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Irs Tax Form 1040x

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Irs Tax Form 1040x

Irs tax form 1040x 3. Irs tax form 1040x   Investment Expenses Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Limits on DeductionsPassive activity. Irs tax form 1040x Other income (nonpassive income). Irs tax form 1040x Expenses. Irs tax form 1040x Additional information. Irs tax form 1040x Interest ExpensesInvestment Interest Limit on Deduction Bond Premium AmortizationSpecial rules to determine amounts payable on a bond. Irs tax form 1040x Basis. Irs tax form 1040x How To Figure Amortization Choosing To Amortize How To Report Amortization Expenses of Producing IncomeFees to buy or sell. Irs tax form 1040x Including mutual fund or REMIC expenses in income. Irs tax form 1040x Nondeductible ExpensesUsed as collateral. Irs tax form 1040x Short-sale expenses. Irs tax form 1040x Expenses for both tax-exempt and taxable income. Irs tax form 1040x State income taxes. Irs tax form 1040x Nondeductible amount. Irs tax form 1040x Basis adjustment. Irs tax form 1040x How To Report Investment Expenses When To Report Investment Expenses Topics - This chapter discusses: Limits on Deductions , Interest Expenses , Bond Premium Amortization , Expenses of Producing Income , Nondeductible Expenses , How To Report Investment Expenses , and When To Report Investment Expenses . Irs tax form 1040x Useful Items - You may want to see: Publication 535 Business Expenses 925 Passive Activity and At-Risk Rules 929 Tax Rules for Children and Dependents Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 4952 Investment Interest Expense Deduction See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Irs tax form 1040x Limits on Deductions Your deductions for investment expenses may be limited by: The at-risk rules, The passive activity loss limits, The limit on investment interest, or The 2% limit on certain miscellaneous itemized deductions. Irs tax form 1040x The at-risk rules and passive activity rules are explained briefly in this section. Irs tax form 1040x The limit on investment interest is explained later in this chapter under Interest Expenses . Irs tax form 1040x The 2% limit is explained later in this chapter under Expenses of Producing Income . Irs tax form 1040x At-risk rules. Irs tax form 1040x   Special at-risk rules apply to most income-producing activities. Irs tax form 1040x These rules limit the amount of loss you can deduct to the amount you risk losing in the activity. Irs tax form 1040x Generally, this is the cash and the adjusted basis of property you contribute to the activity. Irs tax form 1040x It also includes money you borrow for use in the activity if you are personally liable for repayment or if you use property not used in the activity as security for the loan. Irs tax form 1040x For more information, see Publication 925. Irs tax form 1040x Passive activity losses and credits. Irs tax form 1040x   The amount of losses and tax credits you can claim from passive activities is limited. Irs tax form 1040x Generally, you are allowed to deduct passive activity losses only up to the amount of your passive activity income. Irs tax form 1040x Also, you can use credits from passive activities only against tax on the income from passive activities. Irs tax form 1040x There are exceptions for certain activities, such as rental real estate activities. Irs tax form 1040x Passive activity. Irs tax form 1040x   A passive activity generally is any activity involving the conduct of any trade or business in which you do not materially participate and any rental activity. Irs tax form 1040x However, if you are involved in renting real estate, the activity is not a passive activity if both of the following are true. Irs tax form 1040x More than one-half of the personal services you perform during the year in all trades or businesses are performed in real property trades or businesses in which you materially participate. Irs tax form 1040x You perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate. Irs tax form 1040x  The term “trade or business” generally means any activity that involves the conduct of a trade or business, is conducted in anticipation of starting a trade or business, or involves certain research or experimental expenditures. Irs tax form 1040x However, it does not include rental activities or certain activities treated as incidental to holding property for investment. Irs tax form 1040x   You are considered to materially participate in an activity if you are involved on a regular, continuous, and substantial basis in the operations of the activity. Irs tax form 1040x Other income (nonpassive income). Irs tax form 1040x    Generally, you can use losses from passive activities only to offset income from passive activities. Irs tax form 1040x You cannot use passive activity losses to offset your other income, such as your wages or your portfolio income. Irs tax form 1040x Portfolio income includes gross income from interest, dividends, annuities, or royalties that is not derived in the ordinary course of a trade or business. Irs tax form 1040x It also includes gains or losses (not derived in the ordinary course of a trade or business) from the sale or trade of property (other than an interest in a passive activity) producing portfolio income or held for investment. Irs tax form 1040x This includes capital gain distributions from mutual funds (and other regulated investment companies) and real estate investment trusts. Irs tax form 1040x   You cannot use passive activity losses to offset Alaska Permanent Fund dividends. Irs tax form 1040x Expenses. Irs tax form 1040x   Do not include in the computation of your passive activity income or loss: Expenses (other than interest) that are clearly and directly allocable to your portfolio income, or Interest expense properly allocable to portfolio income. Irs tax form 1040x However, this interest and other expenses may be subject to other limits. Irs tax form 1040x These limits are explained in the rest of this chapter. Irs tax form 1040x Additional information. Irs tax form 1040x   For more information about determining and reporting income and losses from passive activities, see Publication 925. Irs tax form 1040x Interest Expenses This section discusses interest expenses you may be able to deduct as an investor. Irs tax form 1040x For information on business interest, see chapter 4 of Publication 535. Irs tax form 1040x You cannot deduct personal interest expenses other than qualified home mortgage interest, as explained in Publication 936, Home Mortgage Interest Deduction, and interest on certain student loans, as explained in Publication 970. Irs tax form 1040x Investment Interest If you borrow money to buy property you hold for investment, the interest you pay is investment interest. Irs tax form 1040x You can deduct investment interest subject to the limit discussed later. Irs tax form 1040x However, you cannot deduct interest you incurred to produce tax-exempt income. Irs tax form 1040x See Tax-exempt income under Nondeductible Expenses, later. Irs tax form 1040x You also cannot deduct interest expenses on straddles discussed under Interest expense and carrying charges on straddles , later. Irs tax form 1040x Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. Irs tax form 1040x Investment property. Irs tax form 1040x   Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. Irs tax form 1040x It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). Irs tax form 1040x Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). Irs tax form 1040x Partners, shareholders, and beneficiaries. Irs tax form 1040x   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. Irs tax form 1040x Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. Irs tax form 1040x Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. Irs tax form 1040x The allocation is not affected by the use of property that secures the debt. Irs tax form 1040x Example 1. Irs tax form 1040x You borrow $10,000 and use $8,000 to buy stock. Irs tax form 1040x You use the other $2,000 to buy items for your home. Irs tax form 1040x Since 80% of the debt is used for, and allocated to, investment purposes, 80% of the interest on that debt is investment interest. Irs tax form 1040x The other 20% is nondeductible personal interest. Irs tax form 1040x Debt proceeds received in cash. Irs tax form 1040x   If you receive debt proceeds in cash, the proceeds are generally not treated as investment property. Irs tax form 1040x Debt proceeds deposited in account. Irs tax form 1040x   If you deposit debt proceeds in an account, that deposit is treated as investment property, regardless of whether the account bears interest. Irs tax form 1040x But, if you withdraw the funds and use them for another purpose, you must reallocate the debt to