original issue discount (OID). Irs efile The lender must report the annual part of the OID as interest income. Irs efile The borrower may be able to deduct the OID as interest expense. Irs efile See Original Issue Discount (OID) , later. Irs efile Exceptions to the below-market loan rules. Irs efile   Exceptions to the below-market loan rules are discussed here. Irs efile Exception for loans of $10,000 or less. Irs efile   The rules for below-market loans do not apply to any day on which the total outstanding amount of loans between the borrower and lender is $10,000 or less. Irs efile This exception applies only to: Gift loans between individuals if the gift loan is not directly used to buy or carry income-producing assets, and Pay-related loans or corporation-shareholder loans if the avoidance of federal tax is not a principal purpose of the interest arrangement. Irs efile This exception does not apply to a term loan described in (2) earlier that previously has been subject to the below-market loan rules. Irs efile Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Irs efile Exception for loans to continuing care facilities. Irs efile   Loans to qualified continuing care facilities under continuing care contracts are not subject to the rules for below-market loans for the calendar year if the lender or the lender's spouse is age 62 or older at the end of the year. Irs efile For the definitions of qualified continuing care facility and continuing care contract, see Internal Revenue Code section 7872(h). Irs efile Exception for loans without significant tax effect. Irs efile   Loans are excluded from the below-market loan rules if their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. Irs efile These loans include: Loans made available by the lender to the general public on the same terms and conditions that are consistent with the lender's customary business practice; Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public; Certain employee-relocation loans; Certain loans from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Irs efile S. Irs efile trade or business and would not be exempt from U. Irs efile S. Irs efile tax under an income tax treaty; Gift loans to a charitable organization, contributions to which are deductible, if the total outstanding amount of loans between the organization and lender is $250,000 or less at all times during the tax year; and Other loans on which the interest arrangement can be shown to have no significant effect on the federal tax liability of the lender or the borrower. Irs efile For a loan described in (6) above, all the facts and circumstances are used to determine if the interest arrangement has a significant effect on the federal tax liability of the lender or borrower. Irs efile Some factors to be considered are: Whether items of income and deduction generated by the loan offset each other; The amount of these items; The cost to you of complying with the below-market loan rules, if they were to apply; and Any reasons other than taxes for structuring the transaction as a below-market loan. Irs efile If you structure a transaction to meet this exception and one of the principal purposes of that structure is the avoidance of federal tax, the loan will be considered a tax-avoidance loan, and this exception will not apply. Irs efile Limit on forgone interest for gift loans of $100,000 or less. Irs efile   For gift loans between individuals, if the outstanding loans between the lender and borrower total $100,000 or less, the forgone interest to be included in income by the lender and deducted by the borrower is limited to the amount of the borrower's net investment income for the year. Irs efile If the borrower's net investment income is $1,000 or less, it is treated as zero. Irs efile This limit does not apply to a loan if the avoidance of federal tax is one of the main purposes of the interest arrangement. Irs efile Effective dates. Irs efile    These rules apply to term loans made after June 6, 1984, and to demand loans outstanding after that date. Irs efile U. Irs efile S. Irs efile Savings Bonds This section provides tax information on U. Irs efile S. Irs efile savings bonds. Irs efile It explains how to report the interest income on these bonds and how to treat transfers of these bonds. Irs efile U. Irs efile S. Irs efile savings bonds currently offered to individuals include Series EE bonds and Series I bonds. Irs efile For other information on U. Irs efile S. Irs efile savings bonds, write to:  For Series HH/H: Bureau of the Fiscal Service Division of Customer Assistance P. Irs efile O. Irs efile Box 2186 Parkersburg, WV 26106-2186  For Series EE and I paper savings bonds: Bureau of the Fiscal Service Division of Customer Assistance P. Irs efile O. Irs efile Box 7012 Parkersburg, WV 26106-7012  For Series EE and I electronic bonds: Bureau of the Fiscal Service  Division of Customer Assistance P. Irs efile O. Irs efile Box 7015 Parkersburg, WV 26106-7015 Or, on the Internet, visit: www. Irs efile treasurydirect. Irs efile gov/indiv/indiv. Irs efile htm. Irs efile Accrual method taxpayers. Irs efile   If you use an accrual method of accounting, you must report interest on U. Irs efile S. Irs efile savings bonds each year as it accrues. Irs efile You cannot postpone reporting interest until you receive it or until the bonds mature. Irs efile Cash method taxpayers. Irs efile   If you use the cash method of accounting, as most individual taxpayers do, you generally report the interest on U. Irs efile S. Irs efile savings bonds when you receive it. Irs efile But see Reporting options for cash method taxpayers , later. Irs efile Series HH bonds. Irs efile   These bonds were issued at face value. Irs efile Interest is paid twice a year by direct deposit to your bank account. Irs efile If you are a cash method taxpayer, you must report interest on these bonds as income in the year you receive it. Irs efile   Series HH bonds were first offered in 1980 and last offered in August 2004. Irs efile Before 1980, series H bonds were issued. Irs efile Series H bonds are treated the same as series HH bonds. Irs efile If you are a cash method taxpayer, you must report the interest when you receive it. Irs efile   Series H bonds have a maturity period of 30 years. Irs efile Series HH bonds mature in 20 years. Irs efile The last series H bonds matured in 2009. Irs efile The last series HH bonds will mature in 2024. Irs efile Series EE and series I bonds. Irs efile   Interest on these bonds is payable when you redeem the bonds. Irs efile The difference between the purchase price and the redemption value is taxable interest. Irs efile Series EE bonds. Irs efile   Series EE bonds were first offered in January 1980 and have a maturity period of 30 years. Irs efile Before July 1980, series E bonds were issued. Irs efile The original 10-year maturity period of series E bonds has been extended to 40 years for bonds issued before December 1965 and 30 years for bonds issued after November 1965. Irs efile Paper series EE and series E bonds are issued at a discount. Irs efile The face value is payable to you at maturity. Irs efile Electronic series EE bonds are issued at their face value. Irs efile The face value plus accrued interest is payable to you at maturity. Irs efile As of January 1, 2012, paper savings bonds were no longer sold at financial institutions. Irs efile    Owners of paper series EE bonds can convert them to electronic bonds. Irs efile These converted bonds do not retain the denomination listed on the paper certificate but are posted at their purchase price (with accrued interest). Irs efile Series I bonds. Irs efile   Series I bonds were first offered in 1998. Irs efile These are inflation-indexed bonds issued at their face amount with a maturity period of 30 years. Irs efile The face value plus all accrued interest is payable to you at maturity. Irs efile Reporting options for cash method taxpayers. Irs efile   If you use the cash method of reporting income, you can report the interest on series EE, series E, and series I bonds in either of the following ways. Irs efile Method 1. Irs efile Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year in which they mature. Irs efile (However, see Savings bonds traded , later. Irs efile )  Note. Irs efile Series EE bonds issued in 1983 matured in 2013. Irs efile If you have used method 1, you generally must report the interest on these bonds on your 2013 return. Irs efile The last series E bonds were issued in 1980 and matured in 2010. Irs efile If you used method 1, you generally should have reported the interest on these bonds on your 2010 return. Irs efile Method 2. Irs efile Choose to report the increase in redemption value as interest each year. Irs efile  You must use the same method for all series EE, series E, and series I bonds you own. Irs efile If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1. Irs efile If you plan to cash your bonds in the same year you will pay for higher educational expenses, you may want to use method 1 because you may be able to exclude the interest from your income. Irs efile To learn how, see Education Savings Bond Program, later. Irs efile Change