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Students Filing Taxes 2013

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Students Filing Taxes 2013

Students filing taxes 2013 2. Students filing taxes 2013   American Opportunity Credit Table of Contents Introduction Can You Claim the CreditWho Can Claim the Credit Who Cannot Claim the Credit What Expenses QualifyQualified Education Expenses No Double Benefit Allowed Expenses That Do Not Qualify Who Is an Eligible StudentException. Students filing taxes 2013 Who Can Claim a Dependent's Expenses Figuring the CreditEffect of the Amount of Your Income on the Amount of Your Credit Refundable Part of Credit Claiming the Credit Introduction For 2013, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. Students filing taxes 2013 They are the American opportunity credit (this chapter) and the lifetime learning credit ( chapter 3 ). Students filing taxes 2013 This chapter explains: Who can claim the American opportunity credit, What expenses qualify for the credit, Who is an eligible student, Who can claim a dependent's expenses, How to figure the credit, How to claim the credit, and When the credit must be repaid. Students filing taxes 2013 What is the tax benefit of the American opportunity credit. Students filing taxes 2013   For the tax year, you may be able to claim an American opportunity credit of up to $2,500 for qualified education expenses paid for each eligible student. Students filing taxes 2013   A tax credit reduces the amount of income tax you may have to pay. Students filing taxes 2013 Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. Students filing taxes 2013 Forty percent of the American opportunity credit may be refundable. Students filing taxes 2013 This means that if the refundable portion of your credit is more than your tax, the excess will be refunded to you. Students filing taxes 2013   Your allowable American opportunity credit may be limited by the amount of your income. Students filing taxes 2013 Also, the nonrefundable part of the credit may be limited by the amount of your tax. Students filing taxes 2013 Overview of the American opportunity credit. Students filing taxes 2013   See Table 2-1, Overview of the American Opportunity Credit , for the basics of this credit. Students filing taxes 2013 The details are discussed in this chapter. Students filing taxes 2013 Can you claim more than one education credit this year. Students filing taxes 2013   For each student, you can elect for any year only one of the credits. Students filing taxes 2013 For example, if you elect to take the American opportunity credit for a child on your 2013 tax return, you cannot use that same child's qualified education expenses to figure the lifetime learning credit for 2013. Students filing taxes 2013   If you pay qualified education expenses for more than one student in the same year, you can choose to take the American opportunity credit on a per-student, per-year basis. Students filing taxes 2013 If you pay qualified education expenses for a student (or students) for whom you do not claim the American opportunity credit, you can use the adjusted qualified education expenses of that student (or those students) in figuring your lifetime learning credit. Students filing taxes 2013 This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year. Students filing taxes 2013 Differences between the American opportunity and lifetime learning credits. Students filing taxes 2013   There are several differences between these two credits. Students filing taxes 2013 For example, you can claim the American opportunity credit based on the same student's expenses for no more than 4 tax years, which includes any tax years you claimed the Hope Scholarship Credit for that student. Students filing taxes 2013 However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses. Students filing taxes 2013 The differences between these credits are shown in Appendix B, Highlights of Education Tax Benefits for Tax Year 2013 near the end of this publication. Students filing taxes 2013 If you claim the American opportunity credit for any student, you can choose between using that student's adjusted qualified education expenses for the American opportunity credit or the lifetime learning credit. Students filing taxes 2013 If you have the choice, the American opportunity credit will always be greater than the lifetime learning credit. Students filing taxes 2013 Table 2-1. Students filing taxes 2013 Overview of the American Opportunity Credit Maximum credit Up to $2,500 credit per eligible student Limit on modified adjusted gross income (MAGI) $180,000 if married filing jointly; $90,000 if single, head of household, or qualifying widow(er) Refundable or nonrefundable 40% of credit may be refundable; the rest is nonrefundable Number of years of postsecondary education Available ONLY if the student had not completed the first 4 years of postsecondary education before 2013 Number of tax years credit available Available ONLY for 4 tax years per eligible student (including any year(s) Hope Scholarship Credit was claimed) Type of program required Student must be pursuing a program leading to a degree or other recognized education credential Number of courses Student must be enrolled at least half time for at least one academic period that begins during the tax year Felony drug conviction As of the end of 2013, the student had not been convicted of a felony for possessing or distributing a controlled substance Qualified expenses Tuition, required enrollment fees, and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance Payments for academic periods Payments made in 2013 for academic periods beginning in 2013 or beginning in the first 3 months of 2014 Can You Claim the Credit The following rules will help you determine if you are eligible to claim the American opportunity credit on your tax return. Students filing taxes 2013 Who Can Claim the Credit Generally, you can claim the American opportunity credit if all three of the following requirements are met. Students filing taxes 2013 You pay qualified education expenses of higher education. Students filing taxes 2013 You pay the education expenses for an eligible student. Students filing taxes 2013 The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Students filing taxes 2013 Student qualifications. Students filing taxes 2013   Generally, you can take the American opportunity credit for a student only if all of the following four requirements are met. Students filing taxes 2013 As of the beginning of 2013, the student had not completed the first four years of postsecondary education (generally, the freshman through senior years of college), as determined by the eligible educational institution. Students filing taxes 2013 For this purpose, do not include academic credit awarded solely because of the student's performance on proficiency examinations. Students filing taxes 2013 Neither the American opportunity credit nor the Hope Scholarship Credit has been claimed (by you or anyone else) for this student for any four tax years before 2013. Students filing taxes 2013 If the American opportunity credit (and Hope Scholarship Credit) has been claimed for this student for any three or fewer tax years before 2013, this requirement is met. Students filing taxes 2013 For at least one academic period beginning (or treated as beginning) in 2013, the student both: Was enrolled in a program that leads to a degree, certificate, or other recognized educational credential; and Carried at least one-half the normal full-time workload for his or her course of study. Students filing taxes 2013 The standard for what is half of the normal full-time work load is determined by each eligible educational institution. Students filing taxes 2013 However, the standard may not be lower than any of those established by the U. Students filing taxes 2013 S. Students filing taxes 2013 Department of Education under the Higher Education Act of 1965. Students filing taxes 2013 For purposes of whether the student satisfies this third requirement for 2013, treat an academic period beginning in the first three months of 2014 as if it began in 2013 if qualified education expenses for the student were paid in 2013 for that academic period. Students filing taxes 2013 See Prepaid expenses, later. Students filing taxes 2013 As of the end of 2013, the student had not been convicted of a federal or state felony for possessing or distributing a controlled substance. Students filing taxes 2013 Example 1. Students filing taxes 2013 Sharon was eligible for the Hope Scholarship Credit for 2007 and 2008 and for the American opportunity credit for 2010 and 2012. Students filing taxes 2013 Her parents claimed the Hope Scholarship Credit for Sharon on their tax returns for 2007 and 2008 and claimed the American opportunity credit for Sharon on their 2010 tax return. Students filing taxes 2013 Sharon claimed the American opportunity credit on her 2012 tax return. Students filing taxes 2013 The American opportunity credit and Hope Scholarship Credit have been claimed for Sharon for four tax years before 2013. Students filing taxes 2013 Therefore, the American opportunity credit cannot be claimed by Sharon for 2013. Students filing taxes 2013 If Sharon were to file Form 8863 for 2013, she would check “Yes” for Part III, line 23, and would be eligible to claim only the lifetime learning credit. Students filing taxes 2013 Example 2. Students filing taxes 2013 Wilbert was eligible for the American opportunity credit for 2009, 2010, 2011, and 2013. Students filing taxes 2013 His parents claimed the American opportunity credit for Wilbert on their tax returns for 2009, 2010, and 2011. Students filing taxes 2013 No one claimed an American opportunity credit or Hope Scholarship Credit for Wilbert for any other tax year. Students filing taxes 2013 The American opportunity credit and Hope Scholarship Credit have been claimed for Wilbert for only three tax years before 2013. Students filing taxes 2013 Therefore, Wilbert meets the second requirement to be eligible for the American opportunity credit. Students filing taxes 2013 If Wilbert were to file Form 8863 for 2013, he would check “No” for Part III, line 23. Students filing taxes 2013 If Wilbert meets all of the other requirements, he is eligible for the American opportunity credit. Students filing taxes 2013 Example 3. Students filing taxes 2013 Glenda enrolls on a full-time basis in a degree program for the 2014 Spring semester, which begins in January 2014. Students filing taxes 2013 Glenda pays her tuition for the 2014 Spring semester in December 2013. Students filing taxes 2013 Because the tuition Glenda paid in 2013 relates to an academic period that begins in the first 3 months of 2014, her eligibility to claim an American opportunity credit in 2013 is determined as if the 2014 Spring semester began in 2013. Students filing taxes 2013 If the requirements above are not met for any student, you cannot take the American opportunity credit for that student. Students filing taxes 2013 You may be able to take the lifetime learning credit for part or all of that student's qualified education expenses instead. Students filing taxes 2013 Note. Students filing taxes 2013 Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you. Students filing taxes 2013 “Qualified education expenses” are defined later under Qualified Education Expenses . Students filing taxes 2013 “Eligible students” are defined later under Who Is an Eligible Student . Students filing taxes 2013 A dependent for whom you claim an exemption is defined later under Who Can Claim a Dependent's Expenses . Students filing taxes 2013 You may find Figure 2-1, Can You Claim the American Opportunity Credit for 2013 , later, helpful in determining if you can claim an American opportunity credit on your tax return. Students filing taxes 2013 This image is too large to be displayed in the current screen. Students filing taxes 2013 Please click the link to view the image. Students filing taxes 2013 Figure 2-1 Can you claim the American opportunity credit for 2012? Who Cannot Claim the Credit You cannot claim the American opportunity credit for 2013 if any of the following apply. Students filing taxes 2013 Your filing status is married filing separately. Students filing taxes 2013 You are listed as a dependent on another person's tax return (such as your parents'). Students filing taxes 2013 See Who Can Claim a Dependent's Expenses , later. Students filing taxes 2013 Your modified adjusted gross income (MAGI) is $90,000 or more ($180,000 or more in the case of a joint return). Students filing taxes 2013 MAGI is explained later under Effect of the Amount of Your Income on the Amount of Your Credit . Students filing taxes 2013 You (or your spouse) were a nonresident alien for any part of 2013 and the nonresident alien did not elect to be treated as a resident alien for tax purposes. Students