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Taxaide Publication 561 - Main Contents Table of Contents What Is Fair Market Value (FMV)?Factors. Taxaide Stock. Taxaide Options. Taxaide Determining Fair Market Value Problems in Determining Fair Market Value Valuation of Various Kinds of PropertyHousehold Goods Used Clothing Jewelry and Gems Paintings, Antiques, and Other Objects of Art Collections Cars, Boats, and Aircraft Inventory Patents Stocks and Bonds Real Estate Interest in a Business Annuities, Interests for Life or Terms of Years, Remainders, and Reversions Certain Life Insurance and Annuity Contracts Partial Interest in Property Not in Trust AppraisalsDeductions of More Than $5,000 Deductions of More Than $500,000 Qualified Appraisal Form 8283 Internal Revenue Service Review of Appraisals Penalty How To Get Tax HelpLow income tax clinics (LITCs). Taxaide What Is Fair Market Value (FMV)? To figure how much you may deduct for property that you contribute, you must first determine its fair market value on the date of the contribution. Taxaide Fair market value. Taxaide   Fair market value (FMV) is the price that property would sell for on the open market. Taxaide It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts. Taxaide If you put a restriction on the use of property you donate, the FMV must reflect that restriction. Taxaide Example 1. Taxaide If you give used clothing to the Salvation Army, the FMV would be the price that typical buyers actually pay for clothing of this age, condition, style, and use. Taxaide Usually, such items are worth far less than what you paid for them. Taxaide Example 2. Taxaide If you donate land and restrict its use to agricultural purposes, you must value the land at its value for agricultural purposes, even though it would have a higher FMV if it were not restricted. Taxaide Factors. Taxaide   In making and supporting the valuation of property, all factors affecting value are relevant and must be considered. Taxaide These include: The cost or selling price of the item, Sales of comparable properties, Replacement cost, and Opinions of experts. Taxaide   These factors are discussed later. Taxaide Also, see Table 1 for a summary of questions to ask as you consider each factor. Taxaide Date of contribution. Taxaide   Ordinarily, the date of a contribution is the date that the transfer of the property takes place. Taxaide Stock. Taxaide   If you deliver, without any conditions, a properly endorsed stock certificate to a qualified organization or to an agent of the organization, the date of the contribution is the date of delivery. Taxaide If the certificate is mailed and received through the regular mail, it is the date of mailing. Taxaide If you deliver the certificate to a bank or broker acting as your agent or to the issuing corporation or its agent, for transfer into the name of the organization, the date of the contribution is the date the stock is transferred on the books of the corporation. Taxaide Options. Taxaide   If you grant an option to a qualified organization to buy real property, you have not made a charitable contribution until the organization exercises the option. Taxaide The amount of the contribution is the FMV of the property on the date the option is exercised minus the exercise price. Taxaide Example. Taxaide You grant an option to a local university, which is a qualified organization, to buy real property. Taxaide Under the option, the university could buy the property at any time during a 2-year period for $40,000. Taxaide The FMV of the property on the date the option is granted is $50,000. Taxaide In the following tax year, the university exercises the option. Taxaide The FMV of the property on the date the option is exercised is $55,000. Taxaide Therefore, you have made a charitable contribution of $15,000 ($55,000, the FMV, minus $40,000, the exercise price) in the tax year the option is exercised. Taxaide Determining Fair Market Value Determining the value of donated property would be a simple matter if you could rely only on fixed formulas, rules, or methods. Taxaide Usually it is not that simple. Taxaide Using such formulas, etc. Taxaide , seldom results in an acceptable determination of FMV. Taxaide There is no single formula that always applies when determining the value of property. Taxaide This is not to say that a valuation is only guesswork. Taxaide You must consider all the facts and circumstances connected with the property, such as its desirability, use, and scarcity. Taxaide For example, donated furniture should not be evaluated at some fixed rate such as 15% of the cost of new replacement furniture. Taxaide When the furniture is contributed, it may be out of style or in poor condition, therefore having little or no market value. Taxaide On the other hand, it may be an antique, the value of which could not be determined by using any formula. Taxaide Cost or Selling Price of the Donated Property The cost of the property to you or the actual selling price received by the qualified organization may be the best indication of its FMV. Taxaide However, because conditions in the market change, the cost or selling price of property may have less weight if the property was not bought or sold reasonably close to the date of contribution. Taxaide The cost or selling price is a good indication of the property's value if: The purchase or sale took place close to the valuation date in an open market, The purchase or sale was at “arm's-length,” The buyer and seller knew all relevant facts, The buyer and seller did not have to act, and The market did not change between the date of purchase or sale and the valuation date. Taxaide Example. Taxaide Tom Morgan, who is not a dealer in gems, bought an assortment of gems for $5,000 from a promoter. Taxaide The promoter claimed that the price was “wholesale” even though he and other dealers made similar sales at similar prices to other persons who were not dealers. Taxaide The promoter said that if Tom kept the gems for more than 1 year and then gave them to charity, Tom could claim a charitable deduction of $15,000, which, according to the promoter, would be the value of the gems at the time of contribution. Taxaide Tom gave the gems to a qualified