from method 1. Irs efile   If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission from the IRS. Irs efile In the year of change, you must report all interest accrued to date and not previously reported for all your bonds. Irs efile   Once you choose to report the interest each year, you must continue to do so for all series EE, series E, and series I bonds you own and for any you get later, unless you request permission to change, as explained next. Irs efile Change from method 2. Irs efile   To change from method 2 to method 1, you must request permission from the IRS. Irs efile Permission for the change is automatically granted if you send the IRS a statement that meets all the following requirements. Irs efile You have typed or printed the following number at the top: “131. Irs efile ” It includes your name and social security number under “131. Irs efile ” It includes the year of change (both the beginning and ending dates). Irs efile It identifies the savings bonds for which you are requesting this change. Irs efile It includes your agreement to: Report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest; and Report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years. Irs efile   You must attach this statement to your tax return for the year of change, which you must file by the due date (including extensions). Irs efile   You can have an automatic extension of 6 months from the due date of your return for the year of change (excluding extensions) to file the statement with an amended return. Irs efile On the statement, type or print “Filed pursuant to section 301. Irs efile 9100-2. Irs efile ” To get this extension, you must have filed your original return for the year of the change by the due date (including extensions). Irs efile    By the date you file the original statement with your return, you must also send a signed copy to the address below. Irs efile    Internal Revenue Service Attention: CC:IT&A (Automatic Rulings Branch) P. Irs efile O. Irs efile Box 7604 Benjamin Franklin Station Washington, DC 20044   If you use a private delivery service, send the signed copy to the address below. Irs efile Internal Revenue Service Attention: CC:IT&A  (Automatic Rulings Branch) Room 5336 1111 Constitution Avenue, NW Washington, DC 20224    Instead of filing this statement, you can request permission to change from method 2 to method 1 by filing Form 3115. Irs efile In that case, follow the form instructions for an automatic change. Irs efile No user fee is required. Irs efile Co-owners. Irs efile   If a U. Irs efile S. Irs efile savings bond is issued in the names of co-owners, such as you and your child or you and your spouse, interest on the bond is generally taxable to the co-owner who bought the bond. Irs efile One co-owner's funds used. Irs efile   If you used your funds to buy the bond, you must pay the tax on the interest. Irs efile This is true even if you let the other co-owner redeem the bond and keep all the proceeds. Irs efile Under these circumstances, the co-owner who redeemed the bond will receive a Form 1099-INT at the time of redemption and must provide you with another Form 1099-INT showing the amount of interest from the bond taxable to you. Irs efile The co-owner who redeemed the bond is a “nominee. Irs efile ” See Nominee distributions under How To Report Interest Income, later, for more information about how a person who is a nominee reports interest income belonging to another person. Irs efile Both co-owners' funds used. Irs efile   If you and the other co-owner each contribute part of the bond's purchase price, the interest is generally taxable to each of you, in proportion to the amount each of you paid. Irs efile Community property. Irs efile   If you and your spouse live in a community property state and hold bonds as community property, one-half of the interest is considered received by each of you. Irs efile If you file separate returns, each of you generally must report one-half of the bond interest. Irs efile For more information about community property, see Publication 555. Irs efile Table 1-2. Irs efile   These rules are also shown in Table 1-2. Irs efile Child as only owner. Irs efile   Interest on U. Irs efile S. Irs efile savings bonds bought for and registered only in the name of your child is income to your child, even if you paid for the bonds and are named as beneficiary. Irs efile If the bonds are series EE, series E, or series I bonds, the interest on the bonds is income to your child in the earlier of the year the bonds are cashed or disposed of or the year the bonds mature, unless your child chooses to report the interest income each year. Irs efile Choice to report interest each year. Irs efile   The choice to report the accrued interest each year can be made either by your child or by you for your child. Irs efile This choice is made by filing an income tax return that shows all the interest earned to date, and by stating on the return that your child chooses to report the interest each year. Irs efile Either you or your child should keep a copy of this return. Irs efile   Unless your child is otherwise required to file a tax return for any year after making this choice, your child does not have to file a return only to report the annual accrual of U. Irs efile S. Irs efile savings bond interest under this choice. Irs efile However, see Tax on unearned income of certain children , earlier, under General Information. Irs efile Neither you nor your child can change the way you report the interest unless you request permission from the IRS, as discussed earlier under Change from method 2 . Irs efile Ownership transferred. Irs efile   If you bought series E, series EE, or series I bonds entirely with your own funds and had them reissued in your co-owner's name or beneficiary's name alone, you must include in your gross income for the year of reissue all interest that you earned on these bonds and have not previously reported. Irs efile But, if the bonds were reissued in your name alone, you do not have to report the interest accrued at that time. Irs efile   This same rule applies when bonds (other than bonds held as community property) are transferred between spouses or incident to divorce. Irs efile Example. Irs efile You bought series EE bonds entirely with your own funds. Irs efile You did not choose to report the accrued interest each year. Irs efile Later, you transfer the bonds to your former spouse under a divorce agreement. Irs efile You must include the deferred accrued interest, from the date of the original issue of the bonds to the date of transfer, in your income in the year of transfer. Irs efile Your former spouse includes in income the interest on the bonds from the date of transfer to the date of redemption. Irs efile Table 1-2. Irs efile Who Pays the Tax on U. Irs efile S. Irs efile Savings Bond Interest IF . Irs efile . Irs efile . Irs efile THEN the interest must be reported by . Irs efile . Irs efile . Irs efile you buy a bond in your name and the name of another person as co-owners, using only your own funds you. Irs efile you buy a bond in the name of another person, who is the sole owner of the bond the person for whom you bought the bond. Irs efile you and another person buy a bond as co-owners, each contributing part of the purchase price both you and the other co-owner, in proportion to the amount each paid for the bond. Irs efile you and your spouse, who live in a community property state, buy a bond that is community property you and your spouse. Irs efile If you file separate returns, both you and your spouse generally report one-half of the interest. Irs efile Purchased jointly. Irs efile   If you and a co-owner each contributed funds to buy series E, series EE, or series I bonds jointly and later have the bonds reissued in the co-owner's name alone, you must include in your gross income for the year of reissue your share of all the interest earned on the bonds that you have not previously reported. Irs efile The former co-owner does not have to include in gross income at the time of reissue his or her share of the interest earned that was not reported before the transfer. Irs efile This interest, however, as well as all interest earned after the reissue, is income to the former co-owner. Irs efile   This income-reporting rule also applies when the bonds are reissued in the name of your former co-owner and a new co-owner. Irs efile But the new co-owner will report only his or her share of the interest earned after the transfer. Irs efile   If bonds that you and a co-owner bought jointly are reissued to each of you separately in the same proportion as your contribution to the purchase price, neither you nor your co-owner has to report at that time the interest earned before the bonds were reissued. Irs efile Example 1. Irs efile You and your spouse each spent an equal amount to buy a $1,000 series EE savings bond. Irs efile The bond was issued to you and your spouse as co-owners. Irs efile You both postpone reporting interest on the bond. Irs efile You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. Irs efile At that time neither you nor your spouse has to report the interest earned