determine the amount considered to be for investment purposes. Irs tax form 1040x Example 2. Irs tax form 1040x Assume in Example 1 that you borrowed the money on March 1 and immediately bought the stock for $8,000. Irs tax form 1040x You did not buy the household items until June 1. Irs tax form 1040x You had deposited the $2,000 in the bank. Irs tax form 1040x You had no other transactions on the bank account until June. Irs tax form 1040x You did not sell the stock, and you made no principal payments on the debt. Irs tax form 1040x You paid interest from another account. Irs tax form 1040x The $8,000 is treated as being used for an investment purpose. Irs tax form 1040x The $2,000 is treated as being used for an investment purpose for the 3-month period. Irs tax form 1040x Your total interest expense for 3 months on this debt is investment interest. Irs tax form 1040x In June, when you spend the $2,000 for household items, you must begin to allocate 80% of the debt and the interest expense to investment purposes and 20% to personal purposes. Irs tax form 1040x Amounts paid within 30 days. Irs tax form 1040x   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. Irs tax form 1040x This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Irs tax form 1040x   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. Irs tax form 1040x Payments on debt may require new allocation. Irs tax form 1040x   As you repay a debt used for more than one purpose, you must reallocate the balance. Irs tax form 1040x You must first reduce the amount allocated to personal purposes by the repayment. Irs tax form 1040x You then reallocate the rest of the debt to find what part is for investment purposes. Irs tax form 1040x Example 3. Irs tax form 1040x If, in Example 2 , you repay $500 on November 1, the entire repayment is applied against the amount allocated to personal purposes. Irs tax form 1040x The debt balance is now allocated as $8,000 for investment purposes and $1,500 for personal purposes. Irs tax form 1040x Until the next reallocation is necessary, 84% ($8,000 ÷ $9,500) of the debt and the interest expense is allocated to investment. Irs tax form 1040x Pass-through entities. Irs tax form 1040x   If you use borrowed funds to buy an interest in a partnership or S corporation, then the interest on those funds must be allocated based on the assets of the entity. Irs tax form 1040x If you contribute to the capital of the entity, you can make the allocation using any reasonable method. Irs tax form 1040x Additional allocation rules. Irs tax form 1040x   For more information about allocating interest expense, see chapter 4 of Publication 535. Irs tax form 1040x When To Deduct Investment Interest If you use the cash method of accounting, you must pay the interest before you can deduct it. Irs tax form 1040x If you use an accrual method of accounting, you can deduct interest over the period it accrues, regardless of when you pay it. Irs tax form 1040x For an exception, see Unpaid expenses owed to related party under When To Report Investment Expenses, later in this chapter. Irs tax form 1040x Example. Irs tax form 1040x You borrowed $1,000 on August 26, 2013, payable in 90 days at 12% interest. Irs tax form 1040x On November 26, 2013, you paid this with a new note for $1,030, due on February 26, 2014. Irs tax form 1040x If you use the cash method of accounting, you cannot deduct any part of the $30 interest on your return for 2013 because you did not actually pay it. Irs tax form 1040x If you use an accrual method, you may be able to deduct a portion of the interest on the loans through December 31, 2013, on your return for 2013. Irs tax form 1040x Interest paid in advance. Irs tax form 1040x   Generally, if you pay interest in advance for a period that goes beyond the end of the tax year, you must spread the interest over the tax years to which it belongs under the OID rules discussed in chapter 1. Irs tax form 1040x You can deduct in each year only the interest for that year. Irs tax form 1040x Interest on margin accounts. Irs tax form 1040x   If you are a cash method taxpayer, you can deduct interest on margin accounts to buy taxable securities as investment interest in the year you paid it. Irs tax form 1040x You are considered to have paid interest on these accounts only when you actually pay the broker or when payment becomes available to the broker through your account. Irs tax form 1040x Payment may become available to the broker through your account when the broker collects dividends or interest for your account, or sells securities held for you or received from you. Irs tax form 1040x   You cannot deduct any interest on money borrowed for personal reasons. Irs tax form 1040x Limit on interest deduction for market discount bonds. Irs tax form 1040x   The amount you can deduct for interest expense you paid or accrued during the year to buy or carry a market discount bond may be limited. Irs tax form 1040x This limit does not apply if you accrue the market discount and include it in your income currently. Irs tax form 1040x   Under this limit, the interest is deductible only to the extent it is more than: The total interest and OID includible in gross income for the bond for the year, plus The market discount for the number of days you held the bond during the year. Irs tax form 1040x Figure the amount in (2) above using the rules for figuring accrued market discount in chapter 1 under Market Discount Bonds . Irs tax form 1040x Interest not deducted due to limit. Irs tax form 1040x   In the year you dispose of the bond, you can deduct any interest expense you were not allowed to deduct in earlier years because of the limit. Irs tax form 1040x Choosing to deduct disallowed interest expense before the year of disposition. Irs tax form 1040x   You can choose to deduct disallowed interest expense in any year before the year you dispose of the bond, up to your net interest income from the bond during the year. Irs tax form 1040x The rest of the disallowed interest expense remains deductible in the year you dispose of the bond. Irs tax form 1040x Net interest income. Irs tax form 1040x   This is the interest income (including OID) from the bond that you include in income for the year, minus the interest expense paid or accrued during the year to purchase or carry the bond. Irs tax form 1040x Limit on interest deduction for short-term obligations. Irs tax form 1040x   If the current income inclusion rules discussed in chapter 1 under Discount on Short-Term Obligations do not apply to you, the amount you can deduct for interest expense you paid or accrued during the year to buy or carry a short-term obligation is limited. Irs tax form 1040x   The interest is deductible only to the extent it is more than: The amount of acquisition discount or OID on the obligation for the tax year, plus The amount of any interest payable on the obligation for the year that is not included in income because of your accounting method (other than interest taken into account in determining the amount of acquisition discount or OID). Irs tax form 1040x The method of determining acquisition discount and OID for short-term obligations is discussed in chapter 1 under Discount on Short-Term Obligations . Irs tax form 1040x Interest not deducted due to limit. Irs tax form 1040x   In the year you dispose of the obligation, or, if you choose, in another year in which you have net interest income from the obligation, you can deduct any interest expense you were not allowed to deduct for an earlier year because of the limit. Irs tax form 1040x Follow the same rules provided in the earlier discussion under Limit on interest deduction for market discount bonds , earlier. Irs tax form 1040x Limit on Deduction Generally, your deduction for investment interest expense is limited to your net investment income. Irs tax form 1040x You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. Irs tax form 1040x The interest carried over is treated as investment interest paid or accrued in that next year. Irs tax form 1040x You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. Irs tax form 1040x Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. Irs tax form 1040x Investment income. Irs tax form 1040x   This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). Irs tax form 1040x Investment income does not include Alaska Permanent Fund dividends. Irs tax form 1040x It also does not include qualified dividends or net capital gain unless you choose to include them. Irs tax form 1040x Choosing to include qualified dividends. Irs tax form 1040x   Investment income generally does not include qualified dividends, discussed in chapter 1. Irs tax form 1040x However, you can choose to include all or part of your qualified dividends in investment income. Irs tax form 1040x   You make this choice by completing Form 4952, line 4g, according