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Tax Amend

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Tax Amend

Tax amend 2. Tax amend   Ordinary or Capital Gain or Loss Table of Contents IntroductionSection 1231 transactions. Tax amend Topics - This chapter discusses: Useful Items - You may want to see: Capital Assets Noncapital AssetsCommodities derivative dealer. Tax amend 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). Tax amend You must do this to figure your net capital gain or loss. Tax amend For individuals, a net capital gain may be taxed at a different tax rate than ordinary income. Tax amend See Capital Gains Tax Rates in chapter 4. Tax amend Your deduction for a net capital loss may be limited. Tax amend See Treatment of Capital Losses in chapter 4. Tax amend Capital gain or loss. Tax amend   Generally, you will have a capital gain or loss if you sell or exchange a capital asset. Tax amend You also may have a capital gain if your section 1231 transactions result in a net gain. Tax amend Section 1231 transactions. Tax amend   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. Tax amend They also include certain involuntary conversions of business or investment property, including capital assets. Tax amend See Section 1231 Gains and Losses in chapter 3 for more information. Tax amend 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. Tax amend Capital Assets Almost everything you own and use for personal purposes, pleasure, or investment is a capital asset. Tax amend For exceptions, see Noncapital Assets, later. Tax amend The following items are examples of capital assets. Tax amend Stocks and bonds. Tax amend A home owned and occupied by you and your family. Tax amend Timber grown on your home property or investment property, even if you make casual sales of the timber. Tax amend Household furnishings. Tax amend A car used for pleasure or commuting. Tax amend Coin or stamp collections. Tax amend Gems and jewelry. Tax amend Gold, silver, and other metals. Tax amend Personal-use property. Tax amend   Generally, property held for personal use is a capital asset. Tax amend Gain from a sale or exchange of that property is a capital gain. Tax amend Loss from the sale or exchange of that property is not deductible. Tax amend You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Tax amend Investment property. Tax amend   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. Tax amend This treatment does not apply to property used to produce rental income. Tax amend See Business assets, later, under Noncapital Assets. Tax amend Release of restriction on land. Tax amend   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. Tax amend Noncapital Assets A noncapital asset is property that is not a capital asset. Tax amend The following kinds of property are not capital assets. Tax amend Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business. Tax amend Inventories are discussed in Publication 538, Accounting Periods and Methods. Tax amend But, see the Tip below. Tax amend 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. Tax amend 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). Tax amend Sales of this type of property are discussed in chapter 3. Tax amend Real property used in your trade or business or as rental property, even if the property is fully depreciated. Tax amend 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. Tax amend But, see the Tip below. Tax amend U. Tax amend S. Tax amend 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. Tax amend Any commodities derivative financial instrument (discussed later) held by a commodities derivatives dealer unless it meets both of the following requirements. Tax amend It is established to the satisfaction of the IRS that the instrument has no connection to the activities of the dealer as a dealer. Tax amend 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. Tax amend 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. Tax amend Supplies of a type you regularly use or consume in the ordinary course of your trade or business. Tax amend You can elect to treat as capital assets certain self-created musical compositions or copyrights you sold or exchanged. Tax amend See chapter 4 of Publication 550 for details. Tax amend Property held mainly for sale to customers. Tax amend   Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business are not capital assets. Tax amend Inventories are discussed in Publication 538. Tax amend Business assets. Tax amend   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. Tax amend The sale or disposition of business property is discussed in chapter 3. Tax amend Letters and memoranda. Tax amend   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. Tax amend 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. Tax amend For this purpose, letters and memoranda addressed to you are considered prepared for you. Tax amend If letters or memoranda are prepared by persons under your administrative control, they are considered prepared for you whether or not you review them. Tax amend Commodities derivative financial instrument. Tax amend   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). Tax amend Commodities derivative dealer. Tax amend   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. Tax amend Hedging transaction. Tax amend   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. Tax amend Risk of price changes or currency fluctuations involving ordinary property you hold or will hold. Tax amend 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. Tax amend Sales and Exchanges Between Related Persons This section discusses the rules that may apply to the sale or exchange of property between related persons. Tax amend If these rules apply, gains may be treated as ordinary income and losses may not be deductible. Tax amend See Transfers to Spouse in chapter 1 for rules that apply to spouses. Tax amend 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. Tax amend It is ordinary income if the sale or exchange is a depreciable property transaction or a controlled partnership transaction. Tax amend Depreciable property transaction. Tax amend   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. Tax amend A person and the person's controlled entity or entities. Tax amend 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. Tax amend 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). Tax amend 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). Tax amend Controlled entity. Tax amend   A person's controlled entity is either of the following. Tax amend 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. Tax amend An entity whose relationship with that person is one of the following. Tax amend 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. Tax amend 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. Tax amend Two S corporations, if the same persons own more than 50% in value of the outstanding stock of each corporation. Tax amend 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. Tax amend Controlled partnership transaction. Tax amend   A gain recognized in a controlled partnership transaction may be ordinary income. Tax amend 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. Tax amend   A controlled partnership transaction is a transaction directly or indirectly between either of the following pairs of entities. Tax amend A partnership and a person who directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. Tax amend Two partnerships, if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. Tax amend Determining ownership. Tax amend   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. Tax amend 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. Tax amend (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. Tax amend ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. Tax amend Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. Tax amend 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. Tax amend 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. Tax amend Nondeductible Loss A loss on the sale or exchange of property between related persons is not deductible. Tax amend This applies to both direct and indirect transactions, but not to distributions of property from a corporation in a complete liquidation. Tax amend For the list of related persons, see Related persons next. Tax amend 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. Tax amend The gain on each item is taxable. Tax amend The loss on any item is nondeductible. Tax amend Gains from the sales of any of these items may not be offset by losses on the sales of any of the other items. Tax amend Related persons. Tax amend   The following is a list of related persons. Tax amend Members of a family, including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Tax amend ), and lineal descendants (children, grandchildren, etc. Tax amend ). Tax amend An individual and a corporation if the individual directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. Tax amend Two corporations that are members of the same controlled group as defined in section 267(f) of the Internal Revenue Code. Tax amend 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. Tax amend A grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Tax amend Fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. Tax amend 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. Tax amend 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. Tax amend Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Tax amend 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. Tax amend An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest. Tax amend Two partnerships if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. Tax amend 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. Tax amend Partnership interests. Tax amend   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. Tax amend Controlled groups. Tax amend   Losses on transactions between members of the same controlled group described in (3) earlier are deferred rather than denied. Tax amend   For more information, see section 267(f) of the Internal Revenue Code. Tax amend Ownership of stock or partnership interests. Tax amend   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. Tax amend 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. Tax amend (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. Tax amend ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. Tax amend Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. Tax amend 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. Tax amend 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. Tax amend 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. Tax amend Indirect transactions. Tax amend   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. Tax