to the date of reissue. Irs efile Example 2. Irs efile You bought a $1,000 series EE savings bond entirely with your own funds. Irs efile The bond was issued to you and your spouse as co-owners. Irs efile You both postponed reporting interest on the bond. Irs efile You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. Irs efile You must report half the interest earned to the date of reissue. Irs efile Transfer to a trust. Irs efile   If you own series E, series EE, or series I bonds and transfer them to a trust, giving up all rights of ownership, you must include in your income for that year the interest earned to the date of transfer if you have not already reported it. Irs efile However, if you are considered the owner of the trust and if the increase in value both before and after the transfer continues to be taxable to you, you can continue to defer reporting the interest earned each year. Irs efile You must include the total interest in your income in the year you cash or dispose of the bonds or the year the bonds finally mature, whichever is earlier. Irs efile   The same rules apply to previously unreported interest on series EE or series E bonds if the transfer to a trust consisted of series HH or series H bonds you acquired in a trade for the series EE or series E bonds. Irs efile See Savings bonds traded , later. Irs efile Decedents. Irs efile   The manner of reporting interest income on series E, series EE, or series I bonds, after the death of the owner (decedent), depends on the accounting and income-reporting methods previously used by the decedent. Irs efile Decedent who reported interest each year. Irs efile   If the bonds transferred because of death were owned by a person who used an accrual method, or who used the cash method and had chosen to report the interest each year, the interest earned in the year of death up to the date of death must be reported on that person's final return. Irs efile The person who acquires the bonds includes in income only interest earned after the date of death. Irs efile Decedent who postponed reporting interest. Irs efile   If the transferred bonds were owned by a decedent who had used the cash method and had not chosen to report the interest each year, and who had bought the bonds entirely with his or her own funds, all interest earned before death must be reported in one of the following ways. Irs efile The surviving spouse or personal representative (executor, administrator, etc. Irs efile ) who files the final income tax return of the decedent can choose to include on that return all interest earned on the bonds before the decedent's death. Irs efile The person who acquires the bonds then includes in income only interest earned after the date of death. Irs efile If the choice in (1) is not made, the interest earned up to the date of death is income in respect of the decedent and should not be included in the decedent's final return. Irs efile All interest earned both before and after the decedent's death (except any part reported by the estate on its income tax return) is income to the person who acquires the bonds. Irs efile If that person uses the cash method and does not choose to report the interest each year, he or she can postpone reporting it until the year the bonds are cashed or disposed of or the year they mature, whichever is earlier. Irs efile In the year that person reports the interest, he or she can claim a deduction for any federal estate tax paid on the part of the interest included in the decedent's estate. Irs efile For more information on income in respect of a decedent, see Publication 559, Survivors, Executors, and Administrators. Irs efile Example 1. Irs efile Your uncle, a cash method taxpayer, died and left you a $1,000 series EE bond. Irs efile He had bought the bond for $500 and had not chosen to report the interest each year. Irs efile At the date of death, interest of $200 had accrued on the bond, and its value of $700 was included in your uncle's estate. Irs efile Your uncle's executor chose not to include the $200 accrued interest in your uncle's final income tax return. Irs efile The $200 is income in respect of the decedent. Irs efile You are a cash method taxpayer and do not choose to report the interest each year as it is earned. Irs efile If you cash the bond when it reaches maturity value of $1,000, you report $500 interest income—the difference between maturity value of $1,000 and the original cost of $500. Irs efile For that year, you can deduct (as a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit) any federal estate tax paid because the $200 interest was included in your uncle's estate. Irs efile Example 2. Irs efile If, in Example 1 , the executor had chosen to include the $200 accrued interest in your uncle's final return, you would report only $300 as interest when you cashed the bond at maturity. Irs efile $300 is the interest earned after your uncle's death. Irs efile Example 3. Irs efile If, in Example 1 , you make or have made the choice to report the increase in redemption value as interest each year, you include in gross income for the year you acquire the bond all of the unreported increase in value of all series E, series EE, and series I bonds you hold, including the $200 on the bond you inherited from your uncle. Irs efile Example 4. Irs efile When your aunt died, she owned series HH bonds that she had acquired in a trade for series EE bonds. Irs efile You were the beneficiary of these bonds. Irs efile Your aunt used the cash method and did not choose to report the interest on the series EE bonds each year as it accrued. Irs efile Your aunt's executor chose not to include any interest earned before your aunt's death on her final return. Irs efile The income in respect of the decedent is the sum of the unreported interest on the series EE bonds and the interest, if any, payable on the series HH bonds but not received as of the date of your aunt's death. Irs efile You must report any interest received during the year as income on your return. Irs efile The part of the interest payable but not received before your aunt's death is income in respect of the decedent and may qualify for the estate tax deduction. Irs efile For information on when to report the interest on the series EE bonds traded, see Savings bonds traded , later. Irs efile Savings bonds distributed from a retirement or profit-sharing plan. Irs efile   If you acquire a U. Irs efile S. Irs efile savings bond in a taxable distribution from a retirement or profit-sharing plan, your income for the year of distribution includes the bond's redemption value (its cost plus the interest accrued before the distribution). Irs efile When you redeem the bond (whether in the year of distribution or later), your interest income includes only the interest accrued after the bond was distributed. Irs efile To figure the interest reported as a taxable distribution and your interest income when you redeem the bond, see Worksheet for savings bonds distributed from a retirement or profit-sharing plan under How To Report Interest Income, later. Irs efile Savings bonds traded. Irs efile   If you postponed reporting the interest on your series EE or series E bonds, you did not recognize taxable income when you traded the bonds for series HH or series H bonds, unless you received cash in the trade. Irs efile (You cannot trade series I bonds for series HH bonds. Irs efile After August 31, 2004, you cannot trade any other series of bonds for series HH bonds. Irs efile ) Any cash you received is income up to the amount of the interest earned on the bonds traded. Irs efile When your series HH or series H bonds mature, or if you dispose of them before maturity, you report as interest the difference between their redemption value and your cost. Irs efile Your cost is the sum of the amount you paid for the traded series EE or series E bonds plus any amount you had to pay at the time of the trade. Irs efile Example. Irs efile You traded series EE bonds (on which you postponed reporting the interest) for $2,500 in series HH bonds and $223 in cash. Irs efile You reported the $223 as taxable income on your tax return. Irs efile At the time of the trade, the series EE bonds had accrued interest of $523 and a redemption value of $2,723. Irs efile You hold the series HH bonds until maturity, when you receive $2,500. Irs efile You must report $300 as interest income in the year of maturity. Irs efile This is the difference between their redemption value, $2,500, and your cost, $2,200 (the amount you paid for the series EE bonds). Irs efile (It is also the difference between the accrued interest of $523 on the series EE bonds and the $223 cash received on the trade. Irs efile ) Choice to report interest in year of trade. Irs efile   You could have chosen to treat all of the previously unreported accrued interest on series EE or series E bonds traded for series HH bonds as income in the year of the trade. Irs efile If you made this choice, it is treated as a change from method 1. Irs efile See Change from method 1 under Series EE and series I bonds, earlier. Irs efile Form 1099-INT for U. Irs efile S. Irs efile savings bond interest. Irs