to its instructions. Irs tax form 1040x   If you choose to include any of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. Irs tax form 1040x Choosing to include net capital gain. Irs tax form 1040x    Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). Irs tax form 1040x However, you can choose to include all or part of your net capital gain in investment income. Irs tax form 1040x   You make this choice by completing Form 4952, line 4g, according to its instructions. Irs tax form 1040x   If you choose to include any of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. Irs tax form 1040x   For more information about the capital gains rates, see Capital Gain Tax Rates in chapter 4. Irs tax form 1040x    Before making either choice, consider the overall effect on your tax liability. Irs tax form 1040x Compare your tax if you make one or both of these choices with your tax if you do not. Irs tax form 1040x Investment income of child reported on parent's return. Irs tax form 1040x   Investment income includes the part of your child's interest and dividend income you choose to report on your return. Irs tax form 1040x If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814. Irs tax form 1040x Include it on line 4a of Form 4952. Irs tax form 1040x Example. Irs tax form 1040x Your 8-year-old son has interest income of $2,200, which you choose to report on your own return. Irs tax form 1040x You enter $2,200 on Form 8814, lines 1a and 4, and $200 on lines 6 and 12 and complete Part II. Irs tax form 1040x Also enter $200 on Form 1040, line 21. Irs tax form 1040x Your investment income includes this $200. Irs tax form 1040x Child's qualified dividends. Irs tax form 1040x   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. Irs tax form 1040x However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. Irs tax form 1040x   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). Irs tax form 1040x Child's Alaska Permanent Fund dividends. Irs tax form 1040x   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. Irs tax form 1040x To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. Irs tax form 1040x Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. Irs tax form 1040x Subtract the result from the amount on Form 8814, line 12. Irs tax form 1040x Example. Irs tax form 1040x Your 10-year-old child has taxable interest income of $4,000 and Alaska Permanent Fund dividends of $2,000. Irs tax form 1040x You choose to report this on your return. Irs tax form 1040x You enter $4,000 on Form 8814, line 1a, $2,000 on line 2a, and $6,000 on line 4. Irs tax form 1040x You then enter $4,000 on Form 8814, lines 6 and 12, and Form 1040, line 21. Irs tax form 1040x You figure the amount of your child's income that you can consider your investment income as follows: $4,000 − ($4,000 × ($2,000 ÷ $6,000)) = $2,667 You include the result, $2,667, on Form 4952, line 4a. Irs tax form 1040x Child's capital gain distributions. Irs tax form 1040x   If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D (Form 1040), line 13, or Form 1040, line 13) generally does not count as investment income. Irs tax form 1040x However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. Irs tax form 1040x   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). Irs tax form 1040x Investment expenses. Irs tax form 1040x   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. Irs tax form 1040x Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. Irs tax form 1040x Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A (Form 1040), line 27. Irs tax form 1040x See Expenses of Producing Income , later, for a discussion of the 2% limit. Irs tax form 1040x Losses from passive activities. Irs tax form 1040x   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). Irs tax form 1040x See Publication 925 for information about passive activities. Irs tax form 1040x Example. Irs tax form 1040x Ted is a partner in a partnership that operates a business. Irs tax form 1040x However, he does not materially participate in the partnership's business. Irs tax form 1040x Ted's interest in the partnership is considered a passive activity. Irs tax form 1040x Ted's investment income from interest and dividends (other than qualified dividends) is $10,000. Irs tax form 1040x His investment expenses (other than interest) are $3,200 after taking into account the 2% limit on miscellaneous itemized deductions. Irs tax form 1040x His investment interest expense is $8,000. Irs tax form 1040x Ted also has income from the partnership of $2,000. Irs tax form 1040x Ted figures his net investment income and the limit on his investment interest expense deduction in the following way: Total investment income $10,000 Minus: Investment expenses (other than interest) 3,200 Net investment income $6,800 Deductible investment interest expense for the year $6,800 The $2,000 of income from the passive activity is not used in determining Ted's net investment income. Irs tax form 1040x His investment interest deduction for the year is limited to $6,800, the amount of his net investment income. Irs tax form 1040x Form 4952 Use Form 4952 to figure your deduction for investment interest. Irs tax form 1040x See Form 4952 for more information. Irs tax form 1040x Exception to use of Form 4952. Irs tax form 1040x   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. Irs tax form 1040x Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. Irs tax form 1040x You do not have any other deductible investment expenses. Irs tax form 1040x You have no carryover of investment interest expense from 2012. Irs tax form 1040x   If you meet all of these tests, you can deduct all of your investment interest. Irs tax form 1040x    Bond Premium Amortization If you pay a premium to buy a bond, the premium is part of your basis in the bond. Irs tax form 1040x If the bond yields taxable interest, you can choose to amortize the premium. Irs tax form 1040x This generally means that each year, over the life of the bond, you use a part of the premium to reduce the amount of interest includible in your income. Irs tax form 1040x If you make this choice, you must reduce your basis in the bond by the amortization for the year. Irs tax form 1040x If the bond yields tax-exempt interest, you must amortize the premium. Irs tax form 1040x This amortized amount is not deductible in determining taxable income. Irs tax form 1040x However, each year you must reduce your basis in the bond (and tax-exempt interest otherwise reportable on Form 1040, line 8b) by the amortization for the year. Irs tax form 1040x Bond premium. Irs tax form 1040x   Bond premium is the amount by which your basis in the bond right after you get it is more than the total of all amounts payable on the bond after you get it (other than payments of qualified stated interest). Irs tax form 1040x For example, a bond with a maturity value of $1,000 generally would have a $50 premium if you buy it for $1,050. Irs tax form 1040x Special rules to determine amounts payable on a bond. Irs tax form 1040x   For special rules that apply to determine the amounts payable on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. Irs tax form 1040x 171-3. Irs tax form 1040x Basis. Irs tax form 1040x   In general, your basis for figuring bond premium amortization is the same as your basis for figuring any loss on the sale of the bond. Irs tax form 1040x However, you may need to use a different basis for: Convertible bonds, Bonds you got in a trade, and Bonds whose basis has to be determined using the basis of the person who transferred the bond to you. Irs tax form 1040x See Regulations section 1. Irs tax form 1040x 171-1(e). Irs tax form 1040x Dealers. Irs tax form 1040x   A dealer in taxable bonds (or anyone who holds them mainly for sale to customers in the ordinary course of a trade or business or who would properly include bonds in inventory at the close of the tax year) cannot claim a deduction for amortizable bond premium. Irs tax form 1040x   See section 75 of the Internal Revenue Code for the treatment of bond premium by a dealer in tax-exempt bonds. Irs tax form 1040x How To Figure Amortization For bonds issued after September 27, 1985, you must amortize bond premium using a constant yield method on the basis of the bond's yield to maturity, determined by using the bond's basis and compounding at the close of each accrual period. Irs tax form 1040x Constant yield method. Irs tax form 1040x   Figure the bond premium amortization for each accrual period as follows. Irs tax form 1040x Step 1: Determine your yield. Irs tax form 1040x   Your yield is the discount rate that, when used in figuring the present value of all remaining payments to be made on the bond (including payments of qualified stated interest), produces an amount equal to your basis in the bond. Irs tax form 1040x Figure the yield as of the date you