filing taxes 2013 More information on nonresident aliens can be found in Publication 519, U. Students filing taxes 2013 S. Students filing taxes 2013 Tax Guide for Aliens. Students filing taxes 2013 What Expenses Qualify The American opportunity credit is based on adjusted qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Students filing taxes 2013 Generally, the credit is allowed for adjusted qualified education expenses paid in 2013 for an academic period beginning in 2013 or beginning in the first three months of 2014. Students filing taxes 2013 For example, if you paid $1,500 in December 2013 for qualified tuition for the spring 2014 semester beginning January 2014, you can use that $1,500 in figuring your 2013 credit. Students filing taxes 2013 Academic period. Students filing taxes 2013   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. Students filing taxes 2013 In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. Students filing taxes 2013 Paid with borrowed funds. Students filing taxes 2013   You can claim an American opportunity credit for qualified education expenses paid with the proceeds of a loan. Students filing taxes 2013 Use the expenses to figure the American opportunity credit for the year in which the expenses are paid, not the year in which the loan is repaid. Students filing taxes 2013 Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account. Students filing taxes 2013 Student withdraws from class(es). Students filing taxes 2013   You can claim an American opportunity credit for qualified education expenses not refunded when a student withdraws. Students filing taxes 2013 Qualified Education Expenses For purposes of the American opportunity credit, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Students filing taxes 2013 Eligible educational institution. Students filing taxes 2013   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Students filing taxes 2013 S. Students filing taxes 2013 Department of Education. Students filing taxes 2013 It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Students filing taxes 2013 The educational institution should be able to tell you if it is an eligible educational institution. Students filing taxes 2013   Certain educational institutions located outside the United States also participate in the U. Students filing taxes 2013 S. Students filing taxes 2013 Department of Education's Federal Student Aid (FSA) programs. Students filing taxes 2013 Related expenses. Students filing taxes 2013   Student-activity fees are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance. Students filing taxes 2013   However, expenses for books, supplies, and equipment needed for a course of study are included in qualified education expenses whether or not the materials are purchased from the educational institution. Students filing taxes 2013 Prepaid expenses. Students filing taxes 2013   Qualified education expenses paid in 2013 for an academic period that begins in the first three months of 2014 can be used in figuring an education credit for 2013 only. Students filing taxes 2013 See Academic period, earlier. Students filing taxes 2013 For example, if you pay $2,000 in December 2013, for qualified tuition for the 2014 winter quarter that begins in January 2014, you can use that $2,000 in figuring an education credit for 2013 only (if you meet all the other requirements). Students filing taxes 2013    You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 education credit(s). Students filing taxes 2013   In the following examples, assume that each student is an eligible student at an eligible educational institution. Students filing taxes 2013 Example 1. Students filing taxes 2013 Jefferson is a sophomore in University V's degree program in dentistry. Students filing taxes 2013 This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. Students filing taxes 2013 Because the equipment rental is needed for his course of study, Jefferson's equipment rental fee is a qualified expense. Students filing taxes 2013 Example 2. Students filing taxes 2013 Grace and William, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. Students filing taxes 2013 The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. Students filing taxes 2013 William bought his books from a friend; Grace bought hers at College W's bookstore. Students filing taxes 2013 Both are qualified education expenses for the American opportunity credit. Students filing taxes 2013 Example 3. Students filing taxes 2013 When Kelly enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. Students filing taxes 2013 This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and the student government. Students filing taxes 2013 No portion of the fee covers personal expenses. Students filing taxes 2013 Although labeled as a student activity fee, the fee is required for Kelly's enrollment and attendance at College X and is a qualified expense. Students filing taxes 2013 No Double Benefit Allowed You cannot do any of the following. Students filing taxes 2013 Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim an American opportunity credit based on those same expenses. Students filing taxes 2013 Claim an American opportunity credit in the same year that you are claiming a tuition and fees deduction for the same student. Students filing taxes 2013 Claim an American opportunity credit for any student and use any of that student's expenses in figuring your lifetime learning credit. Students filing taxes 2013 Figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP) using the same expenses you used to figure the American opportunity credit. Students filing taxes 2013 See Coordination With American Opportunity and Lifetime Learning Credits in chapter 7, Coverdell Education Savings Account, and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8, Qualified Tuition Program. Students filing taxes 2013 Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. Students filing taxes 2013 See Adjustments to Qualified Education Expenses, next. Students filing taxes 2013 Adjustments to Qualified Education Expenses For each student, reduce the qualified education expenses paid by or on behalf of that student under the following rules. Students filing taxes 2013 The result is the amount of adjusted qualified education expenses for each student. Students filing taxes 2013 Tax-free educational assistance. Students filing taxes 2013   For tax-free educational assistance received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. Students filing taxes 2013 See Academic period, earlier. Students filing taxes 2013   Some tax-free educational assistance received after 2013 may be treated as a refund of qualified education expenses paid in 2013. Students filing taxes 2013 This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2013 for qualified education expenses paid on behalf of a student in 2013 (or attributable to enrollment at an eligible educational institution during 2013). Students filing taxes 2013   If this tax-free educational assistance is received after 2013 but before you file your 2013 income tax return, see Refunds received after 2013 but before your income tax return is filed, later. Students filing taxes 2013 If this tax-free educational assistance is received after 2013 and after you file your 2013 income tax return, see Refunds received after 2013 and after your income tax return is filed, later. Students filing taxes 2013   Tax-free educational assistance includes: The tax-free parts of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions). Students filing taxes 2013 Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Students filing taxes 2013 Generally, any scholarship or fellowship is treated as tax free. Students filing taxes 2013 However, a scholarship or fellowship is not treated as tax free to the extent the student includes it in gross income (if the student is required to file a tax return for the year the scholarship or fellowship is received) and either of the following is true. Students filing taxes 2013 The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Students filing taxes 2013 The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Students filing taxes 2013 You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received. Students filing taxes 2013 For examples, see Coordination with Pell grants and other scholarships, later. Students filing taxes 2013 Refunds. Students filing taxes 2013   A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. Students filing taxes 2013 Some tax-free educational assistance received after 2013 may be treated as a refund. Students filing taxes 2013 See Tax-free educational assistance, earlier. Students filing taxes 2013 Refunds received in 2013. Students filing taxes 2013   For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses for 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013. Students filing taxes 2013 Refunds received after 2013 but before your income tax return is filed. Students filing taxes 2013   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid before you file an income tax return for 2013, the amount of qualified education expenses for 2013 is reduced by the amount of the refund. Students filing taxes 2013 Refunds received after 2013 and after your income tax return is filed. Students filing taxes 2013   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid after you file an income tax return for 2013, you may need to repay some or all of the credit. Students filing taxes 2013 See Credit recapture, next. Students filing taxes 2013 Credit recapture. Students filing taxes 2013    If any tax-free educational assistance for the qualified education expenses paid in 2013, or any refund of your qualified education expenses paid in 2013, is received after you file your 2013 income tax return, you must recapture (repay) any excess credit. Students filing taxes 2013 You do this by refiguring the amount of your adjusted qualified education expenses for 2013 by reducing the expenses by the amount of the refund or tax-free educational assistance. Students filing taxes 2013 You then refigure your education credit(s) for 2013 and figure the amount by which your 2013 tax liability would have increased if you claimed the refigured credit(s). Students filing taxes 2013 Include that amount as an additional tax for the year the refund or tax-free assistance was received. Students filing taxes 2013 Example. Students filing taxes 2013   You paid $7,000 tuition and fees in August 2013, and your child began college in September 2013. Students filing taxes 2013 You filed your 2013 tax return on February 17, 2014, and claimed an American opportunity credit of $2,500. Students filing taxes 2013 After you filed your return, you received a refund of $4,000. Students filing taxes 2013 You must refigure your 2013 American opportunity credit using $3,000 of qualified education expenses instead of $7,000. Students filing taxes 2013 The refigured credit is $2,250. Students filing taxes 2013 The increase to your tax liability is also $250. Students filing taxes 2013 Include the difference of $250 as additional tax on your 2014 tax return. Students filing taxes 2013 See the instructions for your 2014 income tax return to determine where to include this tax. Students filing taxes 2013 If you pay qualified education expenses in 2014 for an academic period that begins in the first 3 months of 2014 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2014 instead of reducing your expenses for 2013. Students filing taxes 2013 Amounts that do not reduce qualified education expenses. Students filing taxes 2013   Do not reduce qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. Students filing taxes 2013   Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations. Students filing taxes 2013 The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Students filing taxes 2013 The use of the money is not restricted. Students filing taxes 2013 Example 1. Students filing taxes 2013 Joan paid $3,000 for tuition and $5,000 for room and board at University X. Students filing taxes 2013 The university did not require her to pay any fees in addition to her tuition in order to enroll in or attend classes. Students filing taxes 2013 To help pay these costs, she was awarded a $2,000 scholarship and a $4,000 student loan. Students filing taxes 2013 The terms of the scholarship state that it can be used to pay any of Joan's college expenses. Students filing taxes 2013 University X applies the $2,000 scholarship against Joan's $8,000 total bill, and Joan pays the $6,000 balance of her bill from University X with a combination of her student loan and her savings. Students filing taxes 2013 Joan does not report any portion of the scholarship as income on her tax return. Students filing taxes 2013 In figuring the amount of either education credit (American opportunity or lifetime learning), Joan must reduce her qualified education