efile   When you cash a bond, the bank or other payer that redeems it must give you a Form 1099-INT if the interest part of the payment you receive is $10 or more. Irs efile Box 3 of your Form 1099-INT should show the interest as the difference between the amount you received and the amount paid for the bond. Irs efile However, your Form 1099-INT may show more interest than you have to include on your income tax return. Irs efile For example, this may happen if any of the following are true. Irs efile You chose to report the increase in the redemption value of the bond each year. Irs efile The interest shown on your Form 1099-INT will not be reduced by amounts previously included in income. Irs efile You received the bond from a decedent. Irs efile The interest shown on your Form 1099-INT will not be reduced by any interest reported by the decedent before death, or on the decedent's final return, or by the estate on the estate's income tax return. Irs efile Ownership of the bond was transferred. Irs efile The interest shown on your Form 1099-INT will not be reduced by interest that accrued before the transfer. Irs efile You were named as a co-owner, and the other co-owner contributed funds to buy the bond. Irs efile The interest shown on your Form 1099-INT will not be reduced by the amount you received as nominee for the other co-owner. Irs efile (See Co-owners , earlier in this section, for more information about the reporting requirements. Irs efile ) You received the bond in a taxable distribution from a retirement or profit-sharing plan. Irs efile The interest shown on your Form 1099-INT will not be reduced by the interest portion of the amount taxable as a distribution from the plan and not taxable as interest. Irs efile (This amount is generally shown on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Irs efile , for the year of distribution. Irs efile )   For more information on including the correct amount of interest on your return, see U. Irs efile S. Irs efile savings bond interest previously reported or Nominee distributions under How To Report Interest Income, later. Irs efile    Interest on U. Irs efile S. Irs efile savings bonds is exempt from state and local taxes. Irs efile The Form 1099-INT you receive will indicate the amount that is for U. Irs efile S. Irs efile savings bonds interest in box 3. Irs efile Do not include this income on your state or local income tax return. Irs efile Education Savings Bond Program You may be able to exclude from income all or part of the interest you receive on the redemption of qualified U. Irs efile S. Irs efile savings bonds during the year if you pay qualified higher educational expenses during the same year. Irs efile This exclusion is known as the Education Savings Bond Program. Irs efile You do not qualify for this exclusion if your filing status is married filing separately. Irs efile Form 8815. Irs efile   Use Form 8815 to figure your exclusion. Irs efile Attach the form to your Form 1040 or Form 1040A. Irs efile Qualified U. Irs efile S. Irs efile savings bonds. Irs efile   A qualified U. Irs efile S. Irs efile savings bond is a series EE bond issued after 1989 or a series I bond. Irs efile The bond must be issued either in your name (sole owner) or in your and your spouse's names (co-owners). Irs efile You must be at least 24 years old before the bond's issue date. Irs efile For example, a bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or child. Irs efile    The issue date of a bond may be earlier than the date the bond is purchased because the issue date assigned to a bond is the first day of the month in which it is purchased. Irs efile Beneficiary. Irs efile   You can designate any individual (including a child) as a beneficiary of the bond. Irs efile Verification by IRS. Irs efile   If you claim the exclusion, the IRS will check it by using bond redemption information from the Department of Treasury. Irs efile Qualified expenses. Irs efile   Qualified higher educational expenses are tuition and fees required for you, your spouse, or your dependent (for whom you claim an exemption) to attend an eligible educational institution. Irs efile   Qualified expenses include any contribution you make to a qualified tuition program or to a Coverdell education savings account. Irs efile For information about these programs, see Publication 970, Tax Benefits for Education. Irs efile   Qualified expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program. Irs efile Eligible educational institutions. Irs efile   These institutions include most public, private, and nonprofit universities, colleges, and vocational schools that are accredited and eligible to participate in student aid programs run by the Department of Education. Irs efile Reduction for certain benefits. Irs efile   You must reduce your qualified higher educational expenses by all of the following tax-free benefits. Irs efile Tax-free part of scholarships and fellowships. Irs efile Expenses used to figure the tax-free portion of distributions from a Coverdell ESA. Irs efile Expenses used to figure the tax-free portion of distributions from a qualified tuition program. Irs efile Any tax-free payments (other than gifts or inheritances) received as educational assistance, such as: Veterans' educational assistance benefits, Qualified tuition reductions, or Employer-provided educational assistance. Irs efile Any expense used in figuring the American Opportunity and lifetime learning credits. Irs efile For information about these benefits, see Publication 970. Irs efile Amount excludable. Irs efile   If the total proceeds (interest and principal) from the qualified U. Irs efile S. Irs efile savings bonds you redeem during the year are not more than your adjusted qualified higher educational expenses for the year, you may be able to exclude all of the interest. Irs efile If the proceeds are more than the expenses, you may be able to exclude only part of the interest. Irs efile   To determine the excludable amount, multiply the interest part of the proceeds by a fraction. Irs efile The numer
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Irs efile 21. Irs efile   Medical and Dental Expenses Table of Contents What's New Introduction Useful Items - You may want to see: What Are Medical Expenses? What Expenses Can You Include This Year?Community property states. Irs efile How Much of the Expenses Can You Deduct? Whose Medical Expenses Can You Include?Yourself Spouse Dependent Decedent What Medical Expenses Are Includible?Insurance Premiums Meals and Lodging Transportation Disabled Dependent Care Expenses How Do You Treat Reimbursements?Insurance Reimbursement Damages for Personal Injuries How Do You Figure and Report the Deduction on Your Tax Return?What Tax Form Do You Use? Impairment-Related Work Expenses Health Insurance Costs for Self-Employed Persons What's New Medical and dental expenses. Irs efile  Beginning January 1, 2013, you can deduct only the part of your medical and dental expenses that exceed 10% of your adjusted gross income (AGI) (7. Irs efile 5% if either you or your spouse is age 65 or older). Irs efile Standard mileage rate. Irs efile  The standard mileage rate allowed for operating expenses for a car when you use it for medical reasons is 24 cents per mile. Irs efile See Transportation under What Medical Expenses Are Includible. Irs efile Introduction This chapter will help you determine the following. Irs efile What medical expenses are. Irs efile What expenses you can include this year. Irs efile How much of the expenses you can deduct. Irs efile Whose medical expenses you can include. Irs efile What medical expenses are includible. Irs efile How to treat reimbursements. Irs efile How to report the deduction on your tax return. Irs efile How to report impairment-related work expenses. Irs efile How to report health insurance costs if you are self-employed. Irs efile Useful Items - You may want to see: Publications 502 Medical and Dental Expenses 969 Health Savings Accounts and Other Tax-Favored Health Plans Form (and Instructions) Schedule A (Form 1040) Itemized Deductions What Are Medical Expenses? Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. Irs efile These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. Irs efile They include the costs of equipment, supplies, and diagnostic devices needed for these purposes. Irs efile Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. Irs efile They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation. Irs efile Medical expenses include the premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care. Irs efile Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract. Irs efile What Expenses Can You Include This Year? You can include only the medical and dental expenses you paid this year, regardless of when the services were provided. Irs efile If you pay medical expenses by check, the day you mail or deliver the check generally is the date of payment. Irs efile If you use a “pay-by-phone” or “online” account to pay your medical expenses, the date reported on the statement of the financial institution showing when payment was made is the date of payment. Irs efile If you use a credit card, include medical expenses you charge to your credit card in the year the charge is made, not when you actually pay the amount charged. Irs efile Separate returns. Irs efile   If you and your spouse live in a noncommunity property state and file separate returns, each of you can include only the medical expenses each actually paid. Irs efile Any medical expenses paid out of a joint checking account in which you and your spouse have the same interest are considered to have been paid equally by each of you, unless you can show otherwise. Irs efile Community property states. Irs efile   If you and your spouse live in a community property state and file separate returns, or are registered domestic partners in Nevada, Washington, or California, any medical expenses paid out of community funds are divided equally. Irs efile Each of you should include half the expenses. Irs efile If medical expenses are paid out of the separate funds of one individual, only the individual who paid the medical expenses can include them. Irs efile If you live in a community property state, and are not filing a joint return, see Publication 555, Community Property. Irs efile How Much of the Expenses Can You Deduct? Generally, you can deduct on Schedule A (Form 1040) only the amount of your medical and dental expenses that is more than 10% of your AGI (7. Irs efile 5% of your AGI if either you or your spouse is age 65 or older)(Form 1040, line 38). Irs efile Example. Irs efile You are unmarried and under age 65 and your AGI is $40,000, 10% of which is $4,000. Irs efile You paid medical expenses of $2,500. Irs efile You cannot deduct any of your medical expenses because they are not more than 10% of your AGI. Irs efile Whose Medical Expenses Can You Include? You can generally include medical expenses you pay for yourself, as well as those you pay for someone who was your spouse or your dependent either when the services were provided or when you paid for them. Irs efile There are different rules for decedents and for individuals who are the subject of multiple support agreements. Irs efile See Support claimed under a multiple support agreement , later. Irs efile Yourself You can include medical expenses you paid for yourself. Irs efile Spouse You can include medical expenses you paid for your spouse. Irs efile To include these expenses, you must have been married either at the time your spouse received the medical services or at the time you paid the medical expenses. Irs efile Example 1. Irs efile Mary received medical treatment before she married Bill. Irs efile Bill paid for the treatment after they married. Irs efile Bill can include these expenses in figuring his medical expense deduction even if Bill and Mary file separate returns. Irs efile If Mary had paid the expenses, Bill could not include Mary's expenses in his separate return. Irs efile Mary would include the amounts she paid during the year in her separate return. Irs efile If they filed a joint return, the medical expenses both paid during the year would be used to figure their medical expense deduction. Irs efile Example 2. Irs efile This year, John paid medical expenses for his wife Louise, who died last year. Irs efile John married Belle this year and they file a joint return. Irs efile Because John was married to Louise when she received the medical services, he can include those expenses in figuring his medical expense deduction for this year. Irs efile Dependent You can include medical expenses you paid for your dependent. Irs efile For you to include these expenses, the person must have been your dependent either at the time the medical services were provided or at the time you paid the expenses. Irs efile A person generally qualifies as your dependent for purposes of the medical expense deduction if both of the following requirements are met. Irs efile The person was a qualifying child (defined later) or a qualifying relative (defined later), and The person was a U. Irs efile S. Irs efile citizen or national, or a resident of the United States, Canada, or Mexico. Irs efile If your qualifying child was adopted, see Exception for adopted child , next. Irs efile You can include medical expenses you paid for an individual that would have been your dependent except that: He or she received gross income of $3,900 or more in 2013, He or she filed a joint return for 2013, or You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2013 return. Irs efile Exception for adopted child. Irs efile   If you are a U. Irs efile S. Irs efile citizen or U. Irs efile S. Irs efile national and your adopted child lived with you as a member of your household for 2013, that child does not have to be a U. Irs efile S. Irs efile citizen or national or a resident of the United States, Canada, or Mexico. Irs efile Qualifying Child A qualifying child is a child who: Is your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendant of any of them (for example, your grandchild, niece, or nephew), Was: 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 full-time student, and younger than you (or your spouse, if filing jointly), or Any age and permanently and totally disabled, Lived with you for more than half of 2013, Did not provide over half of his or her own support for 2013, and Did not file a joint return, or, if he or she did, it was only to claim a refund. Irs efile Adopted child. Irs efile   A legally adopted child is treated as your own child. Irs efile This includes a child lawfully placed with you for legal adoption. Irs efile   You can include medical expenses that you paid for a child before adoption if the child qualified as your dependent when the medical services were provided or when the expenses were paid. Irs efile   If you pay back an adoption agency or other persons for medical expenses they paid under an agreement with you, you are treated as having paid those expenses provided you clearly substantiate that the payment is directly attributable to the medical care of the child. Irs efile   But if you pay the agency or other person for medical care that was provided and paid for before adoption negotiations began, you cannot include them as medical expenses. Irs efile    You may be able to take an adoption credit for other expenses related to an adoption. Irs efile See the Instructions for Form 8839, Qualified Adoption Expenses, for more information. Irs efile Child of divorced or separated parents. Irs efile   For purposes of the medical and dental expenses deduction, a child of divorced or separated parents can be treated as a dependent of both parents. Irs efile Each parent can include the medical expenses he or she pays for the child, even if the other parent claims the child's dependency exemption, if: The child is in the custody of one or both parents for more than half the year, The child receives over half of his or her support during the year from his or her parents, and The child's parents: Are divorced or legally separated under a decree of divorce or separate maintenance, Are separated under a written separation agreement, or Live apart at all times during the last 6 months of the year. Irs efile This does not apply if the child's exemption is being claimed under a multiple support agreement (discussed later). Irs efile Qualifying Relative A qualifying relative is a person: Who is your: Son, daughter, stepchild, foster child, or a descendant of any of them (for example, your grandchild), Brother, sister, half brother, half sister, or a son or daughter of either of them, Father, mother, or an ancestor or sibling of either of them (for example, your grandmother, grandfather, aunt, or uncle), Stepbrother, stepsister, stepfather, stepmother, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law, or Any other person (other than your spouse) who lived with you all year as a member of your household if your relationship did not violate local law, Who was not a qualifying child (see Qualifying Child earlier) of any other person for 2013, and For whom you provided over half of the support in 2013. Irs efile But see Child of divorced or separated parents , earlier, and Support claimed under a multiple support agreement, next. Irs efile Support claimed under a multiple support agreement. Irs efile   If you are considered to have provided more than half of a qualifying relative's support under a multiple support agreement, you can include medical expenses you pay for that person. Irs efile A multiple support agreement is used when two or more people provide more than half of a person's support, but no one alone provides more than half. Irs efile   Any medical expenses paid by others who joined you in the agreement cannot be included as medical expenses by anyone. Irs efile However, you can include the entire unreimbursed amount you paid for medical expenses. Irs efile Example. Irs efile You and your three brothers each provide one-fourth of your mother's total support. Irs efile Under a multiple support agreement, you treat your mother as your dependent. Irs efile You paid all of her medical expenses. Irs efile Your brothers reimbursed you for three-fourths of these expenses. Irs efile In figuring your medical expense deduction, you