got the bond. Irs tax form 1040x It must be constant over the term of the bond and must be figured to at least two decimal places when expressed as a percentage. Irs tax form 1040x   If you do not know the yield, consult your broker or tax advisor. Irs tax form 1040x Databases available to them are likely to show the yield at the date of purchase. Irs tax form 1040x Step 2: Determine the accrual periods. Irs tax form 1040x   You can choose the accrual periods to use. Irs tax form 1040x They may be of any length and may vary in length over the term of the bond, but each accrual period can be no longer than 1 year and each scheduled payment of principal or interest must occur either on the first or the final day of an accrual period. Irs tax form 1040x The computation is simplest if accrual periods are the same as the intervals between interest payment dates. Irs tax form 1040x Step 3: Determine the bond premium for the accrual period. Irs tax form 1040x   To do this, multiply your adjusted acquisition price at the beginning of the accrual period by your yield. Irs tax form 1040x Then subtract the result from the qualified stated interest for the period. Irs tax form 1040x   Your adjusted acquisition price at the beginning of the first accrual period is the same as your basis. Irs tax form 1040x After that, it is your basis decreased by the amount of bond premium amortized for earlier periods and the amount of any payment previously made on the bond other than a payment of qualified stated interest. Irs tax form 1040x Example. Irs tax form 1040x On February 1, 2012, you bought a taxable bond for $110,000. Irs tax form 1040x The bond has a stated principal amount of $100,000, payable at maturity on February 1, 2019, making your premium $10,000 ($110,000 − $100,000). Irs tax form 1040x The bond pays qualified stated interest of $10,000 on February 1 of each year. Irs tax form 1040x Your yield is 8. Irs tax form 1040x 07439% compounded annually. Irs tax form 1040x You choose to use annual accrual periods ending on February 1 of each year. Irs tax form 1040x To find your bond premium amortization for the accrual period ending on February 1, 2013, you multiply the adjusted acquisition price at the beginning of the period ($110,000) by your yield. Irs tax form 1040x When you subtract the result ($8,881. Irs tax form 1040x 83) from the qualified stated interest for the period ($10,000), you find that your bond premium amortization for the period is $1,118. Irs tax form 1040x 17. Irs tax form 1040x Special rules to figure amortization. Irs tax form 1040x   For special rules to figure the bond premium amortization on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. Irs tax form 1040x 171-3. Irs tax form 1040x Bonds Issued Before September 28, 1985 For these bonds, you can amortize bond premium using any reasonable method. Irs tax form 1040x Reasonable methods include: The straight-line method, and The Revenue Ruling 82-10 method. Irs tax form 1040x Straight-line method. Irs tax form 1040x   Under this method, the amount of your bond premium amortization is the same each month. Irs tax form 1040x Divide the number of months you held the bond during the year by the number of months from the beginning of the tax year (or, if later, the date of acquisition) to the date of maturity or earlier call date. Irs tax form 1040x Then multiply the result by the bond premium (reduced by any bond premium amortization claimed in earlier years). Irs tax form 1040x This gives you your bond premium amortization for the year. Irs tax form 1040x Revenue Ruling 82-10 method. Irs tax form 1040x   Under this method, the amount of your bond premium amortization increases each month over the life of the bond. Irs tax form 1040x This method is explained in Revenue Ruling 82-10, 1982-1 C. Irs tax form 1040x B. Irs tax form 1040x 46. Irs tax form 1040x Choosing To Amortize You choose to amortize the premium on taxable bonds by reporting the amortization for the year on your income tax return for the first tax year you want the choice to apply. Irs tax form 1040x You should attach a statement to your return that you are making this choice under section 171. Irs tax form 1040x See How To Report Amortization, next. Irs tax form 1040x This choice is binding for the year you make it and for later tax years. Irs tax form 1040x It applies to all taxable bonds you own in the year you make the choice and also to those you acquire in later years. Irs tax form 1040x You can change your decision to amortize bond premium only with the written approval of the IRS. Irs tax form 1040x To request approval, use Form 3115. Irs tax form 1040x For more information on requesting approval, see section 5 of the Appendix to Revenue Procedure 2011-14 in Internal Revenue Bulletin 2011-4. Irs tax form 1040x You can find Revenue Procedure 2011-14 at www. Irs tax form 1040x irs. Irs tax form 1040x gov/irb/2011-04_IRB/ar08. Irs tax form 1040x html. Irs tax form 1040x How To Report Amortization Subtract the bond premium amortization from your interest income from these bonds. Irs tax form 1040x Report the bond's interest on Schedule B (Form 1040A or 1040), line 1. Irs tax form 1040x Under your last entry on line 1, put a subtotal of all interest listed on line 1. Irs tax form 1040x Below this subtotal, print “ABP Adjustment,” and the total interest you received. Irs tax form 1040x Subtract this amount from the subtotal, and enter the result on line 2. Irs tax form 1040x Bond premium amortization more than interest. Irs tax form 1040x   If the amount of your bond premium amortization for an accrual period is more than the qualified stated interest for the period, you can deduct the difference as a miscellaneous itemized deduction on Schedule A (Form 1040), line 28. Irs tax form 1040x    But your deduction is limited to the amount by which your total interest inclusions on the bond in prior accrual periods is more than your total bond premium deductions on the bond in prior periods. Irs tax form 1040x Any amount you cannot deduct because of this limit can be carried forward to the next accrual period. Irs tax form 1040x Pre-1998 election to amortize bond premium. Irs tax form 1040x   Generally, if you first elected to amortize bond premium before 1998, the above treatment of the premium does not apply to bonds you acquired before 1988. Irs tax form 1040x Bonds acquired before October 23, 1986. Irs tax form 1040x   The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit. Irs tax form 1040x Bonds acquired after October 22, 1986, but before 1988. Irs tax form 1040x    The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you choose to treat it as an offset to interest income on the bond. Irs tax form 1040x Expenses of Producing Income You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). Irs tax form 1040x To be deductible, these expenses must be ordinary and necessary expenses paid or incurred: To produce or collect income, or To manage property held for producing income. Irs tax form 1040x The expenses must be directly related to the income or income-producing property, and the income must be taxable to you. Irs tax form 1040x The deduction for most income-producing expenses is subject to a 2% limit that also applies to certain other miscellaneous itemized deductions. Irs tax form 1040x The amount deductible is limited to the total of these miscellaneous deductions that is more than 2% of your adjusted gross income. Irs tax form 1040x For information on how to report expenses of producing income, see How To Report Investment Expenses , later. Irs tax form 1040x Attorney or accounting fees. Irs tax form 1040x   You can deduct attorney or accounting fees that are necessary to produce or collect taxable income. Irs tax form 1040x However, in some cases, attorney or accounting fees are part of the basis of property. Irs tax form 1040x See Basis of Investment Property in chapter 4. Irs tax form 1040x Automatic investment service and dividend reinvestment plans. Irs tax form 1040x   A bank may offer its checking account customers an automatic investment service so that, for a charge, each customer can choose to invest a part of the checking account each month in common stock. Irs tax form 1040x Or a bank that is a dividend disbursing agent for a number of publicly-owned corporations may set up an automatic dividend reinvestment service. Irs tax form 1040x Through that service, cash dividends are reinvested in more shares of stock after the bank deducts a service charge. Irs tax form 1040x   A corporation in which you own stock also may have a dividend reinvestment plan. Irs tax form 1040x This plan lets you choose to use your dividends to buy more shares of stock in the corporation instead of receiving the dividends in cash. Irs tax form 1040x   You can deduct the monthly service charge you pay to a bank to participate in an automatic