amend This does not apply to a cross-trade between related parties through an exchange that is purely coincidental and is not prearranged. Tax amend Property received from a related person. Tax amend   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. Tax amend This rule applies only to the original transferee. Tax amend Example 1. Tax amend Your brother sold stock to you for $7,600. Tax amend His cost basis was $10,000. Tax amend His loss of $2,400 was not deductible. Tax amend You later sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900 ($10,500 − $7,600). Tax amend Your recognized gain is only $500, the gain that is more than the $2,400 loss not allowed to your brother. Tax amend Example 2. Tax amend Assume the same facts as in Example 1, except that you sell the stock for $6,900 instead of $10,500. Tax amend Your recognized loss is only $700 ($7,600 − $6,900). Tax amend You cannot deduct the loss not allowed to your brother. Tax amend Other Dispositions This section discusses rules for determining the treatment of gain or loss from various dispositions of property. Tax amend Sale of a Business The sale of a business usually is not a sale of one asset. Tax amend Instead, all the assets of the business are sold. Tax amend Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss. Tax amend A business usually has many assets. Tax amend 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. Tax amend The gain or loss on each asset is figured separately. Tax amend The sale of capital assets results in capital gain or loss. Tax amend 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). Tax amend The sale of inventory results in ordinary income or loss. Tax amend Partnership interests. Tax amend   An interest in a partnership or joint venture is treated as a capital asset when sold. Tax amend The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary gain or loss. Tax amend For more information, see Disposition of Partner's Interest in Publication 541. Tax amend Corporation interests. Tax amend   Your interest in a corporation is represented by stock certificates. Tax amend When you sell these certificates, you usually realize capital gain or loss. Tax amend For information on the sale of stock, see chapter 4 in Publication 550. Tax amend Corporate liquidations. Tax amend   Corporate liquidations of property generally are treated as a sale or exchange. Tax amend Gain or loss generally is recognized by the corporation on a liquidating sale of its assets. Tax amend 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. Tax amend   In certain cases in which the distributee is a corporation in control of the distributing corporation, the distribution may not be taxable. Tax amend For more information, see section 332 of the Internal Revenue Code and the related regulations. Tax amend Allocation of consideration paid for a business. Tax amend   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. Tax amend 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. Tax amend 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. Tax amend It also determines the buyer's basis in the business assets. Tax amend Consideration. Tax amend   The buyer's consideration is the cost of the assets acquired. Tax amend The seller's consideration is the amount realized (money plus the fair market value of property received) from the sale of assets. Tax amend Residual method. Tax amend   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. Tax amend 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. Tax amend Section 743(b) applies if a partnership has an election in effect under section 754 of the Internal Revenue Code. Tax amend   A group of assets constitutes a trade or business if either of the following applies. Tax amend Goodwill or going concern value could, under any circumstances, attach to them. Tax amend The use of the assets would constitute an active trade or business under section 355 of the Internal Revenue Code. Tax amend   The residual method provides for the consideration to be reduced first by the amount of Class I assets (defined below). Tax amend The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Tax amend See Classes of assets next for the complete order. Tax amend Classes of assets. Tax amend   The following definitions are the classifications for deemed or actual asset acquisitions. Tax amend Allocate the consideration among the assets in the following order. Tax amend The amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date. Tax amend 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. Tax amend Class I assets are cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). Tax amend Class II assets are certificates of deposit, U. Tax amend S. Tax amend Government securities, foreign currency, and actively traded personal property, including stock and securities. Tax amend Class III assets are accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Tax amend However, see section 1. Tax amend 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. Tax amend 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. Tax amend Class V assets are all assets other than Class I, II, III, IV, VI, and VII assets. Tax amend    Note. Tax amend Furniture and fixtures, buildings, land, vehicles, and equipment, which constitute all or part of a trade or business are generally Class V assets. Tax amend Class VI assets are section 197 intangibles (other than goodwill and going concern value). Tax amend Class VII assets are goodwill and going concern value (whether the goodwill or going concern value qualifies as a section 197 intangible). Tax amend   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. Tax amend For example, if an asset is described in both Class II and Class IV, choose Class II. Tax amend Example. Tax amend The total paid in the sale of the assets of Company SKB is $21,000. Tax amend No cash or deposit accounts or similar accounts were sold. Tax amend The company's U. Tax amend S. Tax amend Government securities sold had a fair market value of $3,200. Tax amend The only other asset transferred (other than goodwill and going concern value) was inventory with a fair market value of $15,000. Tax amend Of the $21,000 paid for the assets of Company SKB, $3,200 is allocated to U. Tax amend S. Tax amend Government securities, $15,000 to inventory assets, and the remaining $2,800 to goodwill and going concern value. Tax amend Agreement. Tax amend   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. Tax amend This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Tax amend Reporting requirement. Tax amend   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. Tax amend Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Tax amend Generally, the buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Tax amend See the Instructions for Form 8594. Tax amend Dispositions of Intangible Property Intangible property is any personal property that has value but cannot be seen or touched. Tax amend It includes such items as patents, copyrights, and the goodwill value of a business. Tax amend 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. Tax amend The treatment of section 1231 gain or loss and the recapture of amortization and depreciation as ordinary income are explained in chapter 3. Tax amend 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. Tax amend 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. Tax amend The following discussions explain special rules that apply to certain dispositions of intangible property. Tax amend 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. Tax amend They include the following assets. Tax amend Goodwill. Tax amend Going concern value. Tax amend Workforce in place. Tax amend Business books and records, operating systems, and other information bases. Tax amend Patents, copyrights, formulas, processes, designs, patterns, know how, formats, and similar items. Tax amend Customer-based intangibles. Tax amend Supplier-based intangibles. Tax amend Licenses, permits, and other rights granted by a governmental unit. Tax amend Covenants not to compete entered into in connection with the acquisition of a business. Tax amend Franchises, trademarks, and trade names. Tax amend See chapter 8 of Publication 535 for a description of each intangible. Tax amend Dispositions. Tax amend   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. Tax amend Instead, you must increase the adjusted basis of your retained section 197 intangible by the nondeductible loss. Tax amend If you retain more than one section 197 intangible, increase each intangible's adjusted basis. Tax amend 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. Tax amend   In applying this rule, members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity. Tax amend 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. Tax amend Covenant not to compete. Tax amend   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. Tax amend 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. Tax amend Anti-churning rules. Tax amend   Anti-churning rules prevent a taxpayer from converting section 197 intangibles that do not qualify for amortization into property that would qualify for amortization. Tax amend 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. Tax amend Recognize gain on the transfer of the property. Tax amend Pay income tax on the gain at the highest tax rate. Tax amend   If the transferor is a partnership or S corporation, the partnership or S corporation (not the partners or shareholders) can make the election. Tax amend But each partner or shareholder must pay the tax on his or her share of gain. Tax amend   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. Tax amend You must file the tax return by the due date (including extensions). Tax amend You must also notify the transferee of the election in writing by the due date of the return. Tax amend   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). Tax amend Attach the statement to the amended return and write “Filed pursuant to section 301. Tax amend 9100-2” at the top of the statement. Tax amend File the amended return at the same address the original return was filed. Tax amend For more information about making the election, see Regulations section 1. Tax amend 197-2(h)(9). Tax amend For information about reporting the tax on your income tax return, see the Instructions for Form 4797. Tax amend 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. Tax amend 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. Tax amend For information on the treatment of gain or loss on the transfer of capital assets, see chapter 4. Tax amend This treatment applies to your transfer of a patent if you meet all the following conditions. Tax amend You are the holder of the patent. Tax amend You transfer