can include only one-fourth of your mother's medical expenses. Irs efile Your brothers cannot include any part of the expenses. Irs efile However, if you and your brothers share the nonmedical support items and you separately pay all of your mother's medical expenses, you can include the unreimbursed amount you paid for her medical expenses in your medical expenses. Irs efile Decedent Medical expenses paid before death by the decedent are included in figuring any deduction for medical and dental expenses on the decedent's final income tax return. Irs efile This includes expenses for the decedent's spouse and dependents as well as for the decedent. Irs efile The survivor or personal representative of a decedent can choose to treat certain expenses paid by the decedent's estate for the decedent's medical care as paid by the decedent at the time the medical services were provided. Irs efile The expenses must be paid within the 1-year period beginning with the day after the date of death. Irs efile If you are the survivor or personal representative making this choice, you must attach a statement to the decedent's Form 1040 (or the decedent's amended return, Form 1040X) saying that the expenses have not been and will not be claimed on the estate tax return. Irs efile Qualified medical expenses paid before death by the decedent are not deductible if paid with a tax-free distribution from any Archer MSA, Medicare Advantage MSA, or health savings account. Irs efile Amended returns and claims for refund are discussed in chapter 1. Irs efile What if you pay medical expenses of a deceased spouse or dependent?   If you paid medical expenses for your deceased spouse or dependent, include them as medical expenses on your Form 1040 in the year paid, whether they are paid before or after the decedent's death. Irs efile The expenses can be included if the person was your spouse or dependent either at the time the medical services were provided or at the time you paid the expenses. Irs efile What Medical Expenses Are Includible? Use Table 21-1, later, as a guide to determine which medical and dental expenses you can include on Schedule A (Form 1040). Irs efile This table does not include all possible medical expenses. Irs efile To determine if an expense not listed can be included in figuring your medical expense deduction, see What Are Medical Expenses , earlier. Irs efile Insurance Premiums You can include in medical expenses insurance premiums you pay for policies that cover medical care. Irs efile Medical care policies can provide payment for treatment that includes: Hospitalization, surgical services, X-rays, Prescription drugs and insulin, Dental care, Replacement of lost or damaged contact lenses, and Long-term care (subject to additional limitations). Irs efile See Qualified Long-Term Care Insurance Contracts in Publication 502. Irs efile If you have a policy that provides payments for other than medical care, you can include the premiums for the medical care part of the policy if the charge for the medical part is reasonable. Irs efile The cost of the medical part must be separately stated in the insurance contract or given to you in a separate statement. Irs efile Note. Irs efile When figuring the amount of insurance premiums you can include in medical expenses on Schedule A, do not include any health coverage tax credit advance payments shown in box 1 of Form 1099-H, Health Coverage Tax Credit (HCTC) Advance Payments. Irs efile Also, do not include insurance premiums attributable to a nondependent child under age 27 if your premiums increased as a result of adding this child to your policy. Irs efile Employer-sponsored health insurance plan. Irs efile   Do not include in your medical and dental expenses any insurance premiums paid by an employer-sponsored health insurance plan unless the premiums are included in box 1 of your Form W-2. Irs efile Also, do not include any other medical and dental expenses paid by the plan unless the amount paid is included in box 1 of your Form W-2. Irs efile Example. Irs efile You are a federal employee participating in the premium conversion plan of the Federal Employee Health Benefits (FEHB) program. Irs efile Your share of the FEHB premium is paid by making a pre-tax reduction in your salary. Irs efile Because you are an employee whose insurance premiums are paid with money that is never included in your gross income, you cannot deduct the premiums paid with that money. Irs efile Long-term care services. Irs efile   Contributions made by your employer to provide coverage for qualified long-term care services under a flexible spending or similar arrangement must be included in your income. Irs efile This amount will be reported as wages in box 1 of your Form W-2. Irs efile Health reimbursement arrangement (HRA). Irs efile   If you have medical expenses that are reimbursed by a health reimbursement arrangement, you cannot include those expenses in your medical expenses. Irs efile This is because an HRA is funded solely by the employer. Irs efile Retired public safety officers. Irs efile   If you are a retired public safety officer, do not include as medical expenses any health or long-term care premiums that you elected to have paid with tax-free distributions from your retirement plan. Irs efile This applies only to distributions that would otherwise be included in income. Irs efile Medicare A. Irs efile   If you are covered under social security (or if you are a government employee who paid Medicare tax), you are enrolled in Medicare A. Irs efile The payroll tax paid for Medicare A is not a medical expense. Irs efile   If you are not covered under social security (or were not a government employee who paid Medicare tax), you can voluntarily enroll in Medicare A. Irs efile In this situation you can include the premiums you paid for Medicare A as a medical expense. Irs efile Medicare B. Irs efile   Medicare B is supplemental medical insurance. Irs efile Premiums you pay for Medicare B are a medical expense. Irs efile Check the information you received from the Social Security Administration to find out your premium. Irs efile Medicare D. Irs efile    Medicare D is a voluntary prescription drug insurance program for persons with Medicare A or B. Irs efile You can include as a medical expense premiums you pay for Medicare D. Irs efile Prepaid insurance premiums. Irs efile   Premiums you pay before you are age 65 for insurance for medical care for yourself, your spouse, or your dependents after you reach age 65 are medical care expenses in the year paid if they are: Payable in equal yearly installments, or more often, and Payable for at least 10 years, or until you reach age 65 (but not for less than 5 years). Irs efile Unused sick leave used to pay premiums. Irs efile   You must include in gross income cash payments you receive at the time of retirement for unused sick leave. Irs efile You also must include in gross income the value of unused sick leave that, at your option, your employer applies to the cost of your continuing participation in your employer's health plan after you retire. Irs efile You can include this cost of continuing participation in the health plan as a medical expense. Irs efile   If you participate in a health plan where your employer automatically applies the value of unused sick leave to the cost of your continuing participation in the health plan (and you do not have the option to receive cash), do not include the value of the unused sick leave in gross income. Irs efile You cannot include this cost of continuing participation in that health plan as a medical expense. Irs efile Table 21-1. Irs efile Medical and Dental Expenses Checklist. Irs efile See Publication 502 for more information about these and other expenses. Irs efile You can include: You cannot include: Bandages Birth control pills prescribed by your doctor Body scan Braille books Breast pump and supplies Capital expenses for equipment or improvements to your home needed for medical care (see the worksheet in Publication 502) Diagnostic devices Expenses of an organ donor Eye surgery—to promote the correct function of the eye Fertility enhancement, certain procedures Guide dogs or other animals aiding the blind, deaf, and disabled Hospital services fees (lab work, therapy, nursing services, surgery, etc. Irs efile ) Lead-based paint removal Legal abortion Legal operation to prevent having children such as a vasectomy or tubal ligation Long-term care contracts, qualified Meals and lodging provided by a hospital during medical treatment Medical services fees (from doctors, dentists, surgeons, specialists, and other medical practitioners) Medicare Part D premiums Medical and hospital insurance premiums Nursing services Oxygen equipment and oxygen Part of life-care fee paid to retirement home designated for medical care Physical examination Pregnancy test kit Prescription medicines (prescribed by a doctor) and insulin Psychiatric and psychological treatment Social security tax, Medicare tax, FUTA, and state employment tax for worker providing medical care (see Wages for nursing services, below) Special items (artificial limbs, false teeth, eye-glasses, contact