investment service. Irs tax form 1040x If you participate in a dividend reinvestment plan, you can deduct any service charge subtracted from your cash dividends before the dividends are used to buy more shares of stock. Irs tax form 1040x Deduct the charges in the year you pay them. Irs tax form 1040x Clerical help and office rent. Irs tax form 1040x   You can deduct office expenses, such as rent and clerical help, you incurred in connection with your investments and collecting the taxable income on your investments. Irs tax form 1040x Cost of replacing missing securities. Irs tax form 1040x   To replace your taxable securities that are mislaid, lost, stolen, or destroyed, you may have to post an indemnity bond. Irs tax form 1040x You can deduct the premium you pay to buy the indemnity bond and the related incidental expenses. Irs tax form 1040x   You may, however, get a refund of part of the bond premium if the missing securities are recovered within a specified time. Irs tax form 1040x Under certain types of insurance policies, you can recover some of the expenses. Irs tax form 1040x   If you receive the refund in the tax year you pay the amounts, you can deduct only the difference between the expenses paid and the amount refunded. Irs tax form 1040x If the refund is made in a later tax year, you must include the refund in income in the year you received it, but only to the extent that the expenses decreased your tax in the year you deducted them. Irs tax form 1040x Fees to collect income. Irs tax form 1040x   You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect investment income, such as your taxable bond or mortgage interest, or your dividends on shares of stock. Irs tax form 1040x Fees to buy or sell. Irs tax form 1040x   You cannot deduct a fee you pay to a broker to acquire investment property, such as stocks or bonds. Irs tax form 1040x You must add the fee to the cost of the property. Irs tax form 1040x See Basis of Investment Property in chapter 4. Irs tax form 1040x    You cannot deduct any broker's fees, commissions, or option premiums you pay (or that were netted out) in connection with the sale of investment property. Irs tax form 1040x They can be used only to figure gain or loss from the sale. Irs tax form 1040x See Reporting Capital Gains and Losses , in chapter 4, for more information about the treatment of these sale expenses. Irs tax form 1040x Investment counsel and advice. Irs tax form 1040x   You can deduct fees you pay for counsel and advice about investments that produce taxable income. Irs tax form 1040x This includes amounts you pay for investment advisory services. Irs tax form 1040x Safe deposit box rent. Irs tax form 1040x   You can deduct rent you pay for a safe deposit box if you use the box to store taxable income-producing stocks, bonds, or other investment-related papers and documents. Irs tax form 1040x If you also use the box to store tax-exempt securities or personal items, you can deduct only part of the rent. Irs tax form 1040x See Tax-exempt income under Nondeductible Expenses, later, to figure what part you can deduct. Irs tax form 1040x State and local transfer taxes. Irs tax form 1040x   You cannot deduct the state and local transfer taxes you pay when you buy or sell securities. Irs tax form 1040x If you pay these transfer taxes when you buy securities, you must treat them as part of the cost of the property. Irs tax form 1040x If you pay these transfer taxes when you sell securities, you must treat them as a reduction in the amount realized. Irs tax form 1040x Trustee's commissions for revocable trust. Irs tax form 1040x   If you set up a revocable trust and have its income distributed to you, you can deduct the commission you pay the trustee for managing the trust to the extent it is to produce or collect taxable income or to manage property. Irs tax form 1040x However, you cannot deduct any part of the commission used for producing or collecting tax-exempt income or for managing property that produces tax-exempt income. Irs tax form 1040x   If you are a cash-basis taxpayer and pay the commissions for several years in advance, you must deduct a part of the commission each year. Irs tax form 1040x You cannot deduct the entire amount in the year you pay it. Irs tax form 1040x Investment expenses from pass-through entities. Irs tax form 1040x   If you hold an interest in a partnership, S corporation, real estate mortgage investment conduit (REMIC), or a nonpublicly offered mutual fund, you can deduct your share of that entity's investment expenses. Irs tax form 1040x A partnership or S corporation will show your share of these expenses on your Schedule K-1 (Form 1065) or Schedule K-1 (Form 1120S). Irs tax form 1040x A nonpublicly offered mutual fund will indicate your share of these expenses in box 5 of Form 1099-DIV (or substitute statement). Irs tax form 1040x Publicly-offered mutual funds are discussed later. Irs tax form 1040x   If you hold an interest in a REMIC, any expenses relating to your residual interest investment will be shown on Schedule Q (Form 1066), line 3b. Irs tax form 1040x Any expenses relating to your regular interest investment will appear in box 5 of Form 1099-INT (or substitute statement) or box 9 of Form 1099-OID (or substitute statement). Irs tax form 1040x   Report your share of these investment expenses on Schedule A (Form 1040), subject to the 2% limit, in the same manner as your other investment expenses. Irs tax form 1040x Including mutual fund or REMIC expenses in income. Irs tax form 1040x   Your share of the investment expenses of a REMIC or a nonpublicly offered mutual fund, as described above, are considered to be indirect deductions through that pass-through entity. Irs tax form 1040x You must include in your gross income an amount equal to the expenses allocated to you, whether or not you are able to claim a deduction for those expenses. Irs tax form 1040x If you are a shareholder in a nonpublicly offered mutual fund, you must include on your return the full amount of ordinary dividends or other distributions of stock, as shown in box 1a of Form 1099-DIV (or substitute statement). Irs tax form 1040x If you are a residual interest holder in a REMIC, you must report as ordinary income on Schedule E (Form 1040) the total amounts shown on Schedule Q (Form 1066), lines 1b and 3b. Irs tax form 1040x If you are a REMIC regular interest holder, you must include the amount of any expense allocation you received on Form 1040, line 8a. Irs tax form 1040x Publicly-offered mutual funds. Irs tax form 1040x   Most mutual funds are publicly offered. Irs tax form 1040x These mutual funds, generally, are traded on an established securities exchange. Irs tax form 1040x These funds do not pass investment expenses through to you. Irs tax form 1040x Instead, the dividend income they report to you in box 1a of Form 1099-DIV (or substitute statement) is already reduced by your share of investment expenses. Irs tax form 1040x As a result, you cannot deduct the expenses on your return. Irs tax form 1040x   Include the amount from box 1a of Form 1099-DIV (or substitute statement) in your income. Irs tax form 1040x    A publicly offered mutual fund is one that: Is continuously offered pursuant to a public offering, Is regularly traded on an established securities market, and Is held by or for no fewer than 500 persons at any time during the year. Irs tax form 1040x Contact your mutual fund if you are not sure whether it is publicly offered. Irs tax form 1040x Nondeductible Expenses Some expenses that you incur as an investor are not deductible. Irs tax form 1040x Stockholders' meetings. Irs tax form 1040x   You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you have no interest other than owning stock. Irs tax form 1040x This is true even if your purpose in attending is to get information that would be useful in making further investments. Irs tax form 1040x Investment-related seminar. Irs tax form 1040x   You cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes. Irs tax form 1040x Single-premium life insurance, endowment, and annuity contracts. Irs tax form 1040x   You cannot deduct interest on money you borrow to buy or carry a single-premium life insurance, endowment, or annuity contract. Irs tax form 1040x Used as collateral. Irs tax form 1040x   If you use a single premium annuity contract as collateral to obtain or continue a mortgage loan, you cannot deduct any interest on the loan that is collateralized by the annuity contract. Irs tax form 1040x Figure the amount of interest expense disallowed by multiplying the current interest rate on the mortgage loan by the lesser of the amount of the annuity contract used as collateral or the amount of the loan. Irs tax form 1040x Borrowing on insurance. Irs tax form 1040x   Generally, you cannot deduct interest on money you borrow to buy or carry a life