expenses by the amount of the scholarship ($2,000) because she excluded the entire scholarship from her income. Students filing taxes 2013 The student loan is not tax-free educational assistance, so she does not need to reduce her qualified expenses by any part of the loan proceeds. Students filing taxes 2013 Joan is treated as having paid $1,000 in qualified education expenses ($3,000 tuition – $2,000 scholarship). Students filing taxes 2013 Example 2. Students filing taxes 2013 The facts are the same as in Example 1, except that Joan reports her entire scholarship as income on her tax return. Students filing taxes 2013 Because Joan reported the entire $2,000 scholarship in her income, she does not need to reduce her qualified education expenses. Students filing taxes 2013 Joan is treated as having paid $3,000 in qualified education expenses. Students filing taxes 2013 Coordination with Pell grants and other scholarships. Students filing taxes 2013   In some cases, you may be able to reduce your tax liability by including scholarships in income. Students filing taxes 2013 If you are claiming an education credit for a claimed dependent who received a scholarship, you may be able to reduce your tax liability if the student includes the scholarship in income. Students filing taxes 2013 The scholarship must be one that may (by its terms) be applied to expenses (such as room and board) other than qualified education expenses. Students filing taxes 2013 Example 1—No scholarship. Students filing taxes 2013 Bill Pass, age 28 and unmarried, enrolled full-time in 2013 as a first-year student at a local college to earn a degree in law enforcement. Students filing taxes 2013 This was his first year of postsecondary education. Students filing taxes 2013 During 2013, he paid $5,600 for his qualified education expenses and $4,400 for his room and board for the fall 2013 semester. Students filing taxes 2013 He and the college meet all the requirements for the American opportunity credit. Students filing taxes 2013 Bill's AGI and his MAGI, for purposes of figuring his credit, are $30,000. Students filing taxes 2013 Bill takes the standard deduction of $5,950 and personal exemption of $3,800, reducing his AGI to taxable income of $20,250. Students filing taxes 2013 His income tax liability, before credits, is $2,599 and Bill claims no credits other than the American opportunity credit. Students filing taxes 2013 He figures his American opportunity credit based on qualified education expenses of $4,000, which results in a credit of $2,500 and tax after credits of $99. Students filing taxes 2013 Example 2—Scholarship excluded from income. Students filing taxes 2013 The facts are the same as in Example 1—No scholarship, except that Bill was awarded a $5,600 scholarship. Students filing taxes 2013 Under the terms of his scholarship, it may be used to pay any educational expenses, including room and board. Students filing taxes 2013 If Bill excludes the scholarship from income, he will be deemed (for purposes of computing his education credit) to have used the scholarship to pay for tuition, required fees, and course materials. Students filing taxes 2013 His adjusted qualified education expenses will be zero and he will not have an education credit. Students filing taxes 2013 Therefore, Bill's tax after credits would be $2,599. Students filing taxes 2013 Example 3—Scholarship partially included in income. Students filing taxes 2013 The facts are the same as in Example 2—Scholarship excluded from income. Students filing taxes 2013 If, unlike Example 2, Bill includes $4,000 of the scholarship in income, he will be deemed to have used that amount to pay for room and board. Students filing taxes 2013 The remaining $1,600 of the $5,600 scholarship will reduce his qualified education expenses and his adjusted qualified education expenses will be $4,000. Students filing taxes 2013 Bill's AGI will increase to $34,000, his taxable income will increase to $24,250, and his tax before credits will increase to $3,199. Students filing taxes 2013 Based on his adjusted qualified education expenses of $4,000, Bill would be able to claim an American opportunity tax credit of $2,500 and his tax after credits would be $699. Students filing taxes 2013 Expenses That Do Not Qualify Qualified education expenses do not include amounts paid for: Insurance, Medical expenses (including student health fees), Room and board, Transportation, or Similar personal, living, or family expenses. Students filing taxes 2013 This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. Students filing taxes 2013 Sports, games, hobbies, and noncredit courses. Students filing taxes 2013   Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. Students filing taxes 2013 However, if the course of instruction or other education is part of the student's degree program, these expenses can qualify. Students filing taxes 2013 Comprehensive or bundled fees. Students filing taxes 2013   Some eligible educational institutions combine all of their fees for an academic period into one amount. Students filing taxes 2013 If you do not receive or do not have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed earlier, contact the institution. Students filing taxes 2013 The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T, Tuition Statement. Students filing taxes 2013 See Figuring the Credit , later, for more information about Form 1098-T. Students filing taxes 2013 Who Is an Eligible Student To claim the American opportunity credit, the student for whom you pay qualified education expenses must be an eligible student. Students filing taxes 2013 This is a student who meets all of the following requirements. Students filing taxes 2013 The student did not have expenses that were used to figure an American opportunity credit in any 4 earlier tax years. Students filing taxes 2013 This includes any tax year(s) in which you claimed the Hope Scholarship Credit for the same student. Students filing taxes 2013 The student had not completed the first 4 years of postsecondary education (generally, the freshman, sophomore, junior, and senior years of college) before 2013. Students filing taxes 2013 For at least one academic period beginning in 2013, the student was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. Students filing taxes 2013 The student has not been convicted of any federal or state felony for possessing or distributing a controlled substance as of the end of 2013. Students filing taxes 2013 These requirements are also shown in Figure 2-2, Who is an Eligible Student for the American Opportunity Credit , later. Students filing taxes 2013 Completion of first 4 years. Students filing taxes 2013   A student has completed the first 4 years of postsecondary education if the institution at which the student is enrolled awards the student 4 years of academic credit at that institution for coursework completed by the student before 2013. Students filing taxes 2013 This student generally would not be an eligible student for purposes of the American opportunity credit. Students filing taxes 2013 Exception. Students filing taxes 2013   Any academic credit awarded solely on the basis of the student's performance on proficiency examinations is disregarded in determining whether the student has completed 4 years of postsecondary education. Students filing taxes 2013 Enrolled at least half-time. Students filing taxes 2013   A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study. Students filing taxes 2013   The standard for what is half of the normal full-time work load is determined by each eligible educational institution. Students filing taxes 2013 However, the standard may not be lower than any of those established by the U. Students filing taxes 2013 S. Students filing taxes 2013 Department of Education under the Higher Education Act of 1965. Students filing taxes 2013 Please click here for the text description of the image. Students filing taxes 2013 Figure 2-2 Example 1. Students filing taxes 2013 Mack graduated from high school in June 2012. Students filing taxes 2013 In September, he enrolled in an undergraduate degree program at College U, and attended full-time for both the 2012 fall and 2013 spring semesters. Students filing taxes 2013 For the 2013 fall semester, Mack was enrolled less than half-time. Students filing taxes 2013 Because Mack was enrolled in an undergraduate degree program on at least a half-time basis for at least one academic period that began during 2012 and at least one academic period that began during 2013, he is an eligible student for tax years 2012 and 2013 (including the 2013 fall semester when he enrolled at College U on less than a half-time basis). Students filing taxes 2013 Example 2. Students filing taxes 2013 After taking classes at College V on a part-time basis for a few years, Shelly became a full-time student for the 2013 spring semester. Students filing taxes 2013 College V classified Shelly as a second-semester senior (fourth year) for the 2013 spring semester and as a first-semester graduate student (fifth year) for the 2013 fall semester. Students filing taxes 2013 Because College V did not classify Shelly as having completed the first 4 years of postsecondary education as of the beginning of 2013, Shelly is an eligible student for tax year 2013. Students filing taxes 2013 Therefore, the qualified education expenses paid for the 2013 spring semester and the 2013 fall semester are taken into account in calculating the American opportunity credit for 2013. Students filing taxes 2013 Example 3. Students filing taxes 2013 During the 2012 fall semester, Larry was a high school student who took classes on a half-time basis at College X. Students filing taxes 2013 Larry was not enrolled as part of a degree program at College X because College X only admits students to a degree program if they have a high school diploma or equivalent. Students filing taxes 2013 Because Larry was not enrolled in a degree program at College X during 2012, Larry was not an eligible student for tax year 2012. Students filing taxes 2013 Example 4. Students filing taxes 2013 The facts are the same as in Example 3. Students filing taxes 2013 During the 2013 spring semester, Larry again attended College X but not as part of a degree program. Students filing taxes 2013 Larry graduated from high school in June 2013. Students filing taxes 2013 For the 2013 fall semester, Larry enrolled as a full-time student in College X as part of a degree program, and College X awarded Larry credit for his prior coursework at College X. Students filing taxes 2013 Because Larry was enrolled in a degree program at College X for the 2013 fall term on at least a half-time basis, Larry is an eligible student for all of tax year 2013. Students filing taxes 2013 Therefore, the qualified education expenses paid for classes taken at College X during both the 2013 spring semester (during which Larry was not enrolled in a degree program) and the 2013 fall semester are taken into account in computing any American opportunity credit. Students filing taxes 2013 Example 5. Students filing taxes 2013 Dee graduated from high school in June 2012. Students filing taxes 2013 In January 2013, Dee enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a travel agent. Students filing taxes 2013 Dee completed the program in December 2013, and was awarded a certificate. Students filing taxes 2013 In January 2014, she enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a computer programmer. Students filing taxes 2013 Dee is an eligible student for both tax years 2013 and 2014 because she meets the degree requirement, the work load requirement, and the year of study requirement for those years. Students filing taxes 2013 Who Can Claim a Dependent's Expenses If there are qualified education expenses for your dependent during a tax year, either you or your dependent, but not both of you, can claim an American opportunity credit for your dependent's expenses for that year. Students filing taxes 2013 For you to claim an American opportunity credit for your dependent's expenses, you must also claim an exemption for your dependent. Students filing taxes 2013 You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c. Students filing taxes 2013 IF you. Students filing taxes 2013 . Students filing taxes 2013 . Students filing taxes 2013 THEN only. Students filing taxes 2013 . Students filing taxes 2013 . Students filing taxes 2013 claim an exemption on  your tax return for a  dependent who is an  eligible student you can claim the American opportunity credit based on that dependent's expenses. Students filing taxes 2013 The dependent cannot claim the credit. Students filing taxes 2013 do not claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption) the dependent can claim the American opportunity credit. Students filing taxes 2013 You cannot claim the credit based on this dependent's expenses. Students