the patent other than by gift, inheritance, or devise. Tax amend You transfer all substantial rights to the patent or an undivided interest in all such rights. Tax amend You do not transfer the patent to a related person. Tax amend Holder. Tax amend   You are the holder of a patent if you are either of the following. Tax amend The individual whose effort created the patent property and who qualifies as the original and first inventor. Tax amend 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. Tax amend All substantial rights. Tax amend   All substantial rights to patent property are all rights that have value when they are transferred. Tax amend 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. Tax amend   All substantial rights to a patent are not transferred if any of the following apply to the transfer. Tax amend The rights are limited geographically within a country. Tax amend The rights are limited to a period less than the remaining life of the patent. Tax amend 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. Tax amend 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. Tax amend Related persons. Tax amend   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. Tax amend Members of your family include your spouse, ancestors, and lineal descendants, but not your brothers, sisters, half-brothers, or half-sisters. Tax amend Substitute “25% or more” ownership for “more than 50%. Tax amend ”   If you fit within the definition of a related person independent of family status, the brother-sister exception in (1), earlier, does not apply. Tax amend For example, a transfer between a brother and a sister as beneficiary and fiduciary of the same trust is a transfer between related persons. Tax amend The brother-sister exception does not apply because the trust relationship is independent of family status. Tax amend 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. Tax amend 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. Tax amend Significant power, right, or continuing interest. Tax amend   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. Tax amend   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. Tax amend A right to disapprove any assignment of the interest, or any part of it. Tax amend A right to end the agreement at will. Tax amend 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. Tax amend A right to make the recipient sell or advertise only your products or services. Tax amend A right to make the recipient buy most supplies and equipment from you. Tax amend 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. Tax amend 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. Tax amend However, you may receive capital gain treatment on at least part of the proceeds provided you meet certain requirements. Tax amend See section 1237 of the Internal Revenue Code. Tax amend Timber Standing timber held as investment property is a capital asset. Tax amend Gain or loss from its sale is reported as a capital gain or loss on Form 8949, and Schedule D (Form 1040), as applicable. Tax amend If you held the timber primarily for sale to customers, it is not a capital asset. Tax amend Gain or loss on its sale is ordinary business income or loss. Tax amend It is reported in the gross receipts or sales and cost of goods sold items of your return. Tax amend 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. Tax amend These sales constitute a very minor part of their farm businesses. Tax amend In these cases, amounts realized from such sales, and the expenses of cutting, hauling, etc. Tax amend , are ordinary farm income and expenses reported on Schedule F (Form 1040), Profit or Loss From Farming. Tax amend 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. Tax amend Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Tax amend This is true whether the timber is cut under contract or whether you cut it yourself. Tax amend Under the rules discussed below, disposition of the timber is treated as a section 1231 transaction. Tax amend See chapter 3. Tax amend Gain or loss is reported on Form 4797. Tax amend Christmas trees. Tax amend   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. Tax amend They qualify for both rules discussed below. Tax amend Election to treat cutting as a sale or exchange. Tax amend   Under the general rule, the cutting of timber results in no gain or loss. Tax amend It is not until a sale or exchange occurs that gain or loss is realized. Tax amend 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. Tax amend 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. Tax amend Any later sale results in ordinary business income or loss. Tax amend See Example, later. Tax amend   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. Tax amend Making the election. Tax amend   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. Tax amend You do not have to make the election in the first year you cut timber. Tax amend You can make it in any year to which the election would apply. Tax amend If the timber is partnership property, the election is made on the partnership return. Tax amend This election cannot be made on an amended return. Tax amend   Once you have made the election, it remains in effect for all later years unless you cancel it. Tax amend   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. Tax amend The prior election (and revocation) is disregarded for purposes of making a subsequent election. Tax amend See Form T (Timber), Forest Activities Schedule, for more information. Tax amend Gain or loss. Tax amend   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. Tax amend   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. Tax amend 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. Tax amend   Timber depletion is discussed in chapter 9 of Publication 535. Tax amend Example. Tax amend In April 2013, you had owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Tax amend It had an adjusted basis for depletion of $40 per MBF. Tax amend You are a calendar year taxpayer. Tax amend On January 1, 2013, the timber had a fair market value (FMV) of $350 per MBF. Tax amend It was cut in April for sale. Tax amend On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Tax amend You report the difference between the fair market value and your adjusted basis for depletion as a gain. Tax amend 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. Tax amend You figure your gain as follows. Tax amend 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. Tax amend Outright sales of timber. Tax amend   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). Tax amend 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). Tax amend Cutting contract. Tax amend   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Tax amend You are the owner of the timber. Tax amend You held the timber longer than 1 year before its disposal. Tax amend You kept an economic interest in the timber. Tax amend   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. Tax amend   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. Tax amend 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. Tax amend Date of disposal. Tax amend   The date of disposal is the date the timber is cut. Tax amend 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. Tax amend   This election applies only to figure the holding period of the timber. Tax amend It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Tax amend   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Tax amend The statement must identify the advance payments subject to the election and the contract under which they were made. Tax amend   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). Tax amend Attach the statement to the amended return and write “Filed pursuant to section 301. Tax amend 9100-2” at the top of the statement. Tax amend File the amended return at the same address the original return was filed. Tax amend Owner. Tax amend   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. Tax amend 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. Tax amend Tree stumps. Tax amend   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. Tax amend Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Tax amend However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Tax amend Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Tax amend   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Tax amend Precious Metals and Stones, Stamps, and Coins Gold, silver, gems, stamps, coins, etc. Tax amend , are capital assets except when they are held for sale by a dealer. Tax amend Any gain or loss from their sale or exchange generally is a capital gain or loss. Tax amend If you are a dealer, the amount received from the sale is ordinary business income. Tax amend 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. Tax amend You owned the coal or iron ore longer than 1 year before its disposal. Tax amend You kept an economic interest in the coal or iron ore. Tax amend For this rule, the date the coal or iron ore is mined is considered the date of its disposal. Tax amend 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). Tax amend This amount is included on Form 4797 along with your other section 1231 gains and losses. Tax amend You are considered an owner if you own or sublet an economic interest in the coal or iron ore in place. Tax amend If you own only an option to buy the coal in place, you do not qualify as an owner. Tax amend 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. Tax amend 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. Tax amend Rather, their total, along with the adjusted depletion basis, is deducted from the amount received to determine gain. Tax amend If the total of these expenses plus the adjusted depletion basis is more than the amount received, the result is a loss. Tax amend Special rule. Tax amend   The above treatment does not apply if you directly or indirectly dispose of the iron ore or coal to any of the following persons. Tax amend 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). Tax amend 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. Tax amend Conversion Transactions Recognized gain on the disposition or termination of any position held as part of certain conversion transactions is treated as ordinary income. Tax amend 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. Tax amend An applicable straddle (generally, any set of offsetting positions with respect to personal property, including stock). Tax amend 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. Tax amend 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. Tax amend For more information, see chapter 4 of Publication 550. Tax amend Prev  Up  Next   Home   More Online Publications
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Consumer Protection Offices