insurance, endowment, or annuity contract if you plan to systematically borrow part or all of the increases in the cash value of the contract. Irs tax form 1040x This rule applies to the interest on the total amount borrowed to buy or carry the contract, not just the interest on the borrowed increases in the cash value. Irs tax form 1040x Tax-exempt income. Irs tax form 1040x   You cannot deduct expenses you incur to produce tax-exempt income. Irs tax form 1040x Nor can you deduct interest on money you borrow to buy tax-exempt securities or shares in a mutual fund or other regulated investment company that distributes only exempt-interest dividends. Irs tax form 1040x Short-sale expenses. Irs tax form 1040x   The rule disallowing a deduction for interest expenses on tax-exempt securities applies to amounts you pay in connection with personal property used in a short sale or amounts paid by others for the use of any collateral in connection with the short sale. Irs tax form 1040x However, it does not apply to the expenses you incur if you deposit cash as collateral for the property used in the short sale and the cash does not earn a material return during the period of the sale. Irs tax form 1040x Short sales are discussed in Short Sales in chapter 4. Irs tax form 1040x Expenses for both tax-exempt and taxable income. Irs tax form 1040x   You may have expenses that are for both tax-exempt and taxable income. Irs tax form 1040x If you cannot specifically identify what part of the expenses is for each type of income, you can divide the expenses, using reasonable proportions based on facts and circumstances. Irs tax form 1040x You must attach a statement to your return showing how you divided the expenses and stating that each deduction claimed is not based on tax-exempt income. Irs tax form 1040x   One accepted method for dividing expenses is to do it in the same proportion that each type of income is to the total income. Irs tax form 1040x If the expenses relate in part to capital gains and losses, include the gains, but not the losses, in figuring this proportion. Irs tax form 1040x To find the part of the expenses that is for the tax-exempt income, divide your tax-exempt income by the total income and multiply your expenses by the result. Irs tax form 1040x Example. Irs tax form 1040x You received $6,000 interest; $4,800 was tax-exempt and $1,200 was taxable. Irs tax form 1040x In earning this income, you had $500 of expenses. Irs tax form 1040x You cannot specifically identify the amount of each expense item that is for each income item, so you must divide your expenses. Irs tax form 1040x 80% ($4,800 tax-exempt interest divided by $6,000 total interest) of your expenses is for the tax-exempt income. Irs tax form 1040x You cannot deduct $400 (80% of $500) of the expenses. Irs tax form 1040x You can deduct $100 (the rest of the expenses) because they are for the taxable interest. Irs tax form 1040x State income taxes. Irs tax form 1040x   If you itemize your deductions, you can deduct, as taxes, state income taxes on interest income that is exempt from federal income tax. Irs tax form 1040x But you cannot deduct, as either taxes or investment expenses, state income taxes on other exempt income. Irs tax form 1040x Interest expense and carrying charges on straddles. Irs tax form 1040x   You cannot deduct interest and carrying charges allocable to personal property that is part of a straddle. Irs tax form 1040x The nondeductible interest and carrying charges are added to the basis of the straddle property. Irs tax form 1040x However, this treatment does not apply if: All the offsetting positions making up the straddle either consist of one or more qualified covered call options and the optioned stock, or consist of section 1256 contracts (and the straddle is not part of a larger straddle); or The straddle is a hedging transaction. Irs tax form 1040x  For information about straddles, including definitions of the terms used in this discussion, see Straddles in chapter 4. Irs tax form 1040x   Interest includes any amount you pay or incur in connection with personal property used in a short sale. Irs tax form 1040x However, you must first apply the rules discussed in Payments in lieu of dividends under Short Sales in chapter 4. Irs tax form 1040x   To determine the interest on market discount bonds and short-term obligations that are part of a straddle, you must first apply the rules discussed under Limit on interest deduction for market discount bonds and Limit on interest deduction for short-term obligations (both under Interest Expenses, earlier). Irs tax form 1040x Nondeductible amount. Irs tax form 1040x   Figure the nondeductible interest and carrying charges on straddle property as follows. Irs tax form 1040x Add: Interest on indebtedness incurred or continued to buy or carry the personal property, and All other amounts (including charges to insure, store, or transport the personal property) paid or incurred to carry the personal property. Irs tax form 1040x Subtract from the amount in (1): Interest (including OID) includible in gross income for the year on the personal property, Any income from the personal property treated as ordinary income on the disposition of short-term government obligations or as ordinary income under the market discount and short-term bond provisions — see Discount on Debt Instruments in chapter 1, The dividends includible in gross income for the year from the personal property, and Any payment on a loan of the personal property for use in a short sale that is includible in gross income. Irs tax form 1040x Basis adjustment. Irs tax form 1040x   Add the nondeductible amount to the basis of your straddle property. Irs tax form 1040x How To Report Investment Expenses To deduct your investment expenses, you must itemize deductions on Schedule A (Form 1040). Irs tax form 1040x Enter your deductible investment interest expense on Schedule A (Form1040), line 14. Irs tax form 1040x Include any deductible short sale expenses. Irs tax form 1040x (See Short Sales in chapter 4 for information on these expenses. Irs tax form 1040x ) Also attach a completed Form 4952 if you used that form to figure your investment interest expense. Irs tax form 1040x Enter the total amount of your other investment expenses (other than interest expenses) on Schedule A (Form 1040), line 23. Irs tax form 1040x List the type and amount of each expense on the dotted lines next to line 23. Irs tax form 1040x (If necessary, you can show the required information on an attached statement. Irs tax form 1040x ) For information on how to report amortizable bond premium, see Bond Premium Amortization , earlier in this chapter. Irs tax form 1040x When To Report Investment Expenses If you use the cash method to report income and expenses, you generally deduct your expenses, except for certain prepaid interest, in the year you pay them. Irs tax form 1040x If you use an accrual method, you generally deduct your expenses when you incur a liability for them, rather than when you pay them. Irs tax form 1040x Also see When To Deduct Investment Interest , earlier in this chapter. Irs tax form 1040x Unpaid expenses owed to related party. Irs tax form 1040x   If you use an accrual method, you cannot deduct interest and other expenses owed to a related cash-basis person until payment is made and the amount is includible in the gross income of that person. Irs tax form 1040x The relationship, for purposes of this rule, is determined as of the end of the tax year for which the interest or expense would otherwise be deductible. Irs tax form 1040x If a deduction is denied under this rule, this rule will continue to apply even if your relationship with the person ceases to exist before the amount is includible in the gross income of that person. Irs tax form 1040x   This rule generally applies to those relationships listed in chapter 4 under Related Party Transactions . Irs tax form 1040x It also applies to accruals by partnerships to partners, partners to partnerships, shareholders to S corporations, and S corporations to shareholders. Irs tax form 1040x   The postponement of deductions for unpaid expenses and interest under the related party rule does not apply to OID, regardless of when payment is made. Irs tax form 1040x This rule also does not apply to loans with below-market interest rates or to certain payments for the use of property and services when the lender or recipient has to include payments periodically in income, even if a payment has not been made. Irs tax form 1040x Prev  Up  Next   Home   More Online Publications
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Higher Education

Find government information on higher education, including accredited colleges and universities, financial aid, GI bill enrollment, GPA calculator, grants, fellowships, studying abroad, tax benefits and more.