filing taxes 2013 Expenses paid by dependent. Students filing taxes 2013   If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. Students filing taxes 2013 Include these expenses when figuring the amount of your American opportunity credit. Students filing taxes 2013    Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are treated as paid by your dependent. Students filing taxes 2013 Expenses paid by you. Students filing taxes 2013   If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the American opportunity credit. Students filing taxes 2013 If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring the American opportunity credit. Students filing taxes 2013 Expenses paid by others. Students filing taxes 2013   Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. Students filing taxes 2013 In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. Students filing taxes 2013 If you claim an exemption on your tax return for the student, you are considered to have paid the expenses. Students filing taxes 2013 Example. Students filing taxes 2013 In 2013, Ms. Students filing taxes 2013 Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. Students filing taxes 2013 For purposes of claiming an American opportunity credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself. Students filing taxes 2013 Unless an exemption for Todd is claimed on someone else's 2013 tax return, only Todd can use the payment to claim an American opportunity credit. Students filing taxes 2013 If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2013 tax return, whoever claims the exemption may be able to use the expenses to claim an American opportunity credit. Students filing taxes 2013 If anyone else claims an exemption for Todd, Todd cannot claim an American opportunity credit. Students filing taxes 2013 Tuition reduction. Students filing taxes 2013    When an eligible educational institution provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. Students filing taxes 2013 If it is taxable, the employee is treated as receiving a payment of that amount and, in turn, paying it to the educational institution on behalf of the student. Students filing taxes 2013 For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Students filing taxes 2013 Figuring the Credit The amount of the American opportunity credit (per eligible student) is the sum of: 100% of the first $2,000 of qualified education expenses you paid for the eligible student, and 25% of the next $2,000 of qualified education expenses you paid for that student. Students filing taxes 2013 The maximum amount of American opportunity credit you can claim in 2013 is $2,500 multiplied by the number of eligible students. Students filing taxes 2013 You can claim the full $2,500 for each eligible student for whom you paid at least $4,000 of adjusted qualified education expenses. Students filing taxes 2013 However, the credit may be reduced based on your MAGI. Students filing taxes 2013 See Effect of the Amount of Your Income on the Amount of Your Credit , later. Students filing taxes 2013 Example. Students filing taxes 2013 Jack and Kay Ford are married and file a joint tax return. Students filing taxes 2013 For 2013, they claim an exemption for their dependent daughter on their tax return. Students filing taxes 2013 Their MAGI is $70,000. Students filing taxes 2013 Their daughter is in her junior (third) year of studies at the local university. Students filing taxes 2013 Jack and Kay paid qualified education expenses of $4,300 in 2013. Students filing taxes 2013 Jack and Kay, their daughter, and the local university meet all of the requirements for the American opportunity credit. Students filing taxes 2013 Jack and Kay can claim a $2,500 American opportunity credit in 2013. Students filing taxes 2013 This is 100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000. Students filing taxes 2013 Form 1098-T. Students filing taxes 2013   To help you figure your American opportunity credit, the student should receive Form 1098-T, Tuition Statement. Students filing taxes 2013 Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2014. Students filing taxes 2013 An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. Students filing taxes 2013 However, the amounts in boxes 1 and 2 of Form 1098-T might be different than what you paid. Students filing taxes 2013 When figuring the credit, use only the amounts you paid or are deemed to have paid in 2013 for qualified education expenses. Students filing taxes 2013   In addition, Form 1098-T should give other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements or refunds, and whether the student was enrolled at least half-time or was a graduate student. Students filing taxes 2013    The eligible educational institution may ask for a completed Form W-9S, Request for Student's or Borrower's Taxpayer Identification Number and Certification, or similar statement to obtain the student's name, address, and taxpayer identification number. Students filing taxes 2013 Effect of the Amount of Your Income on the Amount of Your Credit The amount of your American opportunity credit is phased out (gradually reduced) if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). Students filing taxes 2013 You cannot claim an American opportunity credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return). Students filing taxes 2013 Modified adjusted gross income (MAGI). Students filing taxes 2013   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Students filing taxes 2013 MAGI when using Form 1040A. Students filing taxes 2013   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Students filing taxes 2013 MAGI when using Form 1040. Students filing taxes 2013   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Students filing taxes 2013 You can use Worksheet 2-1, next, to figure your MAGI. Students filing taxes 2013    Worksheet 2-1. Students filing taxes 2013 MAGI for the American Opportunity Credit 1. Students filing taxes 2013 Enter your adjusted gross income  (Form 1040, line 38)   1. Students filing taxes 2013   2. Students filing taxes 2013 Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Students filing taxes 2013       3. Students filing taxes 2013 Enter your foreign housing deduction (Form 2555, line 50)   3. Students filing taxes 2013       4. Students filing taxes 2013 Enter the amount of income from Puerto Rico you are excluding   4. Students filing taxes 2013       5. Students filing taxes 2013 Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Students filing taxes 2013       6. Students filing taxes 2013 Add the amounts on lines 2, 3, 4, and 5   6. Students filing taxes 2013   7. Students filing taxes 2013 Add the amounts on lines 1 and 6. Students filing taxes 2013  This is your modified adjusted  gross income. Students filing taxes 2013 Enter here and  on Form 8863, line 3   7. Students filing taxes 2013   Phaseout. Students filing taxes 2013   If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 2-7, of Form 8863, Part I. Students filing taxes 2013 The same method is shown in the following example. Students filing taxes 2013 Example. Students filing taxes 2013 You are filing a joint return and your MAGI is $165,000. Students filing taxes 2013 In 2013, you paid $5,000 of qualified education expenses. Students filing taxes 2013 You figure a tentative American opportunity credit of $2,500 (100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000 of qualified education expenses). Students filing taxes 2013 Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($2,500) by a fraction. Students filing taxes 2013 The numerator of the fraction is $180,000 (the upper limit for those filing a joint return) minus your MAGI. Students filing taxes 2013 The denominator is $20,000, the range of incomes for the phaseout ($160,000 to $180,000). Students filing taxes 2013 The result is the amount of your phased out (reduced) American opportunity credit ($1,875). Students filing taxes 2013      $2,500 × $180,000 − $165,000  $20,000 = $1,875   Refundable Part of Credit Forty percent of the American opportunity credit is refundable for most taxpayers. Students filing taxes 2013 However, if you were under age 24 at the end of 2013 and the conditions listed below apply to you, you cannot claim any part of the American opportunity credit as a refundable credit on your tax return. Students filing taxes 2013 Instead, your allowed credit (figured on Form 8863, Part II) will be used to reduce your tax as a nonrefundable credit only. Students filing taxes 2013 You do not qualify for a refund if items 1 (a, b, or c), 2, and 3 below apply to you. Students filing taxes 2013 You were: Under age 18 at the end of 2013, or Age 18 at the end of 2013 and your earned income (defined below) was less than one-half of your support (defined below), or Over age 18 and under age 24 at the end of 2013 and a full-time student (defined below) and your earned income (defined below) was less than one-half of your support (defined below). Students filing taxes 2013 At least one of your parents was alive at the end of 2013. Students filing taxes 2013 You are filing a return as single, head of household, qualifying widow(er), or married filing separately for 2013. Students filing taxes 2013 Earned income. Students filing taxes 2013   Earned income includes wages, salaries, professional fees, and other payments received for personal services actually performed. Students filing taxes 2013 Earned income includes the part of any scholarship or fellowship that represents payment for teaching, research, or other services performed by the student that are required as a condition for receiving the scholarship or fellowship. Students filing taxes 2013 Earned income does not include that part of the compensation for personal services rendered to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. Students filing taxes 2013   If you are a sole proprietor or a partner in a trade or business in which both personal services and capital are material income-producing factors, earned income also includes a reasonable allowance for compensation for personal services, but not more than 30% of your share of the net profits from that trade or business (after subtracting the deduction for one-half of self-employment tax). Students filing taxes 2013 However, if capital is not an income-producing factor and your personal services produced the business income, the 30% limit does not apply. Students filing taxes 2013 Support. Students filing taxes 2013   Your support includes food, shelter, clothing, medical and dental care, education, and the like. Students filing taxes 2013 Generally, the amount of the item of support will be the amount of expenses incurred by the one furnishing such item. Students filing taxes 2013 If the item of support is in the form of property or lodging, measure the amount of such item of support by its fair market value. Students filing taxes 2013 However, a scholarship received by you is not considered support if you are a full-time student. Students filing taxes 2013 See Publication 501 for details. Students filing taxes 2013 Full-time student. Students filing taxes 2013   You are a full-time student for 2013 if during any part of any 5 calendar months during the year you were enrolled as a full-time student at an eligible educational institution (defined earlier), or took a full-time, on-farm training course given by such an institution or by a state, county, or local government agency. Students filing taxes 2013 Claiming the Credit You claim the American opportunity credit by completing Form 8863 and submitting it with your Form 1040 or 1040A. Students filing taxes 2013 Enter the nonrefundable part of the credit on Form 1040, line 49, or on Form 1040A, line 31. Students filing taxes 2013 Enter the refundable part of the credit on Form 1040, line 66, or on Form 1040A, line 40. Students filing taxes 2013 A filled-in Form 8863 is shown at the end of this publication. Students filing taxes 2013 Note. Students filing taxes 2013 In Appendix A. Students filing taxes 2013 at the end of this publication, there is an example illustrating the use of Form 8863 when both the American opportunity credit and the lifetime learning credit are claimed on the same tax return. Students filing taxes 2013 Prev  Up  Next   Home   More Online Publications
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The Students Filing Taxes 2013