charity 13 months after buying them. Taxaide The selling price for these gems had not changed from the date of purchase to the date he donated them to charity. Taxaide The best evidence of FMV depends on actual transactions and not on some artificial estimate. Taxaide The $5,000 charged Tom and others is, therefore, the best evidence of the maximum FMV of the gems. Taxaide Terms of the purchase or sale. Taxaide   The terms of the purchase or sale should be considered in determining FMV if they influenced the price. Taxaide These terms include any restrictions, understandings, or covenants limiting the use or disposition of the property. Taxaide Rate of increase or decrease in value. Taxaide   Unless you can show that there were unusual circumstances, it is assumed that the increase or decrease in the value of your donated property from your cost has been at a reasonable rate. Taxaide For time adjustments, an appraiser may consider published price indexes for information on general price trends, building costs, commodity costs, securities, and works of art sold at auction in arm's-length sales. Taxaide Example. Taxaide Bill Brown bought a painting for $10,000. Taxaide Thirteen months later he gave it to an art museum, claiming a charitable deduction of $15,000 on his tax return. Taxaide The appraisal of the painting should include information showing that there were unusual circumstances that justify a 50% increase in value for the 13 months Bill held the property. Taxaide Arm's-length offer. Taxaide   An arm's-length offer to buy the property close to the valuation date may help to prove its value if the person making the offer was willing and able to complete the transaction. Taxaide To rely on an offer, you should be able to show proof of the offer and the specific amount to be paid. Taxaide Offers to buy property other than the donated item will help to determine value if the other property is reasonably similar to the donated property. Taxaide Sales of Comparable Properties The sales prices of properties similar to the donated property are often important in determining the FMV. Taxaide The weight to be given to each sale depends on the following. Taxaide The degree of similarity between the property sold and the donated property. Taxaide The time of the sale—whether it was close to the valuation date. Taxaide The circumstances of the sale—whether it was at arm's-length with a knowledgeable buyer and seller, with neither having to act. Taxaide The conditions of the market in which the sale was made—whether unusually inflated or deflated. Taxaide The comparable sales method of valuing real estate is explained later under Valuation of Various Kinds of Property. Taxaide Example 1. Taxaide Mary Black, who is not a book dealer, paid a promoter $10,000 for 500 copies of a single edition of a modern translation of the Bible. Taxaide The promoter had claimed that the price was considerably less than the “retail” price, and gave her a statement that the books had a total retail value of $30,000. Taxaide The promoter advised her that if she kept the Bibles for more than 1 year and then gave them to a qualified organization, she could claim a charitable deduction for the “retail” price of $30,000. Taxaide Thirteen months later she gave all the Bibles to a church that she selected from a list provided by the promoter. Taxaide At the time of her donation, wholesale dealers were selling similar quantities of Bibles to the general public for $10,000. Taxaide The FMV of the Bibles is $10,000, the price at which similar quantities of Bibles were being sold to others at the time of the contribution. Taxaide Example 2. Taxaide The facts are the same as in Example 1, except that the promoter gave Mary Black a second option. Taxaide The promoter said that if Mary wanted a charitable deduction within 1 year of the purchase, she could buy the 500 Bibles at the “retail” price of $30,000, paying only $10,000 in cash and giving a promissory note for the remaining $20,000. Taxaide The principal and interest on the note would not be due for 12 years. Taxaide According to the promoter, Mary could then, within 1 year of the purchase, give the Bibles to a qualified organization and claim the full $30,000 retail price as a charitable contribution. Taxaide She purchased the Bibles under the second option and, 3 months later, gave them to a church, which will use the books for church purposes. Taxaide At the time of the gift, the promoter was selling similar lots of Bibles for either $10,000 or $30,000. Taxaide The difference between the two prices was solely at the discretion of the buyer. Taxaide The promoter was a willing seller for $10,000. Taxaide Therefore, the value of Mary's contribution of the Bibles is $10,000, the amount at which similar lots of Bibles could be purchased from the promoter by members of the general public. Taxaide Replacement Cost The cost of buying, building, or manufacturing property similar to the donated item should be considered in determining FMV. Taxaide However, there must be a reasonable relationship between the replacement cost and the FMV. Taxaide The replacement cost is the amount it would cost to replace the donated item on the valuation date. Taxaide Often there is no relationship between the replacement cost and the FMV. Taxaide If the supply of the donated property is more or less than the demand for it, the replacement cost becomes less important. Taxaide To determine the replacement cost of the donated property, find the “estimated replacement cost new. Taxaide ” Then subtract from this figure an amount for depreciation due to the physical condition and obsolescence of the donated property. Taxaide You should be able to show the relationship between the depreciated replacement cost and the FMV, as well as how you arrived at the “estimated replacement cost new. Taxaide ” Opinions of Experts Generally, the weight given to an expert's opinion on matters such as the authenticity of a coin or a work of art, or the most profitable and best use of a piece of real estate, depends on the knowledge and competence of the expert and the thoroughness with which the opinion is supported by experience and facts. Taxaide For an expert's opinion to deserve