lenses, hearing aids, crutches, wheelchair, etc. Irs efile ) Special education for mentally or physically disabled persons Stop-smoking programs Transportation for needed medical care Treatment at a drug or alcohol center (includes meals and lodging provided by the center) Wages for nursing services Weight-loss, certain expenses for obesity Baby sitting and childcare Bottled water Contributions to Archer MSAs (see Publication 969) Diaper service Expenses for your general health (even if following your doctor's advice) such as— —Health club dues —Household help (even if recommended by a doctor) —Social activities, such as dancing or swimming lessons —Trip for general health improvement Flexible spending account reimbursements for medical expenses (if contributions were on a pre-tax basis) Funeral, burial, or cremation expenses Health savings account payments for medical expenses Illegal operation, treatment, or medicine Life insurance or income protection policies, or policies providing payment for loss of life, limb, sight, etc. Irs efile Maternity clothes Medical insurance included in a car insurance policy covering all persons injured in or by your car Medicine you buy without a prescription Nursing care for a healthy baby Prescription drugs you brought in (or ordered shipped) from another country, in most cases Nutritional supplements, vitamins, herbal supplements, “natural medicines,” etc. Irs efile , unless recommended by a medical practitioner as a treatment for a specific medical condition diagnosed by a physician Surgery for purely cosmetic reasons Toothpaste, toiletries, cosmetics, etc. Irs efile Teeth whitening Weight-loss expenses not for the treatment of obesity or other disease Meals and Lodging You can include in medical expenses the cost of meals and lodging at a hospital or similar institution if a principal reason for being there is to get medical care. Irs efile See Nursing home , later. Irs efile You may be able to include in medical expenses the cost of lodging not provided in a hospital or similar institution. Irs efile You can include the cost of such lodging while away from home if all of the following requirements are met. Irs efile The lodging is primarily for and essential to medical care. Irs efile The medical care is provided by a doctor in a licensed hospital or in a medical care facility related to, or the equivalent of, a licensed hospital. Irs efile The lodging is not lavish or extravagant under the circumstances. Irs efile There is no significant element of personal pleasure, recreation, or vacation in the travel away from home. Irs efile The amount you include in medical expenses for lodging cannot be more than $50 for each night for each person. Irs efile You can include lodging for a person traveling with the person receiving the medical care. Irs efile For example, if a parent is traveling with a sick child, up to $100 per night can be included as a medical expense for lodging. Irs efile Meals are not included. Irs efile Nursing home. Irs efile   You can include in medical expenses the cost of medical care in a nursing home, home for the aged, or similar institution, for yourself, your spouse, or your dependents. Irs efile This includes the cost of meals and lodging in the home if a principal reason for being there is to get medical care. Irs efile   Do not include the cost of meals and lodging if the reason for being in the home is personal. Irs efile You can, however, include in medical expenses the part of the cost that is for medical or nursing care. Irs efile Transportation Include in medical expenses amounts paid for transportation primarily for, and essential to, medical care. Irs efile You can include: Bus, taxi, train, or plane fares, or ambulance service, Transportation expenses of a parent who must go with a child who needs medical care, Transportation expenses of a nurse or other person who can give injections, medications, or other treatment required by a patient who is traveling to get medical care and is unable to travel alone, and Transportation expenses for regular visits to see a mentally ill dependent, if these visits are recommended as a part of treatment. Irs efile Car expenses. Irs efile   You can include out-of-pocket expenses, such as the cost of gas and oil, when you use your car for medical reasons. Irs efile You cannot include depreciation, insurance, general repair, or maintenance expenses. Irs efile   If you do not want to use your actual expenses for 2013, you can use the standard medical mileage rate of 24 cents per mile. Irs efile    You can also include parking fees and tolls. Irs efile You can add these fees and tolls to your medical expenses whether you use actual expenses or use the standard mileage rate. Irs efile Example. Irs efile In 2013, Bill Jones drove 2,800 miles for medical reasons. Irs efile He spent $500 for gas, $30 for oil, and $100 for tolls and parking. Irs efile He wants to figure the amount he can include in medical expenses both ways to see which gives him the greater deduction. Irs efile He figures the actual expenses first. Irs efile He adds the $500 for gas, the $30 for oil, and the $100 for tolls and parking for a total of $630. Irs efile He then figures the standard mileage amount. Irs efile He multiplies 2,800 miles by 24 cents a mile for a total of $672. Irs efile He then adds the $100 tolls and parking for a total of $772. Irs efile Bill includes the $772 of car expenses with his other medical expenses for the year because the $772 is more than the $630 he figured using actual expenses. Irs efile Transportation expenses you cannot include. Irs efile   You cannot include in medical expenses the cost of transportation in the following situations. Irs efile Going to and from work, even if your condition requires an unusual means of transportation. Irs efile Travel for purely personal reasons to another city for an operation or other medical care. Irs efile Travel that is merely for the general improvement of one's health. Irs efile The costs of operating a specially equipped car for other than medical reasons. Irs efile Disabled Dependent Care Expenses Some disabled dependent care expenses may qualify as either: Medical expenses, or Work-related expenses for purposes of taking a credit for dependent care. Irs efile (See chapter 32 and Publication 503, Child and Dependent Care Expenses. Irs efile ) You can choose to apply them either way as long as you do not use the same expenses to claim both a credit and a medical expense deduction. Irs efile How Do You Treat Reimbursements? You can include in medical expenses only those amounts paid during the taxable year for which you received no insurance or other reimbursement. Irs efile Insurance Reimbursement You must reduce your total medical expenses for the year by all reimbursements for medical expenses that you receive from insurance or other sources during the year. Irs efile This includes payments from Medicare. Irs efile Even if a policy provides reimbursement for only certain specific medical expenses, you must use amounts you receive from that policy to reduce your total medical expenses, including those it does not reimburse. Irs efile Example. Irs efile You have insurance policies that cover your hospital and doctors' bills but not your nursing bills. Irs efile The insurance you receive for the hospital and doctors' bills is more than their charges. Irs efile In figuring your medical deduction, you must reduce the total amount you spent for medical care by the total amount of insurance you received, even if the policies do not cover some of your medical expenses. Irs efile Health reimbursement arrangement (HRA). Irs efile   A health reimbursement arrangement is an employer-funded plan that reimburses employees for medical care expenses and allows unused amounts to be carried forward. Irs efile An HRA is funded solely by the employer and the reimbursements for medical expenses, up to a maximum dollar amount for a coverage period, are not included in your income. Irs efile Other reimbursements. Irs efile   Generally, you do not reduce medical expenses by payments you receive for: Permanent loss or loss of use of a member or function of the body (loss of limb, sight, hearing, etc. Irs efile ) or disfigurement to the extent the payment is based on the nature of the injury without regard to the amount of time lost from work, or Loss of earnings. Irs efile   You must, however, reduce your medical expenses by any part of these payments that is designated for medical costs. Irs efile See How Do You Figure and Report the Deduction on Your Tax Return , later. Irs efile   For how to treat damages received for personal injury or sickness, see Damages for Personal Injuries , later. Irs efile You do not have a medical deduction if you are reimbursed for all of your medical expenses for the year. Irs efile Excess reimbursement. Irs efile   If you are reimbursed more than your medical expenses, you may have to include the excess in income. Irs efile You may want to use Figure 21-A to help you decide if any of your reimbursement is taxable. Irs efile Premiums paid by you. Irs efile   If you pay either the entire premium for your medical insurance or