City, county, regional, and state consumer offices offer a variety of important services. They might mediate complaints, conduct investigations, prosecute offenders of consumer laws, license and regulate professional service providers, provide educational materials and advocate for consumer rights. To save time, call before sending a written complaint. Ask if the office handles the type of complaint you have and if complaint forms are provided.

State Consumer Protection Offices

Tennessee Department of Commerce and Insurance

Website: Tennessee Department of Commerce and Insurance

Address: Tennessee Department of Commerce and Insurance
Division of Consumer Affairs
500 James Robertson Pkwy., 12th Floor
Nashville, TN 37243-0600

Phone Number: 615-741-4737

Toll-free: 1-800-342-8385 (TN)

Tennessee Office of the Attorney General

Website: Tennessee Office of the Attorney General

Address: Tennessee Office of the Attorney General
Consumer Advocate and Protection Division
PO Box 20207
Nashville, TN 37202-0207

Phone Number: 615-741-1671

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Banking Authorities

The officials listed in this section regulate and supervise state-chartered banks. Many of them handle or refer problems and complaints about other types of financial institutions as well. Some also answer general questions about banking and consumer credit. If you are dealing with a federally chartered bank, check Federal Agencies.

Department of Financial Institutions

Website: Department of Financial Institutions

Address: Department of Financial Institutions
Consumer Resources Division
414 Union St., Suite 1000
Nashville, TN 37219

Phone Number: 615-253-2023

Toll-free: 1-800-778-4215 (TN)

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Insurance Regulators

Each state has its own laws and regulations for each type of insurance. The officials listed in this section enforce these laws. Many of these offices can also provide you with information to help you make informed insurance buying decisions.

Department of Commerce and Insurance

Website: Department of Commerce and Insurance

Address: Department of Commerce and Insurance
Consumer Insurance Services
500 James Robertson Pkwy., 4th Floor
Nashville, TN 37243-0574

Phone Number: 615-741-2218

Toll-free: 1-800-342-4029 (TN)

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Securities Administrators

Each state has its own laws and regulations for securities brokers and securities - including stocks, mutual funds, commodities, real estate, etc. The officials and agencies listed in this section enforce these laws and regulations. Many of these offices can also provide information to help you make informed investment decisions.

Department of Commerce and Insurance

Website: Department of Commerce and Insurance

Address: Department of Commerce and Insurance
Securities Division
500 James Robertson Pkwy.
Nashville, TN 37243-0575

Phone Number: 615-741-2947

Toll-free: 1-800-863-9117 (TN)

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Utility Commissions

State Utility Commissions regulate services and rates for gas, electricity and telephones within your state. In some states, the utility commissions regulate other services such as water, transportation, and the moving of household goods. Many utility commissions handle consumer complaints. Sometimes, if a number of complaints are received about the same utility matter, they will conduct investigations.

Regulatory Authority

Website: Regulatory Authority

Address: Regulatory Authority
Consumer Services Division
460 James Robertson Pkwy.
Nashville, TN 37243-0505

Phone Number: 615-741-2904

Toll-free: 1-800-342-8359 (Consumer Services)