Students filing taxes 2013 2. Students filing taxes 2013   Ordinary or Capital Gain or Loss Table of Contents IntroductionSection 1231 transactions. Students filing taxes 2013 Topics - This chapter discusses: Useful Items - You may want to see: Capital Assets Noncapital AssetsCommodities derivative dealer. Students filing taxes 2013 Sales and Exchanges Between Related PersonsGain Is Ordinary Income Nondeductible Loss Other DispositionsSale of a Business Dispositions of Intangible Property Subdivision of Land Timber Precious Metals and Stones, Stamps, and Coins Coal and Iron Ore Conversion Transactions Introduction You must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). Students filing taxes 2013 You must do this to figure your net capital gain or loss. Students filing taxes 2013 For individuals, a net capital gain may be taxed at a different tax rate than ordinary income. Students filing taxes 2013 See Capital Gains Tax Rates in chapter 4. Students filing taxes 2013 Your deduction for a net capital loss may be limited. Students filing taxes 2013 See Treatment of Capital Losses in chapter 4. Students filing taxes 2013 Capital gain or loss. Students filing taxes 2013   Generally, you will have a capital gain or loss if you sell or exchange a capital asset. Students filing taxes 2013 You also may have a capital gain if your section 1231 transactions result in a net gain. Students filing taxes 2013 Section 1231 transactions. Students filing taxes 2013   Section 1231 transactions are sales and exchanges of property held longer than 1 year and either used in a trade or business or held for the production of rents or royalties. Students filing taxes 2013 They also include certain involuntary conversions of business or investment property, including capital assets. Students filing taxes 2013 See Section 1231 Gains and Losses in chapter 3 for more information. Students filing taxes 2013 Topics - This chapter discusses: Capital assets Noncapital assets Sales and exchanges between  related persons Other dispositions Useful Items - You may want to see: Publication 550 Investment Income and Expenses Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 4797 Sales of Business Property 8594 Asset Acquisition Statement Under Section 1060 8949 Sales and Other Dispositions of Capital Assets See chapter 5 for information about getting publications and forms. Students filing taxes 2013 Capital Assets Almost everything you own and use for personal purposes, pleasure, or investment is a capital asset. Students filing taxes 2013 For exceptions, see Noncapital Assets, later. Students filing taxes 2013 The following items are examples of capital assets. Students filing taxes 2013 Stocks and bonds. Students filing taxes 2013 A home owned and occupied by you and your family. Students filing taxes 2013 Timber grown on your home property or investment property, even if you make casual sales of the timber. Students filing taxes 2013 Household furnishings. Students filing taxes 2013 A car used for pleasure or commuting. Students filing taxes 2013 Coin or stamp collections. Students filing taxes 2013 Gems and jewelry. Students filing taxes 2013 Gold, silver, and other metals. Students filing taxes 2013 Personal-use property. Students filing taxes 2013   Generally, property held for personal use is a capital asset. Students filing taxes 2013 Gain from a sale or exchange of that property is a capital gain. Students filing taxes 2013 Loss from the sale or exchange of that property is not deductible. Students filing taxes 2013 You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Students filing taxes 2013 Investment property. Students filing taxes 2013   Investment property (such as stocks and bonds) is a capital asset, and a gain or loss from its sale or exchange is a capital gain or loss. Students filing taxes 2013 This treatment does not apply to property used to produce rental income. Students filing taxes 2013 See Business assets, later, under Noncapital Assets. Students filing taxes 2013 Release of restriction on land. Students filing taxes 2013   Amounts you receive for the release of a restrictive covenant in a deed to land are treated as proceeds from the sale of a capital asset. Students filing taxes 2013 Noncapital Assets A noncapital asset is property that is not a capital asset. Students filing taxes 2013 The following kinds of property are not capital assets. Students filing taxes 2013 Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business. Students filing taxes 2013 Inventories are discussed in Publication 538, Accounting Periods and Methods. Students filing taxes 2013 But, see the Tip below. Students filing taxes 2013 Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of any properties described in (1), above. Students filing taxes 2013 Depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later), even if the property is fully depreciated (or amortized). Students filing taxes 2013 Sales of this type of property are discussed in chapter 3. Students filing taxes 2013 Real property used in your trade or business or as rental property, even if the property is fully depreciated. Students filing taxes 2013 A copyright; a literary, musical, or artistic composition; a letter; a memorandum; or similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs): Created by your personal efforts, Prepared or produced for you (in the case of a letter, memorandum, or similar property), or Received from a person who created the property or for whom the property was prepared under circumstances (for example, by gift) entitling you to the basis of the person who created the property, or for whom it was prepared or produced. Students filing taxes 2013 But, see the Tip below. Students filing taxes 2013 U. Students filing taxes 2013 S. Students filing taxes 2013 Government publications you got from the government for free or for less than the normal sales price or that you acquired under circumstances entitling you to the basis of someone who got the publications for free or for less than the normal sales price. Students filing taxes 2013 Any commodities derivative financial instrument (discussed later) held by a commodities derivatives dealer unless it meets both of the following requirements. Students filing taxes 2013 It is established to the satisfaction of the IRS that the instrument has no connection to the activities of the dealer as a dealer. Students filing taxes 2013 The instrument is clearly identified in the dealer's records as meeting (a) by the end of the day on which it was acquired, originated, or entered into. Students filing taxes 2013 Any hedging transaction (defined later) that is clearly identified as a hedging transaction by the end of the day on which it was acquired, originated, or entered into. Students filing taxes 2013 Supplies of a type you regularly use or consume in the ordinary course of your trade or business. Students filing taxes 2013 You can elect to treat as capital assets certain self-created musical compositions or copyrights you sold or exchanged. Students filing taxes 2013 See chapter 4 of Publication 550 for details. Students filing taxes 2013 Property held mainly for sale to customers. Students filing taxes 2013   Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business are not capital assets. Students filing taxes 2013 Inventories are discussed in Publication 538. Students filing taxes 2013 Business assets. Students filing taxes 2013   Real property and depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later under Dispositions of Intangible Property) are not capital assets. Students filing taxes 2013 The sale or disposition of business property is discussed in chapter 3. Students filing taxes 2013 Letters and memoranda. Students filing taxes 2013   Letters, memoranda, and similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs) are not treated as capital assets (as discussed earlier) if your personal efforts created them or if they were prepared or produced for you. Students filing taxes 2013 Nor is this property a capital asset if your basis in it is determined by reference to the person who created it or the person for whom it was prepared. Students filing taxes 2013 For this purpose, letters and memoranda addressed to you are considered prepared for you. Students filing taxes 2013 If letters or memoranda are prepared by persons under your administrative control, they are considered prepared for you whether or not you review them. Students filing taxes 2013 Commodities derivative financial instrument. Students filing taxes 2013   A commodities derivative financial instrument is a commodities contract or other financial instrument for commodities (other than a share of corporate stock, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a section 1256 contract) the value or settlement price of which is calculated or determined by reference to a specified index (as defined in section 1221(b) of the Internal Revenue Code). Students filing taxes 2013 Commodities derivative dealer. Students filing taxes 2013   A commodities derivative dealer is a person who regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business. Students filing taxes 2013 Hedging transaction. Students filing taxes 2013   A hedging transaction is any transaction you enter into in the normal course of your trade or business primarily to manage any of the following. Students filing taxes 2013 Risk of price changes or currency fluctuations involving ordinary property you hold or will hold. Students filing taxes 2013 Risk of interest rate or price changes or currency fluctuations for borrowings you make or will make, or ordinary obligations you incur or will incur. Students filing taxes 2013 Sales and Exchanges Between Related Persons This section discusses the rules that may apply to the sale or exchange of property between related persons. Students filing taxes 2013 If these rules apply, gains may be treated as ordinary income and losses may not be deductible. Students filing taxes 2013 See Transfers to Spouse in chapter 1 for rules that apply to spouses. Students filing taxes 2013 Gain Is Ordinary Income If a gain is recognized on the sale or exchange of property to a related person, the gain may be ordinary income even if the property is a capital asset. Students filing taxes 2013 It is ordinary income if the sale or exchange is a depreciable property transaction or a controlled partnership transaction. Students filing taxes 2013 Depreciable property transaction. Students filing taxes 2013   Gain on the sale or exchange of property, including a leasehold or a patent application, that is depreciable property in the hands of the person who receives it is ordinary income if the transaction is either directly or indirectly between any of the following pairs of entities. Students filing taxes 2013 A person and the person's controlled entity or entities. Students filing taxes 2013 A taxpayer and any trust in which the taxpayer (or his or her spouse) is a beneficiary unless the beneficiary's interest in the trust is a remote contingent interest; that is, the value of the interest computed actuarially is 5% or less of the value of the trust property. Students filing taxes 2013 An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest (a bequest for a sum of money). Students filing taxes 2013 An employer (or any person related to the employer under rules (1), (2), or (3)) and a welfare benefit fund (within the meaning of section 419(e) of the Internal Revenue Code) that is controlled directly or indirectly by the employer (or any person related to the employer). Students filing taxes 2013 Controlled entity. Students filing taxes 2013   A person's controlled entity is either of the following. Students filing taxes 2013 A corporation in which more than 50% of the value of all outstanding stock, or a partnership in which more than 50% of the capital interest or profits interest, is directly or indirectly owned by or for that person. Students filing taxes 2013 An entity whose relationship with that person is one of the following. Students filing taxes 2013 A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. Students filing taxes 2013 Two corporations that are members of the same controlled group as defined in section 1563(a) of the Internal Revenue Code, except that “more than 50%” is substituted for “at least 80%” in that definition. Students filing taxes 2013 Two S corporations, if the same persons own more than 50% in value of the outstanding stock of each corporation. Students filing taxes 2013 Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Students filing taxes 2013 Controlled partnership transaction. Students filing taxes 2013   A gain recognized in a controlled partnership transaction may be ordinary income. Students filing taxes 2013 The gain is ordinary income if it results from the sale or exchange of property that, in the hands of the party who receives it, is a noncapital asset such as trade accounts receivable, inventory, stock in trade, or depreciable or real property used in a trade or business. Students filing taxes 2013   A controlled partnership transaction is a transaction directly or indirectly between either of the following pairs of entities. Students filing taxes 2013 A partnership and a person who directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. Students filing taxes 2013 Two partnerships, if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. Students filing taxes 2013 Determining