all of the costs of a plan similar to medical insurance and your insurance payments or other reimbursements are more than your total medical expenses for the year, you have an excess reimbursement. Irs efile Generally, you do not include the excess reimbursement in your gross income. Irs efile Premiums paid by you and your employer. Irs efile   If both you and your employer contribute to your medical insurance plan and your employer's contributions are not included in your gross income, you must include in your gross income the part of your excess reimbursement that is from your employer's contribution. Irs efile   See Publication 502 to figure the amount of the excess reimbursement you must include in gross income. Irs efile Reimbursement in a later year. Irs efile   If you are reimbursed in a later year for medical expenses you deducted in an earlier year, you generally must report the reimbursement as income up to the amount you previously deducted as medical expenses. Irs efile   However, do not report as income the amount of reimbursement you received up to the amount of your medical deductions that did not reduce your tax for the earlier year. Irs efile For more information about the recovery of an amount that you claimed as an itemized deduction in an earlier year, see Itemized Deduction Recoveries in chapter 12. Irs efile Figure 21-A. Irs efile Is Your Excess Medical Reimbursement Taxable? Please click here for the text description of the image. Irs efile Figure 21-A. Irs efile Is Your Excess Medical Reimbursement Taxable? Medical expenses not deducted. Irs efile   If you did not deduct a medical expense in the year you paid it because your medical expenses were not more than 10% of your AGI (7. Irs efile 5% of your AGI if either you or your spouse was age 65 or older), or because you did not itemize deductions, do not include the reimbursement up to the amount of the expense in income. Irs efile However, if the reimbursement is more than the expense, see Excess reimbursement , earlier. Irs efile Example. Irs efile For 2013, you were unmarried and under age 65 and you had medical expenses of $500. Irs efile You cannot deduct the $500 because it is less than 10% of your AGI. Irs efile If, in a later year, you are reimbursed for any of the $500 in medical expenses, you do not include the amount reimbursed in your gross income. Irs efile Damages for Personal Injuries If you receive an amount in settlement of a personal injury suit, part of that award may be for medical expenses that you deducted in an earlier year. Irs efile If it is, you must include that part in your income in the year you receive it to the extent it reduced your taxable income in the earlier year. Irs efile See Reimbursement in a Later Year , discussed under How Do You Treat Reimbursements, earlier. Irs efile Future medical expenses. Irs efile   If you receive an amount in settlement of a damage suit for personal injuries, part of that award may be for future medical expenses. Irs efile If it is, you must reduce any future medical expenses for these injuries until the amount you received has been completely used. Irs efile How Do You Figure and Report the Deduction on Your Tax Return? Once you have determined which medical expenses you can include, you figure and report the deduction on your tax return. Irs efile What Tax Form Do You Use? You figure your medical expense deduction on Schedule A (Form 1040). Irs efile You cannot claim medical expenses on Form 1040A or Form 1040EZ. Irs efile If you need more information on itemized deductions or you are not sure if you can itemize, see chapter 20. Irs efile Enter the amount you paid for medical and dental expenses on Schedule A (Form 1040). Irs efile This should be your expenses that were not reimbursed by insurance or any other sources. Irs efile Generally, you can deduct only the amount of your medical and dental expenses that is more than 10% of your AGI (7. Irs efile 5% if either you or your spouse was age 65 or older) shown on line 38, Form 1040. Irs efile Impairment-Related Work Expenses If you are a person with a disability, you can take a business deduction for expenses that are necessary for you to be able to work. Irs efile If you take a business deduction for impairment-related work expenses, do not take a medical deduction for the same expenses. Irs efile You have a disability if you have: A physical or mental disability (for example, blindness or deafness) that functionally limits your being employed, or A physical or mental impairment (for example, a sight or hearing impairment) that substantially limits one or more of your major life activities, such as performing manual tasks, walking, speaking, breathing, learning, or working. Irs efile Impairment-related expenses defined. Irs efile   Impairment-related expenses are those ordinary and necessary business expenses that are: Necessary for you to do your work satisfactorily, For goods and services not required or used, other than incidentally, in your personal activities, and Not specifically covered under other income tax laws. Irs efile Where to report. Irs efile   If you are self-employed, deduct the business expenses on the appropriate form (Schedule C, C-EZ, E, or F) used to report your business income and expenses. Irs efile   If you are an employee, complete Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses. Irs efile Enter on Schedule A (Form 1040), that part of the amount on Form 2106, or Form 2106-EZ, that is related to your impairment. Irs efile Enter the amount that is unrelated to your impairment also on Schedule A (Form 1040). Irs efile Your impairment-related work expenses are not subject to the 2%-of-adjusted-gross-income limit that applies to other employee business expenses. Irs efile Example. Irs efile You are blind. Irs efile You must use a reader to do your work. Irs efile You use the reader both during your regular working hours at your place of work and outside your regular working hours away from your place of work. Irs efile The reader's services are only for your work. Irs efile You can deduct your expenses for the reader as business expenses. Irs efile Health Insurance Costs for Self-Employed Persons If you were self-employed and had a net profit for the year, you may be able to deduct, as an adjustment to income, amounts paid for medical and qualified long-term care insurance on behalf of yourself, your spouse, your dependents, and, your children who were under age 27 at the end of 2013. Irs efile For this purpose, you were self-employed if you were a general partner (or a limited partner receiving guaranteed payments) or you received wages from an S corporation in which you were more than a 2% shareholder. Irs efile The insurance plan must be established under your trade or business and the deduction cannot be more than your earned income from that trade or business. Irs efile You cannot deduct payments for medical insurance for any month in which you were eligible to participate in a health plan subsidized by your employer, your spouse's employer, or, an employer of your dependent or your child under age 27 at the end of 2013. Irs efile You cannot deduct payments for a qualified long-term care insurance contract for any month in which you were eligible to participate in a long-term care insurance plan subsidized by your employer or your spouse's employer. Irs efile If you qualify to take the deduction, use the Self-Employed Health Insurance Deduction Worksheet in the Form 1040 instructions to figure the amount you can deduct. Irs efile But if any of the following applies, do not use that worksheet. Irs efile You had more than one source of income subject to self-employment tax. Irs efile You file Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion. Irs efile You are using amounts paid for qualified long-term care insurance to figure the deduction. Irs efile If you cannot use the worksheet in the Form 1040 instructions, use the worksheet in Publication 535, Business Expenses, to figure your deduction. Irs efile Note. Irs efile When figuring the amount you can deduct for insurance premiums, do not include any advance payments shown on Form 1099-H, Health Coverage Tax Credit (HCTC) Advance Payments. Irs efile If you are claiming the health coverage tax credit, subtract the amount shown on Form 8885, from the total insurance premiums you paid. Irs efile Do not include amounts paid for health insurance coverage with retirement plan distributions that were tax-free because you are a retired public safety officer. Irs efile Where to report. Irs efile    You take this deduction on Form 1040. Irs efile If you itemize your deductions and do not claim 100% of your self-employed health insurance on Form 1040, you can generally include any remaining premiums with all other medical expenses on Schedule A (Form 1040), subject to the 10% limit (7. Irs efile 5% if either you or your spouse was age 65 or older). Irs efile See Self-Employed Health Insurance Deduction in chapter 6 of Publication 535, Business Expenses, and Medical and Dental Expenses in the Instructions for Schedule A (Form 1040), for more information. Irs efile Prev  Up  Next   Home   More Online Publications