TTY: 1-888-276-0677

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The Tax Amend

Tax amend 7. Tax amend   Coverdell Education Savings Account (ESA) Table of Contents Introduction What Is a Coverdell ESAQualified Education Expenses ContributionsContribution Limits Additional Tax on Excess Contributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Transfer Because of Divorce DistributionsTax-Free Distributions Taxable Distributions When Assets Must Be Distributed Introduction If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. Tax amend For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. Tax amend There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. Tax amend However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. Tax amend See Contributions , later. Tax amend This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. Tax amend What is the tax benefit of the Coverdell ESA. Tax amend   Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. Tax amend   If, for a year, distributions from an account are not more than a designated beneficiary's qualified education expenses at an eligible educational institution, the beneficiary will not owe tax on the distributions. Tax amend See Tax-Free Distributions , later. Tax amend    Table 7-1 summarizes the main features of the Coverdell ESA. Tax amend Table 7-1. Tax amend Coverdell ESA at a Glance Do not rely on this table alone. Tax amend It provides only general highlights. Tax amend See the text for definitions of terms in bold type and for more complete explanations. Tax amend Question Answer What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary. Tax amend Where can it be established? It can be opened in the United States at any bank or other IRS-approved entity that offers Coverdell ESAs. Tax amend Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary. Tax amend Who can contribute to a Coverdell ESA? Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return). Tax amend Are distributions tax free? Yes, if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year. Tax amend What Is a Coverdell ESA A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the Designated beneficiary (defined later) of the account. Tax amend When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary. Tax amend To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. Tax amend The document creating and governing the account must be in writing and must satisfy the following requirements. Tax amend The trustee or custodian must be a bank or an entity approved by the IRS. Tax amend The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions. Tax amend The contribution is in cash. Tax amend The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Tax amend The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000. Tax amend Money in the account cannot be invested in life insurance contracts. Tax amend Money in the account cannot be combined with other property except in a common trust fund or common investment fund. Tax amend The balance in the account generally must be distributed within 30 days after the earlier of the following events. Tax amend The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. Tax amend The beneficiary's death. Tax amend Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. Tax amend For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. Tax amend Designated beneficiary. Tax amend   This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account. Tax amend Contributions to a qualified tuition program (QTP). Tax amend   A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. Tax amend In the case of a change in beneficiary, this is a qualified expense only if the new beneficiary is a family member of that designated beneficiary. Tax amend See chapter 8, Qualified Tuition Program . Tax amend Eligible Educational Institution For purposes of Coverdell ESAs, an eligible educational institution can be either an eligible postsecondary school or an eligible elementary or secondary school. Tax amend Eligible postsecondary school. Tax amend   This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Tax amend S. Tax amend Department of Education. Tax amend It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Tax amend The educational institution should be able to tell you if it is an eligible educational institution. Tax amend   Certain educational institutions located outside the United States also participate in the U. Tax amend S. Tax amend Department of Education's Federal Student Aid (FSA) programs. Tax amend Eligible elementary or secondary school. Tax amend   This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. Tax amend Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. Tax amend As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time. Tax amend The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. Tax amend Tuition and fees. Tax amend Books, supplies, and equipment. Tax amend Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school. Tax amend Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). Tax amend The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Tax amend The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Tax amend The actual amount charged if the student is residing in housing owned or operated by the school. Tax amend Half-time student. Tax amend   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. Tax amend Qualified Elementary and Secondary Education Expenses These are expenses related to enrollment or attendance at an eligible elementary or secondary school. Tax amend As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. Tax amend There are special rules for computer-related expenses. Tax amend The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. Tax amend Tuition and fees. Tax amend Books, supplies, and equipment. Tax amend Academic tutoring. Tax amend Special needs services for a special needs beneficiary. Tax amend The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school. Tax amend Room and board. Tax amend Uniforms. Tax amend Transportation. Tax amend Supplementary items and services (including extended day programs). Tax amend The purchase of computer technology, equipment, or Internet access and related services is a qualified elementary and secondary education expense if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in elementary or secondary school. Tax amend (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. Tax amend ) Contributions Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI (defined later under Contribution Limits ) for the year is less than $110,000. Tax amend For individuals filing joint returns, that amount is $220,000. Tax amend Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. Tax amend There is no requirement that an organization's income be below a certain level. Tax amend Contributions must meet all of the following requirements. Tax amend They must be in cash. Tax amend They cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Tax amend They must be made by the due date of the contributor's tax return (not including extensions). Tax amend Contributions can be made to one or several Coverdell ESAs for the same designated beneficiary provided that the total contributions are not more than the contribution limits (defined later) for a year. Tax amend Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary. Tax amend Table 7-2 summarizes many of the features of contributing to a Coverdell ESA. Tax amend When contributions considered made. Tax amend   Contributions made to a Coverdell ESA for the preceding tax year are considered to have been made on the last day of the preceding year. Tax amend They must be made by the due date (not including extensions) for filing your return for the preceding year. Tax amend   For example, if you make a contribution to a Coverdell ESA in February 2014, and you designate it as a contribution for 2013, you are considered to have made that contribution on December 31, 2013. Tax amend Contribution Limits There are two yearly limits: One on the total amount that can be contributed for each designated beneficiary in any year, and One on the amount that any individual can contribute for any one designated beneficiary for a year. Tax amend Limit for each designated beneficiary. Tax amend   For 2013, the total of all contributions to all Coverdell ESAs set up for the benefit of any one designated beneficiary cannot be more than $2,000. Tax amend This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. Tax amend Rollovers are discussed under Rollovers and Other Transfers , later. Tax amend Example. Tax amend When Maria Luna was born in 2012, three separate Coverdell ESAs were set up for her, one by her parents, one by her grandfather, and one by her aunt. Tax amend In 2013, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. Tax amend For example, if her grandfather contributed $2,000 to one of her Coverdell ESAs, no one else could contribute to any of her three accounts. Tax amend Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. Tax amend These contributions could be put into any of Maria's Coverdell ESA accounts. Tax amend Limit for each contributor. Tax amend   Generally, you can contribute up to $2,000 for each designated beneficiary for 2013. Tax amend This is the most you can contribute for the benefit of any one beneficiary for the year, regardless of the number of Coverdell ESAs set up for the beneficiary. Tax amend Example. Tax amend The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. Tax amend If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2013, he could also contribute $2,000 to Edgar's Coverdell ESA. Tax amend Reduced limit. Tax amend   Your contribution limit may be reduced. Tax amend If your MAGI (defined on this page) is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced (see Figuring the limit , later). Tax amend If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you cannot contribute to anyone's Coverdell ESA. Tax amend Table 7-2. Tax amend Coverdell ESA Contributions at a Glance Do not rely on this table alone. Tax amend It provides only general highlights. Tax amend See the text for more complete explanations. Tax amend Question Answer Are contributions deductible? No. Tax amend What is the annual contribution limit per designated beneficiary? $2,000 for each designated beneficiary. Tax amend What if more than one Coverdell ESA has been opened for the same designated beneficiary? The annual contribution limit is $2,000 for each beneficiary, no matter how many Coverdell ESAs are set up for that beneficiary. Tax amend What if more than one individual makes contributions for the same designated beneficiary? The annual contribution limit is $2,000 per beneficiary, no matter how many individuals contribute. Tax amend Can contributions other than cash be made to a Coverdell ESA? No. Tax amend When must contributions stop? No contributions can be made to a beneficiary's Coverdell ESA after he or she reaches