ownership. Students filing taxes 2013   In the transactions under Depreciable property transaction and Controlled partnership transaction, earlier, use the following rules to determine the ownership of stock or a partnership interest. Students filing taxes 2013 Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Students filing taxes 2013 (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation. Students filing taxes 2013 ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. Students filing taxes 2013 Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. Students filing taxes 2013 For purposes of applying (1) or (2), above, stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. Students filing taxes 2013 But stock or a partnership interest constructively owned by an individual under (2) is not treated as owned by the individual for reapplying (2) to make another person the constructive owner of that stock or partnership interest. Students filing taxes 2013 Nondeductible Loss A loss on the sale or exchange of property between related persons is not deductible. Students filing taxes 2013 This applies to both direct and indirect transactions, but not to distributions of property from a corporation in a complete liquidation. Students filing taxes 2013 For the list of related persons, see Related persons next. Students filing taxes 2013 If a sale or exchange is between any of these related persons and involves the lump-sum sale of a number of blocks of stock or pieces of property, the gain or loss must be figured separately for each block of stock or piece of property. Students filing taxes 2013 The gain on each item is taxable. Students filing taxes 2013 The loss on any item is nondeductible. Students filing taxes 2013 Gains from the sales of any of these items may not be offset by losses on the sales of any of the other items. Students filing taxes 2013 Related persons. Students filing taxes 2013   The following is a list of related persons. Students filing taxes 2013 Members of a family, including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Students filing taxes 2013 ), and lineal descendants (children, grandchildren, etc. Students filing taxes 2013 ). Students filing taxes 2013 An individual and a corporation if the individual directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. Students filing taxes 2013 Two corporations that are members of the same controlled group as defined in section 267(f) of the Internal Revenue Code. Students filing taxes 2013 A trust fiduciary and a corporation if the trust or the grantor of the trust directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. Students filing taxes 2013 A grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Students filing taxes 2013 Fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. Students filing taxes 2013 A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization, or a member of that person's family. Students filing taxes 2013 A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. Students filing taxes 2013 Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Students filing taxes 2013 Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Students filing taxes 2013 An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest. Students filing taxes 2013 Two partnerships if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. Students filing taxes 2013 A person and a partnership if the person directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. Students filing taxes 2013 Partnership interests. Students filing taxes 2013   The nondeductible loss rule does not apply to a sale or exchange of an interest in the partnership between the related persons described in (12) or (13) above. Students filing taxes 2013 Controlled groups. Students filing taxes 2013   Losses on transactions between members of the same controlled group described in (3) earlier are deferred rather than denied. Students filing taxes 2013   For more information, see section 267(f) of the Internal Revenue Code. Students filing taxes 2013 Ownership of stock or partnership interests. Students filing taxes 2013   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership for a loss on a sale or exchange, the following rules apply. Students filing taxes 2013 Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Students filing taxes 2013 (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation. Students filing taxes 2013 ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. Students filing taxes 2013 Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. Students filing taxes 2013 An individual owning (other than by applying (2)) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. Students filing taxes 2013 For purposes of applying (1), (2), or (3), stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. Students filing taxes 2013 But stock or a partnership interest constructively owned by an individual under (2) or (3) is not treated as owned by the individual for reapplying either (2) or (3) to make another person the constructive owner of that stock or partnership interest. Students filing taxes 2013 Indirect transactions. Students filing taxes 2013   You cannot deduct your loss on the sale of stock through your broker if under a prearranged plan a related person or entity buys the same stock you had owned. Students filing taxes 2013 This does not apply to a cross-trade between related parties through an exchange that is purely coincidental and is not prearranged. Students filing taxes 2013 Property received from a related person. Students filing taxes 2013   If, in a purchase or exchange, you received property from a related person who had a loss that was not allowable and you later sell or exchange the property at a gain, you recognize the gain only to the extent it is more than the loss previously disallowed to the related person. Students filing taxes 2013 This rule applies only to the original transferee. Students filing taxes 2013 Example 1. Students filing taxes 2013 Your brother sold stock to you for $7,600. Students filing taxes 2013 His cost basis was $10,000. Students filing taxes 2013 His loss of $2,400 was not deductible. Students filing taxes 2013 You later sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900 ($10,500 − $7,600). Students filing taxes 2013 Your recognized gain is only $500, the gain that is more than the $2,400 loss not allowed to your brother. Students filing taxes 2013 Example 2. Students filing taxes 2013 Assume the same facts as in Example 1, except that you sell the stock for $6,900 instead of $10,500. Students filing taxes 2013 Your recognized loss is only $700 ($7,600 − $6,900). Students filing taxes 2013 You cannot deduct the loss not allowed to your brother. Students filing taxes 2013 Other Dispositions This section discusses rules for determining the treatment of gain or loss from various dispositions of property. Students filing taxes 2013 Sale of a Business The sale of a business usually is not a sale of one asset. Students filing taxes 2013 Instead, all the assets of the business are sold. Students filing taxes 2013 Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss. Students filing taxes 2013 A business usually has many assets. Students filing taxes 2013 When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory or stock in trade. Students filing taxes 2013 The gain or loss on each asset is figured separately. Students filing taxes 2013 The sale of capital assets results in capital gain or loss. Students filing taxes 2013 The sale of real property or depreciable property used in the business and held longer than 1 year results in gain or loss from a section 1231 transaction (discussed in chapter 3). Students filing taxes 2013 The sale of inventory results in ordinary income or loss. Students filing taxes 2013 Partnership interests. Students filing taxes 2013   An interest in a partnership or joint venture is treated as a capital asset when sold. Students filing taxes 2013 The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary gain or loss. Students filing taxes 2013 For more information, see Disposition of Partner's Interest in Publication 541. Students filing taxes 2013 Corporation interests. Students filing taxes 2013   Your interest in a corporation is represented by stock certificates. Students filing taxes 2013 When you sell these certificates, you usually realize capital gain or loss. Students filing taxes 2013 For information on the sale of stock, see chapter 4 in Publication 550. Students filing taxes 2013 Corporate liquidations. Students filing taxes 2013   Corporate liquidations of property generally are treated as a sale or exchange. Students filing taxes 2013 Gain or loss generally is recognized by the corporation on a liquidating sale of its assets. Students filing taxes 2013 Gain or loss generally is recognized also on a liquidating distribution of assets as if the corporation sold the assets to the distributee at fair market value. Students filing taxes 2013   In certain cases in which the distributee is a corporation in control of the distributing corporation, the distribution may not be taxable. Students filing taxes 2013 For more information, see section 332 of the Internal Revenue Code and the related regulations. Students filing taxes 2013 Allocation of consideration paid for a business. Students filing taxes 2013   The sale of a trade or business for a lump sum is considered a sale of each individual asset rather than of a single asset. Students filing taxes 2013 Except for assets exchanged under any nontaxable exchange rules, both the buyer and seller of a business must use the residual method (explained later) to allocate the consideration to each business asset transferred. Students filing taxes 2013 This method determines gain or loss from the transfer of each asset and how much of the consideration is for goodwill and certain other intangible property. Students filing taxes 2013 It also determines the buyer's basis in the business assets. Students filing taxes 2013 Consideration. Students filing taxes 2013   The buyer's consideration is the cost of the assets acquired. Students filing taxes 2013 The seller's consideration is the amount realized (money plus the fair market value of property received) from the sale of assets. Students filing taxes 2013 Residual method. Students filing taxes 2013   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. Students filing taxes 2013 This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b) of the Internal Revenue Code. Students filing taxes 2013 Section 743(b) applies if a partnership has an election in effect under section 754 of the Internal Revenue Code. Students filing taxes 2013   A group of assets constitutes a trade or business if either of the following applies. Students filing taxes 2013 Goodwill or going concern value could, under any circumstances, attach to them. Students filing taxes 2013 The use of the assets would constitute an active trade or business under section 355 of the Internal Revenue Code. Students filing taxes 2013   The residual method provides for the consideration to be reduced first by the amount of Class I assets (defined below). Students filing taxes 2013 The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Students filing taxes 2013 See Classes of assets next for the complete order. Students filing taxes 2013 Classes of assets. Students filing taxes 2013   The following definitions are the classifications for deemed or actual asset acquisitions. Students filing taxes 2013 Allocate the consideration among the assets in the following order. Students filing taxes 2013 The amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date. Students filing taxes 2013 The amount you can allocate to an asset also is subject to any applicable limits under the Internal Revenue Code or general principles of tax law. Students filing taxes 2013 Class I assets are cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). Students filing taxes 2013 Class II assets are certificates of deposit, U. Students filing taxes 2013 S. Students filing taxes 2013 Government securities, foreign currency, and actively traded personal property, including stock and securities. Students filing taxes 2013 Class III assets are accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Students filing taxes 2013 However, see section 1. Students filing taxes 2013 338-6(b)(2)(iii) of the regulations for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. Students filing taxes 2013 Class IV assets are property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. Students filing taxes 2013 Class V assets are all assets other than Class I, II, III, IV, VI, and VII assets. Students filing taxes 2013    Note. Students filing taxes 2013 Furniture and fixtures, buildings, land, vehicles, and equipment, which constitute all or part of a trade or business are generally Class V assets. Students filing taxes 2013 