The Irs Tax Form 1040x

Irs tax form 1040x 1. Irs tax form 1040x   Scholarships, Fellowships, Grants, and Tuition Reductions Table of Contents Reminder Introduction Scholarships and FellowshipsTax-Free Scholarships and Fellowships Taxable Scholarships and Fellowships Reporting Scholarships and Fellowships Other Types of Educational AssistanceFulbright Grants Pell Grants and Other Title IV Need-Based Education Grants Payment to Service Academy Cadets Veterans' Benefits Qualified Tuition Reduction Reminder Individual retirement arrangements (IRAs). Irs tax form 1040x  You can set up and make contributions to an IRA if you receive taxable compensation. Irs tax form 1040x Under this rule, a taxable scholarship or fellowship is compensation only if it is shown in box 1 of your Form W-2, Wage and Tax Statement. Irs tax form 1040x For more information about IRAs, see Publication 590. Irs tax form 1040x Introduction This chapter discusses the income tax treatment of various types of educational assistance you may receive if you are studying, teaching, or researching in the United States. Irs tax form 1040x The educational assistance can be for a primary or secondary school, a college or university, or a vocational school. Irs tax form 1040x Included are discussions of: Scholarships, Fellowships, Need-based education grants, such as a Pell Grant, and Qualified tuition reductions. Irs tax form 1040x Many types of educational assistance are tax free if they meet the requirements discussed here. Irs tax form 1040x Special rules apply to U. Irs tax form 1040x S. Irs tax form 1040x citizens and resident aliens who have received scholarships or fellowships for studying, teaching, or researching abroad. Irs tax form 1040x For information about these rules, see Publication 54, Tax Guide for U. Irs tax form 1040x S. Irs tax form 1040x Citizens and Resident Aliens Abroad. Irs tax form 1040x Scholarships and Fellowships A scholarship is generally an amount paid or allowed to, or for the benefit of, a student (whether an undergraduate or a graduate) at an educational institution to aid in the pursuit of his or her studies. Irs tax form 1040x A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research. Irs tax form 1040x Amount of scholarship or fellowship. Irs tax form 1040x   The amount of a scholarship or fellowship includes the following: The value of contributed services and accommodations. Irs tax form 1040x This includes such services and accommodations as room (lodging), board (meals), laundry service, and similar services or accommodations that are received by an individual as a part of a scholarship or fellowship. Irs tax form 1040x The amount of tuition, matriculation, and other fees that are paid or remitted to the student to aid the student in pursuing study or research. Irs tax form 1040x Any amount received in the nature of a family allowance as a part of a scholarship or fellowship. Irs tax form 1040x Tax-Free Scholarships and Fellowships A scholarship or fellowship is tax free (excludable from gross income) only if you are a candidate for a degree at an eligible educational institution. Irs tax form 1040x A scholarship or fellowship is tax free only to the extent: It does not exceed your expenses; It is not designated or earmarked for other purposes (such as room and board), and does not require (by its terms) that it cannot be used for qualified education expenses; and It does not represent payment for teaching, research, or other services required as a condition for receiving the scholarship. Irs tax form 1040x (But for exceptions, see Payment for services,later. Irs tax form 1040x Use Worksheet 1–1 to figure the amount of a scholarship or fellowship you can exclude from gross income. Irs tax form 1040x Candidate for a degree. Irs tax form 1040x   You are a candidate for a degree if you: Attend a primary or secondary school or are pursuing a degree at a college or university, or Attend an educational institution that: Provides a program that is acceptable for full credit toward a bachelor's or higher degree, or offers a program of training to prepare students for gainful employment in a recognized occupation; and Is authorized under federal or state law to provide such a program and is accredited by a nationally recognized accreditation agency. Irs tax form 1040x Eligible educational institution. Irs tax form 1040x   An eligible educational institution is one whose primary function is the presentation of formal instruction and that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities. Irs tax form 1040x Qualified education expenses. Irs tax form 1040x   For purposes of tax-free scholarships and fellowships, these are expenses for: Tuition and fees required to enroll at or attend an eligible educational institution, and Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. Irs tax form 1040x These items must be required of all students in your course of instruction. Irs tax form 1040x Expenses that do not qualify. Irs tax form 1040x   Qualified education expenses do not include the cost of: Room and board, Travel, Research, Clerical help, or Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution. Irs tax form 1040x Payment for services. Irs tax form 1040x   Generally, you cannot exclude from your gross income the part of any scholarship or fellowship that represents payment for teaching, research, or other services required as a condition for receiving the scholarship. Irs tax form 1040x This applies even if all candidates for a degree must perform the services to receive the degree. Irs tax form 1040x (See exceptions next. Irs tax form 1040x ) Exceptions. Irs tax form 1040x   You do not have to treat as payment for services the part of any scholarship or fellowship that represents payment for teaching, research, or other services if you receive the amount under: The National Health Service Corps Scholarship Program, or The Armed Forces Health Professions Scholarship and Financial Assistance Program. Irs tax form 1040x Example 1. Irs tax form 1040x You received a scholarship of $2,500. Irs tax form 1040x The scholarship was not received under either of the exceptions mentioned above. Irs tax form 1040x As a condition for receiving the scholarship, you must serve as a part-time teaching assistant. Irs tax form 1040x Of the $2,500 scholarship, $1,000 represents payment for teaching. Irs tax form 1040x The provider of your scholarship gives you a Form W-2 showing $1,000 as income. Irs tax form 1040x Your qualified education expenses were at least $1,500. Irs tax form 1040x Assuming that all other conditions are met, $1,500 of your scholarship is tax free. Irs tax form 1040x The $1,000 you received for teaching is taxable. Irs tax form 1040x Example 2. Irs tax form 1040x You are a candidate for a degree at a medical school. Irs tax form 1040x You receive a scholarship (not under either of the exceptions mentioned above) for your medical education and training. Irs tax form 1040x The terms of your scholarship require you to perform future services. Irs tax form 1040x A substantial penalty applies if you do not comply. Irs tax form 1040x The entire amount of your grant is taxable as payment for services in the year it is received. Irs tax form 1040x Athletic Scholarships An athletic scholarship is tax free only if and to the extent it meets the requirements discussed later. Irs tax form 1040x Worksheet 1-1. Irs tax form 1040x    You can use Worksheet 1-1, Taxable Scholarship and Fellowship Income , later, to figure the tax-free and taxable parts of your athletic scholarship. Irs tax form 1040x    Worksheet 1-1. Irs tax form 1040x Taxable Scholarship and Fellowship Income 1. Irs tax form 1040x Enter the total amount of any scholarship or fellowship for 2013. Irs tax form 1040x See Amount of scholarship or fellowship, earlier. Irs tax form 1040x 1. Irs tax form 1040x       If you are a degree candidate at an eligible educational institution, go to line 2. Irs tax form 1040x If you are not a degree candidate at an eligible educational institution, stop here. Irs tax form 1040x The entire amount is taxable. Irs tax form 1040x For information on how to report this amount on your tax return, see Reporting Scholarships and Fellowships , earlier, in this chapter. Irs tax form 1040x       2. Irs tax form 1040x Enter the amount from line 1 that was for teaching, research, or any other services required as a condition for receiving the scholarship. Irs tax form 1040x (Do not include amounts received for these items under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program. Irs tax form 1040x ) 2. Irs tax form 1040x     3. Irs tax form 1040x Subtract line 2 from line 1 3. Irs tax form 1040x     4. Irs tax form 1040x Enter the amount from line 3 that your scholarship or fellowship required you to use for other than qualified education expenses 4. Irs tax form 1040x     5. Irs tax form 1040x Subtract line 4 from line 3 5. Irs tax form 1040x     6. Irs tax form 1040x Enter the amount of your qualified education expenses 6. Irs tax form 1040x     7. Irs tax form 1040x Enter the smaller of line 5 or line 6. Irs tax form 1040x This amount is the most you can exclude from your gross income (the tax-free part of the scholarship or fellowship) 7. Irs tax form 1040x     8. Irs tax form 1040x Subtract line 7 from line 5 8. Irs tax form 1040x     9. Irs tax form 1040x Taxable part. Irs tax form 1040x Add lines 2, 4, and 8. Irs tax form 1040x See Reporting Scholarships and Fellowships , earlier, for how to report this amount on your tax return 9. Irs tax form 1040x     Taxable Scholarships and Fellowships If and to the extent your scholarship or fellowship does not meet the requirements described earlier, it is taxable and must be included in gross income. Irs tax form 1040x You can use Worksheet 1–1, Taxable Scholarship and Fellowship Income, later, to figure the tax-free and taxable parts of your scholarship or fellowship. Irs tax form 1040x Reporting Scholarships and Fellowships Whether you must report your scholarship or fellowship depends on whether you must file a return and whether any part of your scholarship or fellowship is taxable. Irs tax form 1040x If your only income is a completely tax-free scholarship or