age 18, unless the beneficiary is a special needs beneficiary. Tax amend Modified adjusted gross income (MAGI). Tax amend   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Tax amend MAGI when using Form 1040A. Tax amend   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Tax amend MAGI when using Form 1040. Tax amend   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. Tax amend MAGI when using Form 1040NR. Tax amend   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form. Tax amend MAGI when using Form 1040NR-EZ. Tax amend   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form. Tax amend   If you have any of these adjustments, you can use Worksheet 7-1. Tax amend MAGI for a Coverdell ESA , later, to figure your MAGI for Form 1040. Tax amend Worksheet 7-1. Tax amend MAGI for a Coverdell ESA 1. Tax amend Enter your adjusted gross income  (Form 1040, line 38)   1. Tax amend   2. Tax amend Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Tax amend       3. Tax amend Enter your foreign housing deduction (Form 2555, line 50)   3. Tax amend         4. Tax amend Enter the amount of income from Puerto Rico you are excluding   4. Tax amend       5. Tax amend Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Tax amend       6. Tax amend Add lines 2, 3, 4, and 5   6. Tax amend   7. Tax amend Add lines 1 and 6. Tax amend This is your  modified adjusted gross income   7. Tax amend   Figuring the limit. Tax amend    To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. Tax amend The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). Tax amend The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). Tax amend Subtract the result from $2,000. Tax amend This is the amount you can contribute for each beneficiary. Tax amend You can use Worksheet 7-2. Tax amend Coverdell ESA Contribution Limit to figure the limit on contributions. Tax amend    Worksheet 7-2. Tax amend Coverdell ESA Contribution Limit 1. Tax amend Maximum contribution   1. Tax amend $2,000 2. Tax amend Enter your modified adjusted gross income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. Tax amend   3. Tax amend Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Tax amend   4. Tax amend Subtract line 3 from line 2. Tax amend If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Tax amend   5. Tax amend Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Tax amend     Note. Tax amend If the amount on line 4 is greater than or equal to the amount on line 5, stop here. Tax amend You are not allowed to contribute to a Coverdell ESA for 2013. Tax amend       6. Tax amend Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Tax amend . Tax amend 7. Tax amend Multiply line 1 by line 6   7. Tax amend   8. Tax amend Subtract line 7 from line 1   8. Tax amend   Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Tax amend Example. Tax amend Paul, who is single, had a MAGI of $96,500 for 2013. Tax amend Paul can contribute up to $1,800 in 2013 for each beneficiary, as shown in the illustrated Worksheet 7-2, Coverdell ESA Contribution Limit–Illustrated. Tax amend Worksheet 7-2. Tax amend Coverdell ESA Contribution Limit—Illustrated 1. Tax amend Maximum contribution   1. Tax amend $2,000 2. Tax amend Enter your modified adjusted gross  income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. Tax amend 96,500 3. Tax amend Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Tax amend 95,000 4. Tax amend Subtract line 3 from line 2. Tax amend If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Tax amend 1,500 5. Tax amend Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Tax amend 15,000   Note. Tax amend If the amount on line 4 is greater than or equal to the amount on line 5,  stop here. Tax amend You are not allowed to  contribute to a Coverdell ESA for 2013. Tax amend       6. Tax amend Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Tax amend . Tax amend 100 7. Tax amend Multiply line 1 by line 6   7. Tax amend 200 8. Tax amend Subtract line 7 from line 1   8. Tax amend 1,800 Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Tax amend Additional Tax on Excess Contributions The beneficiary must pay a 6% excise tax each year on excess contributions that are in a Coverdell ESA at the end of the year. Tax amend Excess contributions are the total of the following two amounts. Tax amend Contributions to any designated beneficiary's Coverdell ESA for the year that are more than $2,000 (or, if less, the total of each contributor's limit for the year, as discussed earlier). Tax amend Excess contributions for the preceding year, reduced by the total of the following two amounts: Distributions (other than those rolled over as discussed later) during the year, and The contribution limit for the current year minus the amount contributed for the current year. Tax amend Exceptions. Tax amend   The excise tax does not apply if excess contributions made during 2013 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2014, for a calendar year taxpayer). Tax amend   However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. Tax amend You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. Tax amend Box 2 of that form will show the amount of earnings on your excess contributions. Tax amend Code “2” or “3” entered in the blank box below boxes 5 and 6 indicate the year in which the earnings are taxable. Tax amend See Instructions for Recipient on the back of copy B of your Form 1099-Q. Tax amend Enter the amount of earnings on line 21 of Form 1040 (or Form 1040NR) for the applicable tax year. Tax amend For more information, see Taxable Distributions , later. Tax amend   The excise tax does not apply to any rollover contribution. Tax amend Note. Tax amend Contributions made in one year for the preceding tax year are considered to have been made on the last day of the preceding year. Tax amend Example. Tax amend In 2012, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. Tax amend Because Greta did not withdraw the excess before June 1, 2013, she had to pay an additional tax of $18 (6% × $300) when she filed her 2012 tax return. Tax amend In 2013, excess contributions of $500 were made to Greta's account, however, she withdrew $250 from that account to use for qualified education expenses. Tax amend Using the steps shown earlier under Additional Tax on Excess Contributions , Greta figures the excess contribution in her account at the end of 2013 as follows. Tax amend (1)   $500 excess contributions made in 2013     + (2)   $300 excess contributions in ESA at end of 2012     − (2a)   $250 distribution during 2013         $550 excess at end of 2013   × 6%=$33           If Greta limits 2014 contributions to $1,450 ($2,000 maximum allowed − $550 excess contributions from 2013), she will not owe any additional tax in 2014 for excess contributions. Tax amend Figuring and reporting the additional tax. Tax amend   You figure this excise tax in Part V of Form 5329. Tax amend Report the additional tax on Form 1040, line 58 (or Form 1040NR, line 56). Tax amend Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary can be changed. Tax amend The beneficiary's interest can be transferred to a spouse or former spouse because of divorce. Tax amend Rollovers Any amount distributed from a Coverdell ESA is not taxable if it is rolled over to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary's family (including the beneficiary's spouse) who is under age 30. Tax amend This age limitation does not apply if the new beneficiary is a special needs beneficiary. Tax amend An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution. Tax amend Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. Tax amend These are not taxable distributions. Tax amend Members of the beneficiary's family. Tax amend   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. Tax amend Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. Tax amend Brother, sister, stepbrother, or stepsister. Tax amend Father or mother or ancestor of either. Tax amend Stepfather or stepmother. Tax amend Son or daughter of a brother or sister. Tax amend Brother or sister of father or mother. Tax amend Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Tax amend The spouse of any individual listed above. Tax amend First cousin. Tax amend Example. Tax amend When Aaron graduated from college last year he had $5,000 left in his Coverdell ESA. Tax amend He wanted to give this money to his younger sister, who was still in high school. Tax amend In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his sister's Coverdell ESA within 60 days of the distribution. Tax amend Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or distribution. Tax amend This rule does not apply to the rollover of a military death gratuity or payment from Servicemembers' Group Life Insurance (SGLI). Tax amend Military death gratuity. Tax amend   If you received a military death gratuity or a payment from Servicemembers' Group Life Insurance (SGLI), you may roll over all or part of the amount received to one or more Coverdell ESAs for the benefit of members of the beneficiary's family (see Members of the beneficiary's family , earlier). Tax amend Such payments are made to an eligible survivor upon the death of a member of the armed forces. Tax amend The contribution to a Coverdell ESA from survivor benefits received cannot be made later than 1 year after the date on which you receive the gratuity or SGLI payment. Tax amend   This rollover contribution is not subject to (but is in addition to) the contribution limits discussed earlier under Contribution Limits . Tax amend The amount you roll over cannot exceed the total survivor benefits you received, reduced by contributions from these benefits to a Roth IRA or other Coverdell ESAs. Tax amend   The amount contributed from the survivor benefits is treated as part of your basis (cost) in the Coverdell ESA, and will not be taxed when distributed. Tax amend See Distributions , later. Tax amend The limit of one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment. Tax amend Changing the Designated Beneficiary The designated beneficiary can be changed. Tax amend See Members of the beneficiary's family , earlier. Tax amend There are no tax consequences if, at the time of the change, the new beneficiary is under age 30 or is a special needs beneficiary. Tax amend Example. Tax amend Assume the same situation for Aaron as in the last example (see Rollovers , earlier). Tax amend Instead of closing his Coverdell ESA and paying the distribution into his sister's Coverdell ESA, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his sister. Tax amend Transfer Because of Divorce If a spouse or former spouse receives a Coverdell ESA under a divorce or separation instrument, it is not a taxable transfer. Tax amend After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own. Tax amend Example. Tax amend In their divorce settlement, Peg received her ex-husband's Coverdell ESA. Tax amend In this process, the account was transferred into her