Class VI assets are section 197 intangibles (other than goodwill and going concern value). Students filing taxes 2013 Class VII assets are goodwill and going concern value (whether the goodwill or going concern value qualifies as a section 197 intangible). Students filing taxes 2013   If an asset described in one of the classifications described above can be included in more than one class, include it in the lower numbered class. Students filing taxes 2013 For example, if an asset is described in both Class II and Class IV, choose Class II. Students filing taxes 2013 Example. Students filing taxes 2013 The total paid in the sale of the assets of Company SKB is $21,000. Students filing taxes 2013 No cash or deposit accounts or similar accounts were sold. Students filing taxes 2013 The company's U. Students filing taxes 2013 S. Students filing taxes 2013 Government securities sold had a fair market value of $3,200. Students filing taxes 2013 The only other asset transferred (other than goodwill and going concern value) was inventory with a fair market value of $15,000. Students filing taxes 2013 Of the $21,000 paid for the assets of Company SKB, $3,200 is allocated to U. Students filing taxes 2013 S. Students filing taxes 2013 Government securities, $15,000 to inventory assets, and the remaining $2,800 to goodwill and going concern value. Students filing taxes 2013 Agreement. Students filing taxes 2013   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. Students filing taxes 2013 This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Students filing taxes 2013 Reporting requirement. Students filing taxes 2013   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Students filing taxes 2013 Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Students filing taxes 2013 Generally, the buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Students filing taxes 2013 See the Instructions for Form 8594. Students filing taxes 2013 Dispositions of Intangible Property Intangible property is any personal property that has value but cannot be seen or touched. Students filing taxes 2013 It includes such items as patents, copyrights, and the goodwill value of a business. Students filing taxes 2013 Gain or loss on the sale or exchange of amortizable or depreciable intangible property held longer than 1 year (other than an amount recaptured as ordinary income) is a section 1231 gain or loss. Students filing taxes 2013 The treatment of section 1231 gain or loss and the recapture of amortization and depreciation as ordinary income are explained in chapter 3. Students filing taxes 2013 See chapter 8 of Publication 535, Business Expenses, for information on amortizable intangible property and chapter 1 of Publication 946, How To Depreciate Property, for information on intangible property that can and cannot be depreciated. Students filing taxes 2013 Gain or loss on dispositions of other intangible property is ordinary or capital depending on whether the property is a capital asset or a noncapital asset. Students filing taxes 2013 The following discussions explain special rules that apply to certain dispositions of intangible property. Students filing taxes 2013 Section 197 Intangibles Section 197 intangibles are certain intangible assets acquired after August 10, 1993 (after July 25, 1991, if chosen), and held in connection with the conduct of a trade or business or an activity entered into for profit whose costs are amortized over 15 years. Students filing taxes 2013 They include the following assets. Students filing taxes 2013 Goodwill. Students filing taxes 2013 Going concern value. Students filing taxes 2013 Workforce in place. Students filing taxes 2013 Business books and records, operating systems, and other information bases. Students filing taxes 2013 Patents, copyrights, formulas, processes, designs, patterns, know how, formats, and similar items. Students filing taxes 2013 Customer-based intangibles. Students filing taxes 2013 Supplier-based intangibles. Students filing taxes 2013 Licenses, permits, and other rights granted by a governmental unit. Students filing taxes 2013 Covenants not to compete entered into in connection with the acquisition of a business. Students filing taxes 2013 Franchises, trademarks, and trade names. Students filing taxes 2013 See chapter 8 of Publication 535 for a description of each intangible. Students filing taxes 2013 Dispositions. Students filing taxes 2013   You cannot deduct a loss from the disposition or worthlessness of a section 197 intangible you acquired in the same transaction (or series of related transactions) as another section 197 intangible you still hold. Students filing taxes 2013 Instead, you must increase the adjusted basis of your retained section 197 intangible by the nondeductible loss. Students filing taxes 2013 If you retain more than one section 197 intangible, increase each intangible's adjusted basis. Students filing taxes 2013 Figure the increase by multiplying the nondeductible loss by a fraction, the numerator (top number) of which is the retained intangible's adjusted basis on the date of the loss and the denominator (bottom number) of which is the total adjusted basis of all retained intangibles on the date of the loss. Students filing taxes 2013   In applying this rule, members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity. Students filing taxes 2013 For example, a corporation cannot deduct a loss on the sale of a section 197 intangible if, after the sale, a member of the same controlled group retains other section 197 intangibles acquired in the same transaction as the intangible sold. Students filing taxes 2013 Covenant not to compete. Students filing taxes 2013   A covenant not to compete (or similar arrangement) that is a section 197 intangible cannot be treated as disposed of or worthless before you have disposed of your entire interest in the trade or business for which the covenant was entered into. Students filing taxes 2013 Members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity in determining whether a member has disposed of its entire interest in a trade or business. Students filing taxes 2013 Anti-churning rules. Students filing taxes 2013   Anti-churning rules prevent a taxpayer from converting section 197 intangibles that do not qualify for amortization into property that would qualify for amortization. Students filing taxes 2013 However, these rules do not apply to part of the basis of property acquired by certain related persons if the transferor elects to do both the following. Students filing taxes 2013 Recognize gain on the transfer of the property. Students filing taxes 2013 Pay income tax on the gain at the highest tax rate. Students filing taxes 2013   If the transferor is a partnership or S corporation, the partnership or S corporation (not the partners or shareholders) can make the election. Students filing taxes 2013 But each partner or shareholder must pay the tax on his or her share of gain. Students filing taxes 2013   To make the election, you, as the transferor, must attach a statement containing certain information to your income tax return for the year of the transfer. Students filing taxes 2013 You must file the tax return by the due date (including extensions). Students filing taxes 2013 You must also notify the transferee of the election in writing by the due date of the return. Students filing taxes 2013   If you timely filed your return without making the election, you can make the election by filing an amended return within 6 months after the due date of the return (excluding extensions). Students filing taxes 2013 Attach the statement to the amended return and write “Filed pursuant to section 301. Students filing taxes 2013 9100-2” at the top of the statement. Students filing taxes 2013 File the amended return at the same address the original return was filed. Students filing taxes 2013 For more information about making the election, see Regulations section 1. Students filing taxes 2013 197-2(h)(9). Students filing taxes 2013 For information about reporting the tax on your income tax return, see the Instructions for Form 4797. Students filing taxes 2013 Patents The transfer of a patent by an individual is treated as a sale or exchange of a capital asset held longer than 1 year. Students filing taxes 2013 This applies even if the payments for the patent are made periodically during the transferee's use or are contingent on the productivity, use, or disposition of the patent. Students filing taxes 2013 For information on the treatment of gain or loss on the transfer of capital assets, see chapter 4. Students filing taxes 2013 This treatment applies to your transfer of a patent if you meet all the following conditions. Students filing taxes 2013 You are the holder of the patent. Students filing taxes 2013 You transfer the patent other than by gift, inheritance, or devise. Students filing taxes 2013 You transfer all substantial rights to the patent or an undivided interest in all such rights. Students filing taxes 2013 You do not transfer the patent to a related person. Students filing taxes 2013 Holder. Students filing taxes 2013   You are the holder of a patent if you are either of the following. Students filing taxes 2013 The individual whose effort created the patent property and who qualifies as the original and first inventor. Students filing taxes 2013 The individual who bought an interest in the patent from the inventor before the invention was tested and operated successfully under operating conditions and who is neither related to, nor the employer of, the inventor. Students filing taxes 2013 All substantial rights. Students filing taxes 2013   All substantial rights to patent property are all rights that have value when they are transferred. Students filing taxes 2013 A security interest (such as a lien), or a reservation calling for forfeiture for nonperformance, is not treated as a substantial right for these rules and may be kept by you as the holder of the patent. Students filing taxes 2013   All substantial rights to a patent are not transferred if any of the following apply to the transfer. Students filing taxes 2013 The rights are limited geographically within a country. Students filing taxes 2013 The rights are limited to a period less than the remaining life of the patent. Students filing taxes 2013 The rights are limited to fields of use within trades or industries and are less than all the rights that exist and have value at the time of the transfer. Students filing taxes 2013 The rights are less than all the claims or inventions covered by the patent that exist and have value at the time of the transfer. Students filing taxes 2013 Related persons. Students filing taxes 2013   This tax treatment does not apply if the transfer is directly or indirectly between you and a related person as defined earlier in the list under Nondeductible Loss, with the following changes. Students filing taxes 2013 Members of your family include your spouse, ancestors, and lineal descendants, but not your brothers, sisters, half-brothers, or half-sisters. Students filing taxes 2013 Substitute “25% or more” ownership for “more than 50%. Students filing taxes 2013 ”   If you fit within the definition of a related person independent of family status, the brother-sister exception in (1), earlier, does not apply. Students filing taxes 2013 For example, a transfer between a brother and a sister as beneficiary and fiduciary of the same trust is a transfer between related persons. Students filing taxes 2013 The brother-sister exception does not apply because the trust relationship is independent of family status. Students filing taxes 2013 Franchise, Trademark, or Trade Name If you transfer or renew a franchise, trademark, or trade name for a price contingent on its productivity, use, or disposition, the amount you receive generally is treated as an amount realized from the sale of a noncapital asset. Students filing taxes 2013 A franchise includes an agreement that gives one of the parties the right to distribute, sell, or provide goods, services, or facilities within a specified area. Students filing taxes 2013 Significant power, right, or continuing interest. Students filing taxes 2013   If you keep any significant power, right, or continuing interest in the subject matter of a franchise, trademark, or trade name that you transfer or renew, the amount you receive is ordinary royalty income rather than an amount realized from a sale or exchange. Students filing taxes 2013   A significant power, right, or continuing interest in a franchise, trademark, or trade name includes, but is not limited to, the following rights in the transferred interest. Students filing taxes 2013 A right to disapprove any assignment of the interest, or any part of it. Students filing taxes 2013 A right to end the agreement at will. Students filing taxes 2013 A right to set standards of quality for products used or