fellowship, you do not have to file a tax return and no reporting is necessary. Irs tax form 1040x If all or part of your scholarship or fellowship is taxable and you are required to file a tax return, report the taxable amount as explained below. Irs tax form 1040x You must report the taxable amount whether or not you received a Form W-2. Irs tax form 1040x If you receive an incorrect Form W-2, ask the payer for a corrected one. Irs tax form 1040x For information on whether you must file a return, see Publication 501, Exemptions, Standard Deduction, and Filing Information, or your income tax form instructions. Irs tax form 1040x How To Report How you report any taxable scholarship or fellowship income depends on which return you file. Irs tax form 1040x Form 1040EZ. Irs tax form 1040x   If you file Form 1040EZ, include the taxable amount in the total on line 1. Irs tax form 1040x If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount in the space to the left of line 1. Irs tax form 1040x Form 1040A. Irs tax form 1040x   If you file Form 1040A, include the taxable amount in the total on line 7. Irs tax form 1040x If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount in the space to the left of line 7. Irs tax form 1040x Form 1040. Irs tax form 1040x   If you file Form 1040, include the taxable amount in the total on line 7. Irs tax form 1040x If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount on the dotted line next to line 7. Irs tax form 1040x Schedule SE (Form 1040). Irs tax form 1040x   To determine your net earnings from self-employment, include amounts you receive under a scholarship as pay for your services that are reported to you on Form 1099-MISC, Miscellaneous Income. Irs tax form 1040x If your net earnings are $400 or more, you must pay self-employment tax. Irs tax form 1040x Use Schedule SE, Self-Employment Tax, to figure this tax. Irs tax form 1040x Form 1040NR. Irs tax form 1040x   If you file Form 1040NR, report the taxable amount on line 12. Irs tax form 1040x Generally, you must report the amount shown in box 2 of Form(s) 1042-S, Foreign Person's U. Irs tax form 1040x S. Irs tax form 1040x Source Income Subject to Withholding. Irs tax form 1040x See the Instructions for Form 1040NR for more information. Irs tax form 1040x Form 1040NR-EZ. Irs tax form 1040x   If you file Form 1040NR-EZ, report the taxable amount on line 5. Irs tax form 1040x Generally, you must report the amount shown in box 2 of Form(s) 1042-S. Irs tax form 1040x See the Instructions for Form 1040NR-EZ for more information. Irs tax form 1040x Other Types of Educational Assistance The following discussions deal with other common types of educational assistance. Irs tax form 1040x Fulbright Grants A Fulbright grant is generally treated as a scholarship or fellowship in figuring how much of the grant is tax free. Irs tax form 1040x Pell Grants and Other Title IV Need-Based Education Grants These need-based grants are treated as scholarships for purposes of determining their tax treatment. Irs tax form 1040x They are tax free to the extent used for qualified education expenses during the period for which a grant is awarded. Irs tax form 1040x Payment to Service Academy Cadets An appointment to a United States military academy is not a scholarship or fellowship. Irs tax form 1040x Payment you receive as a cadet or midshipman at an armed services academy is pay for personal services and will be reported to you in box 1 of Form W-2. Irs tax form 1040x Include this pay in your income in the year you receive it unless one of the exceptions, discussed earlier under Payment for services , applies. Irs tax form 1040x Veterans' Benefits Payments you receive for education, training, or subsistence under any law administered by the Department of Veterans Affairs (VA) are tax free. Irs tax form 1040x Do not include these payments as income on your federal tax return. Irs tax form 1040x If you qualify for one or more of the education benefits discussed in chapters 2 through 12, you may have to reduce the amount of education expenses qualifying for a specific benefit by part or all of your VA payments. Irs tax form 1040x This applies only to the part of your VA payments that is required to be used for education expenses. Irs tax form 1040x You may want to visit the Veteran's Administration website at www. Irs tax form 1040x gibill. Irs tax form 1040x va. Irs tax form 1040x gov for specific information about the various VA benefits for education. Irs tax form 1040x Example. Irs tax form 1040x You have returned to college and are receiving two education benefits under the latest GI Bill: (1) a $1,534 monthly basic housing allowance (BHA) that is directly deposited to your checking account, and (2) $3,840 paid directly to your college for tuition. Irs tax form 1040x Neither of these benefits is taxable and you do not report them on your tax return. Irs tax form 1040x You also want to claim an American opportunity credit on your return. Irs tax form 1040x You paid $5,000 in qualified education expenses (see chapter 2, American Opportunity Credit , later). Irs tax form 1040x To figure the amount of credit, you must first subtract the $3,840 from your qualified education expenses because this payment under the GI Bill was required to be used for education expenses. Irs tax form 1040x You do not subtract any amount of the BHA because it was paid to you and its use was not restricted. Irs tax form 1040x Qualified Tuition Reduction If you are allowed to study tuition free or for a reduced rate of tuition, you may not have to pay tax on this benefit. Irs tax form 1040x This is called a “tuition reduction. Irs tax form 1040x ” You do not have to include a qualified tuition reduction in your income. Irs tax form 1040x A tuition reduction is qualified only if you receive it from, and use it at, an eligible educational institution. Irs tax form 1040x You do not have to use the tuition reduction at the eligible educational institution from which you received it. Irs tax form 1040x In other words, if you work for an eligible educational institution and the institution arranges for you to take courses at another eligible educational institution without paying any tuition, you may not have to include the value of the free courses in your income. Irs tax form 1040x The rules for determining if a tuition reduction is qualified, and therefore tax free, are different if the education provided is below the graduate level or is graduate education. Irs tax form 1040x You must include in your income any tuition reduction you receive that is payment for your services. Irs tax form 1040x Eligible educational institution. Irs tax form 1040x   An eligible educational institution is one that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities. Irs tax form 1040x Officers, owners, and highly compensated employees. Irs tax form 1040x   Qualified tuition reductions apply to officers, owners, or highly compensated employees only if benefits are available to employees on a nondiscriminatory basis. Irs tax form 1040x This means that the tuition reduction benefits must be available on substantially the same basis to each member of a group of employees. Irs tax form 1040x The group must be defined under a reasonable classification set up by the employer. Irs tax form 1040x The classification must not discriminate in favor of owners, officers, or highly compensated employees. Irs tax form 1040x Payment for services. Irs tax form 1040x   Generally, you must include in income the part of any qualified tuition reduction that represents payment for teaching, research, or other services by the student required as a condition of receiving the qualified tuition reduction. Irs tax form 1040x This applies even if all candidates for a degree must perform the services to receive the degree. Irs tax form 1040x (See below for exceptions. Irs tax form 1040x ) Exceptions. Irs tax form 1040x   You do not have to include in income the part of any scholarship or fellowship that represents payment for teaching, research, or other services if you receive the amount under: The National Health Service Corps Scholarship Program, or The Armed Forces Health Professions Scholarship and Financial Assistance Program. Irs tax form 1040x Education Below the Graduate Level If you receive a tuition reduction for education below the graduate level (including primary, secondary, or high school), it is a qualified tuition reduction, and therefore tax free, only if your relationship to the educational institution providing the benefit is described below. Irs tax form 1040x You are an employee of the eligible educational institution. Irs tax form 1040x You were an employee of the eligible educational institution, but you retired or left on disability. Irs tax form 1040x You are a widow or widower of an individual who died while an employee of the eligible educational institution or who retired or left on disability. Irs tax form 1040x You are the dependent child or spouse of an individual described in (1) through (3), above. Irs tax form 1040x Child of deceased parents. Irs tax form 1040x   For purposes of the qualified tuition reduction, a child is a dependent child if the child is under age 25 and both parents have died. Irs tax form 1040x Child of divorced parents. Irs tax form 1040x   For purposes of the qualified tuition reduction, a dependent child of divorced parents is treated as the dependent of both parents. Irs tax form 1040x Graduate Education A tuition reduction you receive for graduate education is qualified, and therefore tax free, if both of the following requirements are met. Irs tax form 1040x It is provided by an eligible educational institution. Irs tax form 1040x You are a graduate student who performs teaching or research activities for the educational institution. Irs tax form 1040x You must include in income any other tuition reductions for graduate education that you receive. Irs tax form 1040x How To Report Any tuition reduction that is taxable should be included as wages in box 1 of your Form W-2. Irs tax form 1040x Report the amount from Form W-2, box 1, on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ). Irs tax form 1040x Prev  Up  Next   Home   More Online Publications