name. Tax amend Peg now treats the funds in this Coverdell ESA as if she were the original owner. Tax amend Distributions The designated beneficiary of a Coverdell ESA can take a distribution at any time. Tax amend Whether the distributions are tax free depends, in part, on whether the distributions are equal to or less than the amount of Adjusted qualified education expenses (defined later) that the beneficiary has in the same tax year. Tax amend See Table 7-3, Coverdell ESA Distributions at a Glance, for highlights. Tax amend Table 7-3. Tax amend Coverdell ESA Distributions at a Glance Do not rely on this table alone. Tax amend It provides only general highlights. Tax amend See the text for definitions of terms in bold type and for more complete explanations. Tax amend Question Answer Is a distribution from a Coverdell ESA to pay for a designated beneficiary's qualified education expenses tax free? Generally, yes, to the extent the amount of the distribution is not more than the designated beneficiary's adjusted qualified education expenses. Tax amend After the designated beneficiary completes his or her education at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed? Yes. Tax amend Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. Tax amend Also, certain transfers to members of the beneficiary's family are permitted. Tax amend Does the designated beneficiary need to be enrolled for a minimum number of courses to take a tax-free distribution? No. Tax amend Adjusted qualified education expenses. Tax amend   To determine if total distributions for the year are more than the amount of qualified education expenses, reduce total qualified education expenses by any tax-free educational assistance. Tax amend Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Tax amend The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses. Tax amend Tax-Free Distributions Generally, distributions are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year. Tax amend Do not report tax-free distributions (including qualifying rollovers) on your tax return. Tax amend Taxable Distributions A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the beneficiary's adjusted qualified education expenses for the year. Tax amend Excess distribution. Tax amend   This is the part of the total distribution that is more than the beneficiary's adjusted qualified education expenses for the year. Tax amend Earnings and basis. Tax amend   You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2013. Tax amend The amount of your gross distribution will be shown in box 1. Tax amend For 2013, instead of dividing the gross distribution between your earnings (box 2) and your basis (already-taxed amount) (box 3), the payer or trustee may report the fair market value (account balance) of the Coverdell ESA as of December 31, 2013. Tax amend This will be shown in the blank box below boxes 5 and 6. Tax amend   The amount contributed from survivor benefits (see Military death gratuity , earlier) is treated as part of your basis and will not be taxed when distributed. Tax amend Figuring the Taxable Portion of a Distribution The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. Tax amend Figure the taxable portion for 2013 as shown in the following steps. Tax amend Multiply the total amount distributed by a fraction. Tax amend The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the value (balance) of the account at the end of 2013 plus the amount distributed during 2013. Tax amend Subtract the amount figured in (1) from the total amount distributed during 2013. Tax amend The result is the amount of earnings included in the distribution(s). Tax amend Multiply the amount of earnings figured in (2) by a fraction. Tax amend The numerator is the adjusted qualified education expenses paid during 2013 and the denominator is the total amount distributed during 2013. Tax amend Subtract the amount figured in (3) from the amount figured in (2). Tax amend The result is the amount the beneficiary must include in income. Tax amend The taxable amount must be reported on Form 1040 or Form 1040NR, line 21. Tax amend Example. Tax amend You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2013. Tax amend There were no contributions in 2013. Tax amend This is your first distribution from the account, so your basis in the account on December 31, 2012, was $1,500. Tax amend The value (balance) of your account on December 31, 2013, was $950. Tax amend You had $700 of adjusted qualified education expenses (AQEE) for the year. Tax amend Using the steps in Figuring the Taxable Portion of a Distribution , earlier, figure the taxable portion of your distribution as follows. Tax amend   1. Tax amend $850 (distribution) × $1,500 basis + $0 contributions  $950 value + $850 distribution       =$708 (basis portion of distribution)     2. Tax amend $850 (distribution)−$708 (basis portion of distribution)     =$142 (earnings included in distribution)   3. Tax amend $142 (earnings) × $700 AQEE  $850 distribution           =$117 (tax-free earnings)     4. Tax amend $142 (earnings)−$117 (tax-free earnings)=$25 (taxable earnings)                 You must include $25 in income as distributed earnings not used for qualified education expenses. Tax amend Report this amount on Form 1040, line 21, listing the type and amount of income on the dotted line. Tax amend Worksheet 7-3, Coverdell ESA–Taxable Distributions and Basis , at the end of this chapter, can help you figure your adjusted qualified education expenses, how much of your distribution must be included in income, and the remaining basis in your Coverdell ESA(s). Tax amend Coordination With American Opportunity and Lifetime Learning Credits The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. Tax amend This means the beneficiary must reduce qualified higher education expenses by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit. Tax amend Example. Tax amend Derek Green had $5,800 of qualified higher education expenses for 2013, his first year in college. Tax amend He paid his college expenses from the following sources. Tax amend     Partial tuition scholarship (tax free) $1,500     Coverdell ESA distribution 1,000     Gift from parents 2,100     Earnings from part-time job 1,200           Of his $5,800 of qualified higher education expenses, $4,000 was tuition and related expenses that also qualified for an American opportunity credit. Tax amend Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. Tax amend Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses. Tax amend     Total qualified higher education expenses $5,800     Minus: Tax-free educational assistance −1,500     Minus: Expenses taken into account in  figuring American opportunity credit − 4,000     Equals: Adjusted qualified higher education  expenses (AQHEE) $ 300           Since the adjusted qualified higher education expenses ($300) are less than the Coverdell ESA distribution ($1,000), part of the distribution will be taxable. Tax amend The balance in Derek's account was $1,800 on December 31, 2013. Tax amend Prior to 2013, $2,100 had been contributed to this account. Tax amend Contributions for 2013 totaled $400. Tax amend Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below. Tax amend   1. Tax amend $1,000 (distribution) × $2,100 basis + $400 contributions  $1,800 value + $1,000 distribution           =$893 (basis portion of distribution)     2. Tax amend $1,000 (distribution)−$893 (basis portion of distribution)     = $107 (earnings included in distribution)   3. Tax amend $107 (earnings) × $300 AQHEE  $1,000 distribution       =$32 (tax-free earnings)     4. Tax amend $107 (earnings)−$32 (tax-free earnings)=$75 (taxable earnings)                 Derek must include $75 in income (Form 1040, line 21). Tax amend This is the amount of distributed earnings not used for adjusted qualified higher education expenses. Tax amend Coordination With Qualified Tuition Program (QTP) Distributions If a designated beneficiary receives distributions from both a Coverdell ESA and a QTP in the same year, and the total distribution is more than the beneficiary's adjusted qualified higher education expenses, those expenses must be allocated between the distribution from the Coverdell ESA and the distribution from the QTP before figuring how much of each distribution is taxable. Tax amend The following two examples illustrate possible allocations. Tax amend Example 1. Tax amend In 2013, Beatrice graduated from high school and began her first semester of college. Tax amend That year, she had $1,000 of qualified elementary and secondary education expenses (QESEE) for high school and $3,000 of qualified higher education expenses (QHEE) for college. Tax amend To pay these expenses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. Tax amend No one claimed Beatrice as a dependent, nor was she eligible for an education credit. Tax amend She did not receive any tax-free educational assistance in 2013. Tax amend Beatrice must allocate her total qualified education expenses between the two distributions. Tax amend Beatrice knows that tax-free treatment will be available if she applies her $800 Coverdell ESA distribution toward her $1,000 of qualified education expenses for high school. Tax amend The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free. Tax amend Next, Beatrice matches her $4,200 QTP distribution to her $3,000 of QHEE, and finds she has an excess QTP distribution of $1,200 ($4,200 QTP − $3,000 QHEE). Tax amend She cannot use the extra $200 of high school expenses (from (1) above) against the QTP distribution because those expenses do not qualify a QTP for tax-free treatment. Tax amend Finally, Beatrice figures the taxable and tax-free portions of her QTP distribution based on her $3,000 of QHEE. Tax amend (See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program for more information. Tax amend ) Example 2. Tax amend Assume the same facts as in Example 1 , except that Beatrice withdrew $1,800 from her Coverdell ESA and $3,200 from her QTP. Tax amend In this case, she allocates her qualified education expenses as follows. Tax amend Using the same reasoning as in Example 1, Beatrice matches $1,000 of her Coverdell ESA distribution to her $1,000 of QESEE—she has $800 of her distribution remaining. Tax amend Because higher education expenses can also qualify a Coverdell ESA distribution for tax-free treatment, Beatrice allocates her $3,000 of QHEE between the remaining $800 Coverdell ESA and the $3,200 QTP distributions ($4,000 total). Tax amend   $3,000 QHEE × $800 ESA distribution  $4,000 total distribution = $600 QHEE (ESA)     $3,000 QHEE × $3,200 QTP distribution  $4,000 total distribution = $2,400 QHEE (QTP)   Beatrice then figures the taxable part of her: Coverdell ESA distribution based on qualified education expenses of $1,600 ($1,000 QESEE + $600 QHEE). Tax amend See Figuring the Taxable Portion of a Distribution , earlier, in this chapter. Tax amend   QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program). Tax