sold, or for services provided, and for the equipment and facilities used to promote such products or services. Students filing taxes 2013 A right to make the recipient sell or advertise only your products or services. Students filing taxes 2013 A right to make the recipient buy most supplies and equipment from you. Students filing taxes 2013 A right to receive payments based on the productivity, use, or disposition of the transferred item of interest if those payments are a substantial part of the transfer agreement. Students filing taxes 2013 Subdivision of Land If you own a tract of land and, to sell or exchange it, you subdivide it into individual lots or parcels, the gain normally is ordinary income. Students filing taxes 2013 However, you may receive capital gain treatment on at least part of the proceeds provided you meet certain requirements. Students filing taxes 2013 See section 1237 of the Internal Revenue Code. Students filing taxes 2013 Timber Standing timber held as investment property is a capital asset. Students filing taxes 2013 Gain or loss from its sale is reported as a capital gain or loss on Form 8949, and Schedule D (Form 1040), as applicable. Students filing taxes 2013 If you held the timber primarily for sale to customers, it is not a capital asset. Students filing taxes 2013 Gain or loss on its sale is ordinary business income or loss. Students filing taxes 2013 It is reported in the gross receipts or sales and cost of goods sold items of your return. Students filing taxes 2013 Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. Students filing taxes 2013 These sales constitute a very minor part of their farm businesses. Students filing taxes 2013 In these cases, amounts realized from such sales, and the expenses of cutting, hauling, etc. Students filing taxes 2013 , are ordinary farm income and expenses reported on Schedule F (Form 1040), Profit or Loss From Farming. Students filing taxes 2013 Different rules apply if you owned the timber longer than 1 year and elect to either: Treat timber cutting as a sale or exchange, or Enter into a cutting contract. Students filing taxes 2013 Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Students filing taxes 2013 This is true whether the timber is cut under contract or whether you cut it yourself. Students filing taxes 2013 Under the rules discussed below, disposition of the timber is treated as a section 1231 transaction. Students filing taxes 2013 See chapter 3. Students filing taxes 2013 Gain or loss is reported on Form 4797. Students filing taxes 2013 Christmas trees. Students filing taxes 2013   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. Students filing taxes 2013 They qualify for both rules discussed below. Students filing taxes 2013 Election to treat cutting as a sale or exchange. Students filing taxes 2013   Under the general rule, the cutting of timber results in no gain or loss. Students filing taxes 2013 It is not until a sale or exchange occurs that gain or loss is realized. Students filing taxes 2013 But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year the timber is cut. Students filing taxes 2013 Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. Students filing taxes 2013 Any later sale results in ordinary business income or loss. Students filing taxes 2013 See Example, later. Students filing taxes 2013   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or for use in your trade or business. Students filing taxes 2013 Making the election. Students filing taxes 2013   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of the gain or loss. Students filing taxes 2013 You do not have to make the election in the first year you cut timber. Students filing taxes 2013 You can make it in any year to which the election would apply. Students filing taxes 2013 If the timber is partnership property, the election is made on the partnership return. Students filing taxes 2013 This election cannot be made on an amended return. Students filing taxes 2013   Once you have made the election, it remains in effect for all later years unless you cancel it. Students filing taxes 2013   If you previously elected to treat the cutting of timber as a sale or exchange, you may revoke this election without the consent of the IRS. Students filing taxes 2013 The prior election (and revocation) is disregarded for purposes of making a subsequent election. Students filing taxes 2013 See Form T (Timber), Forest Activities Schedule, for more information. Students filing taxes 2013 Gain or loss. Students filing taxes 2013   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its fair market value on the first day of your tax year in which it is cut. Students filing taxes 2013   Your adjusted basis for depletion of cut timber is based on the number of units (feet board measure, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. Students filing taxes 2013 Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 of the Internal Revenue Code and the related regulations. Students filing taxes 2013   Timber depletion is discussed in chapter 9 of Publication 535. Students filing taxes 2013 Example. Students filing taxes 2013 In April 2013, you had owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Students filing taxes 2013 It had an adjusted basis for depletion of $40 per MBF. Students filing taxes 2013 You are a calendar year taxpayer. Students filing taxes 2013 On January 1, 2013, the timber had a fair market value (FMV) of $350 per MBF. Students filing taxes 2013 It was cut in April for sale. Students filing taxes 2013 On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Students filing taxes 2013 You report the difference between the fair market value and your adjusted basis for depletion as a gain. Students filing taxes 2013 This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as capital gain or as ordinary gain. Students filing taxes 2013 You figure your gain as follows. Students filing taxes 2013 FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000 The fair market value becomes your basis in the cut timber and a later sale of the cut timber including any by-product or tree tops will result in ordinary business income or loss. Students filing taxes 2013 Outright sales of timber. Students filing taxes 2013   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined below). Students filing taxes 2013 However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see below). Students filing taxes 2013 Cutting contract. Students filing taxes 2013   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Students filing taxes 2013 You are the owner of the timber. Students filing taxes 2013 You held the timber longer than 1 year before its disposal. Students filing taxes 2013 You kept an economic interest in the timber. Students filing taxes 2013   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. Students filing taxes 2013   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. Students filing taxes 2013 Include this amount on Form 4797 along with your other section 1231 gains or losses to figure whether it is treated as capital or ordinary gain or loss. Students filing taxes 2013 Date of disposal. Students filing taxes 2013   The date of disposal is the date the timber is cut. Students filing taxes 2013 However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. Students filing taxes 2013   This election applies only to figure the holding period of the timber. Students filing taxes 2013 It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Students filing taxes 2013   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Students filing taxes 2013 The statement must identify the advance payments subject to the election and the contract under which they were made. Students filing taxes 2013   If you timely filed your return for the year you received payment without making the election, you still can make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). Students filing taxes 2013 Attach the statement to the amended return and write “Filed pursuant to section 301. Students filing taxes 2013 9100-2” at the top of the statement. Students filing taxes 2013 File the amended return at the same address the original return was filed. Students filing taxes 2013 Owner. Students filing taxes 2013   The owner of timber is any person who owns an interest in it, including a sublessor and the holder of a contract to cut the timber. Students filing taxes 2013 You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. Students filing taxes 2013 Tree stumps. Students filing taxes 2013   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. Students filing taxes 2013 Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Students filing taxes 2013 However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Students filing taxes 2013 Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Students filing taxes 2013   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Students filing taxes 2013 Precious Metals and Stones, Stamps, and Coins Gold, silver, gems, stamps, coins, etc. Students filing taxes 2013 , are capital assets except when they are held for sale by a dealer. Students filing taxes 2013 Any gain or loss from their sale or exchange generally is a capital gain or loss. Students filing taxes 2013 If you are a dealer, the amount received from the sale is ordinary business income. Students filing taxes 2013 Coal and Iron Ore You must treat the disposal of coal (including lignite) or iron ore mined in the United States as a section 1231 transaction if both the following apply to you. Students filing taxes 2013 You owned the coal or iron ore longer than 1 year before its disposal. Students filing taxes 2013 You kept an economic interest in the coal or iron ore. Students filing taxes 2013 For this rule, the date the coal or iron ore is mined is considered the date of its disposal. Students filing taxes 2013 Your gain or loss is the difference between the amount realized from disposal of the coal or iron ore and the adjusted basis you use to figure cost depletion (increased by certain expenses not allowed as deductions for the tax year). Students filing taxes 2013 This amount is included on Form 4797 along with your other section 1231 gains and losses. Students filing taxes 2013 You are considered an owner if you own or sublet an economic interest in the coal or iron ore in place. Students filing taxes 2013 If you own only an option to buy the coal in place, you do not qualify as an owner. Students filing taxes 2013 In addition, this gain or loss treatment does not apply to income realized by an owner who is a co-adventurer, partner, or principal in the mining of coal or iron ore. Students filing taxes 2013 The expenses of making and administering the contract under which the coal or iron ore was disposed of and the expenses of preserving the economic interest kept under the contract are not allowed as deductions in figuring taxable income. Students filing taxes 2013 Rather, their total, along with the adjusted depletion basis, is deducted from the amount received to determine gain. Students filing taxes 2013 If the total of these expenses plus the adjusted depletion basis is more than the amount received, the result is a loss. Students filing taxes 2013 Special rule. Students filing taxes 2013   The above treatment does not apply if you directly or indirectly dispose of the iron ore or coal to any of the following persons. Students filing taxes 2013 A related person whose relationship to you would result in the disallowance of a loss (see Nondeductible Loss under Sales and Exchanges Between Related Persons, earlier). Students filing taxes 2013 An individual, trust, estate, partnership, association, company, or corporation owned or controlled directly or indirectly by the same interests that own or control your business. Students filing taxes 2013 Conversion Transactions Recognized gain on the disposition or termination of any position held as part of certain conversion transactions is treated as ordinary income. Students filing taxes 2013 This applies if substantially all your expected return is attributable to the time value of your net investment (like interest on a loan) and the transaction is any of the following. Students filing taxes 2013 An applicable straddle (generally, any set of offsetting positions with respect to personal property, including stock). Students filing taxes 2013 A transaction in which you acquire property and, at or about the same time, you contract to sell the same or substantially identical property at a specified price. Students filing taxes 2013 Any other transaction that is marketed and sold as producing capital gain from a transaction in which substantially all of your expected return is due to the time value of your net investment. Students filing taxes 2013 For more information, see chapter 4 of Publication 550. Students filing taxes 2013 Prev  Up  Next   Home   More Online Publications