amend The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. Tax amend However, you do not have to allocate your expenses in the same way. Tax amend You can use any reasonable method. Tax amend Losses on Coverdell ESA Investments If you have a loss on your investment in a Coverdell ESA, you may be able to deduct the loss on your income tax return. Tax amend You can deduct the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Tax amend Your basis is the total amount of contributions to that Coverdell ESA. Tax amend You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. Tax amend If you have distributions from more than one Coverdell ESA account during a year, you must combine the information (amount of distribution, basis, etc. Tax amend ) from all such accounts in order to determine your taxable earnings for the year. Tax amend By doing this, the loss from one ESA account reduces the distributed earnings (if any) from any other ESA account. Tax amend For examples of the calculation, see Losses on QTP Investments in chapter 8, Qualified Tuition Program. Tax amend Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. Tax amend Exceptions. Tax amend   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. Tax amend Made because the designated beneficiary is disabled. Tax amend A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. Tax amend A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. Tax amend Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Tax amend Made on account of the attendance of the designated beneficiary at a U. Tax amend S. Tax amend military academy (such as the USMA at West Point). Tax amend This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. Tax amend S. Tax amend Code) attributable to such attendance. Tax amend Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier). Tax amend Made before June 1, 2014, of an excess 2013 contribution (and any earnings on it). Tax amend The distributed earnings must be included in gross income for the year in which the excess contribution was made. Tax amend Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. Tax amend Figuring the additional tax. Tax amend    Use Part II of Form 5329, to figure any additional tax. Tax amend Report the amount on Form 1040, line 58, or Form 1040NR, line 56. Tax amend When Assets Must Be Distributed Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs. Tax amend The designated beneficiary reaches age 30. Tax amend In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. Tax amend However, this rule does not apply if the beneficiary is a special needs beneficiary. Tax amend The designated beneficiary dies before reaching age 30. Tax amend In this case, the remaining assets must generally be distributed within 30 days after the date of death. Tax amend Exception for Transfer to Surviving Spouse or Family Member If a Coverdell ESA is transferred to a surviving spouse or other family member as the result of the death of the designated beneficiary, the Coverdell ESA retains its status. Tax amend (“Family member” was defined earlier under Rollovers . Tax amend ) This means the spouse or other family member can treat the Coverdell ESA as his or her own and does not need to withdraw the assets until he or she reaches age 30. Tax amend This age limitation does not apply if the new beneficiary is a special needs beneficiary. Tax amend There are no tax consequences as a result of the transfer. Tax amend How To Figure the Taxable Earnings When a total distribution is made because the designated beneficiary either reached age 30 or died, the earnings that accumulated tax free in the account must be included in taxable income. Tax amend You determine these earnings as shown in the following two steps. Tax amend Multiply the amount distributed by a fraction. Tax amend The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the balance in the account at the end of 2013 plus the amount distributed during 2013. Tax amend Subtract the amount figured in (1) from the total amount distributed during 2013. Tax amend The result is the amount of earnings included in the distribution. Tax amend For an example, see steps (1) and (2) of the Example under Figuring the Taxable Portion of a Distribution, earlier. Tax amend The beneficiary or other person receiving the distribution must report this amount on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line. Tax amend Worksheet 7-3 Instructions. Tax amend Coverdell ESA—Taxable Distributions and Basis Line G. Tax amend Enter the total distributions received from all Coverdell ESAs during 2013. Tax amend Do not include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). Tax amend Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year for which the contributions were made. Tax amend Line 2. Tax amend Your basis (amount already taxed) in this Coverdell ESA as of December 31, 2012, is the total of:   •All contributions to this Coverdell ESA before 2013 •Minus the tax-free portion of any distributions from this Coverdell ESA before 2013. Tax amend   If your last distribution from this Coverdell ESA was before 2013, you must start with the basis in your account as of the end of the last year in which you took a distribution. Tax amend For years before 2002, you can find that amount on the last line of the worksheet in the Instructions for Form 8606, Nondeductible IRAs, that you completed for that year. Tax amend For years after 2001, you can find that amount by using the ending basis from the worksheet in Publication 970 for that year. Tax amend You can determine your basis in this Coverdell ESA as of December 31, 2012, by adding to the basis as of the end of that year any contributions made to that account after the year of the distribution and before 2013. Tax amend Line 4. Tax amend Enter the total distributions received from this Coverdell ESA in 2013. Tax amend Do not include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). Tax amend   Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year of the contributions. Tax amend Line 7. Tax amend Enter the total value of this Coverdell ESA as of December 31, 2013, plus any outstanding rollovers contributed to the account after 2012, but before the end of the 60-day rollover period. Tax amend A statement should be sent to you by January 31, 2014, for this Coverdell ESA showing the value on December 31, 2013. Tax amend   A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. Tax amend An outstanding rollover is any amount withdrawn within 60 days before the end of 2013 (November 2 through December 31) that was rolled over after December 31, 2013, but within the 60-day rollover period. Tax amend Worksheet 7-3. Tax amend Coverdell ESA—Taxable Distributions and Basis How to complete this worksheet. Tax amend • • • Complete Part I, lines A through H, on only one worksheet. Tax amend  Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs. Tax amend  Complete Part III, the Summary (line 16), on only one worksheet. Tax amend Part I. Tax amend Qualified Education Expenses (Complete for total expenses)       A. Tax amend Enter your total qualified education expenses for 2013   A. Tax amend   B. Tax amend Enter those qualified education expenses paid for with tax-free educational assistance (for example, tax-free scholarships, veterans' educational benefits, Pell grants, employer-provided educational assistance)   B. Tax amend         C. Tax amend Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040). Tax amend Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040 or 1040NR)   C. Tax amend         D. Tax amend Enter those qualified higher education expenses on which  an American opportunity or lifetime learning credit was based   D. Tax amend         E. Tax amend Add lines B, C, and D   D. Tax amend   F. Tax amend Subtract line E from line A. Tax amend This is your adjusted qualified education expense for 2013   E. Tax amend   G. Tax amend Enter your total distributions from all Coverdell ESAs during 2013. Tax amend Do not include rollovers  or the return of excess contributions (see instructions)   F. Tax amend   H. Tax amend Divide line F by line G. Tax amend Enter the result as a decimal (rounded to at least 3 places). Tax amend If the  result is 1. Tax amend 000 or more, enter 1. Tax amend 000   G. Tax amend . Tax amend Part II. Tax amend Taxable Distributions and Basis (Complete separately for each account) 1. Tax amend Enter the amount contributed to this Coverdell ESA for 2013, including contributions made for 2013 from January 1, 2014, through April 15, 2014. Tax amend Do not include rollovers or the return of excess contributions   1. Tax amend   2. Tax amend Enter your basis in this Coverdell ESA as of December 31, 2012 (see instructions)   2. Tax amend   3. Tax amend Add lines 1 and 2   3. Tax amend   4. Tax amend Enter the total distributions from this Coverdell ESA during 2013. Tax amend Do not include rollovers  or the return of excess contributions (see instructions)   4. Tax amend   5. Tax amend Multiply line 4 by line H. Tax amend This is the amount of adjusted qualified  education expense attributable to this Coverdell ESA   5. Tax amend         6. Tax amend Subtract line 5 from line 4   6. Tax amend         7. Tax amend Enter the total value of this Coverdell ESA as of December 31, 2013,  plus any outstanding rollovers (see instructions)   7. Tax amend         8. Tax amend Add lines 4 and 7   8. Tax amend         9. Tax amend Divide line 3 by line 8. Tax amend Enter the result as a decimal (rounded to  at least 3 places). Tax amend If the result is 1. Tax amend 000 or more, enter 1. Tax amend 000   9. Tax amend . Tax amend       10. Tax amend Multiply line 4 by line 9. Tax amend This is the amount of basis allocated to your  distributions, and is tax free   10. Tax amend     Note. Tax amend If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15. Tax amend       11. Tax amend Subtract line 10 from line 4   11. Tax amend   12. Tax amend Divide line 5 by line 4. Tax amend Enter the result as a decimal (rounded to  at least 3 places). Tax amend If the result is 1. Tax amend 000 or more, enter 1. Tax amend 000   12. Tax amend . Tax amend       13. Tax amend Multiply line 11 by line 12. Tax amend This is the amount of qualified education  expenses allocated to your distributions, and is tax free   13. Tax amend   14. Tax amend Subtract line 13 from line 11. Tax amend This is the portion of the distributions from this  Coverdell ESA in 2013 that you must include in income   14. Tax amend   15. Tax amend Subtract line 10 from line 3. Tax amend This is your basis in this Coverdell ESA as of December 31, 2013   15. Tax amend   Part III. Tax amend Summary (Complete only once)       16. Tax amend Taxable amount. Tax amend Add together all amounts on line 14 for all your Coverdell ESAs. Tax amend Enter here  and include on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line   16. Tax amend   Prev  Up  Next   Home   More Online Publications