much weight, the facts must support the opinion. Taxaide For additional information, see Appraisals, later. Taxaide Table 1. Taxaide Factors That Affect FMV IF the factor you are considering is. Taxaide . Taxaide . Taxaide THEN you should ask these questions. Taxaide . Taxaide . Taxaide     cost or selling price Was the purchase or sale of the property reasonably close to the date of contribution? Was any increase or decrease in value, as compared to your cost, at a reasonable rate? Do the terms of purchase or sale limit what can be done with the property? Was there an arm's-length offer to buy the property close to the valuation date?     sales of comparable properties How similar is the property sold to the property donated? How close is the date of sale to the valuation date? Was the sale at arm's-length? What was the condition of the market at the time of sale?     replacement cost What would it cost to replace the donated property? Is there a reasonable relationship between replacement cost and FMV? Is the supply of the donated property more or less than the demand for it?     opinions of experts Is the expert knowledgeable and competent? Is the opinion thorough and supported by facts and experience? Problems in Determining Fair Market Value There are a number of problems in determining the FMV of donated property. Taxaide Unusual Market Conditions The sale price of the property itself in an arm's-length transaction in an open market is often the best evidence of its value. Taxaide When you rely on sales of comparable property, the sales must have been made in an open market. Taxaide If those sales were made in a market that was artificially supported or stimulated so as not to be truly representative, the prices at which the sales were made will not indicate the FMV. Taxaide For example, liquidation sale prices usually do not indicate the FMV. Taxaide Also, sales of stock under unusual circumstances, such as sales of small lots, forced sales, and sales in a restricted market, may not represent the FMV. Taxaide Selection of Comparable Sales Using sales of comparable property is an important method for determining the FMV of donated property. Taxaide However, the amount of weight given to a sale depends on the degree of similarity between the comparable and the donated properties. Taxaide The degree of similarity must be close enough so that this selling price would have been given consideration by reasonably well-informed buyers or sellers of the property. Taxaide Example. Taxaide You give a rare, old book to your former college. Taxaide The book is a third edition and is in poor condition because of a missing back cover. Taxaide You discover that there was a sale for $300, near the valuation date, of a first edition of the book that was in good condition. Taxaide Although the contents are the same, the books are not at all similar because of the different editions and their physical condition. Taxaide Little consideration would be given to the selling price of the $300 property by knowledgeable buyers or sellers. Taxaide Future Events You may not consider unexpected events happening after your donation of property in making the valuation. Taxaide You may consider only the facts known at the time of the gift, and those that could be reasonably expected at the time of the gift. Taxaide Example. Taxaide You give farmland to a qualified charity. Taxaide The transfer provides that your mother will have the right to all income and full use of the property for her life. Taxaide Even though your mother dies 1 week after the transfer, the value of the property on the date it is given is its present value, subject to the life interest as estimated from actuarial tables. Taxaide You may not take a higher deduction because the charity received full use and possession of the land only 1 week after the transfer. Taxaide Using Past Events to Predict the Future A common error is to rely too much on past events that do not fairly reflect the probable future earnings and FMV. Taxaide Example. Taxaide You give all your rights in a successful patent to your favorite charity. Taxaide Your records show that before the valuation date there were three stages in the patent's history of earnings. Taxaide First, there was rapid growth in earnings when the invention was introduced. Taxaide Then, there was a period of high earnings when the invention was being exploited. Taxaide Finally, there was a decline in earnings when competing inventions were introduced. Taxaide The entire history of earnings may be relevant in estimating the future earnings. Taxaide However, the appraiser must not rely too much on the stage of rapid growth in earnings, or of high earnings. Taxaide The market conditions at those times do not represent the condition of the market at the valuation date. Taxaide What is most significant is the trend of decline in earnings up to the valuation date. Taxaide For more information about donations of patents, see Patents, later. Taxaide Valuation of Various Kinds of Property This section contains information on determining the FMV of ordinary kinds of donated property. Taxaide For information on appraisals, see Appraisals, later. Taxaide Household Goods The FMV of used household goods, such as furniture, appliances, and linens, is usually much lower than the price paid when new. Taxaide Such used property may have little or no market value because of its worn condition. Taxaide It may be out of style or no longer useful. Taxaide You cannot take a deduction for household goods donated after August 17, 2006, unless they are in good used condition or better. Taxaide A household good that is not in good used condition or better for which you take a deduction of more than $500 requires a qualified appraisal. Taxaide See Deduction over $500 for certain clothing or household items, later. Taxaide If the property is valuable because it is old or unique, see the discussion under Paintings, Antiques, and Other Objects of Art. Taxaide Used Clothing Used clothing and other personal items are usually worth far less than the price you paid for them. Taxaide Valuation of items of clothing does not lend itself to fixed formulas or methods. Taxaide The price that buyers of used items actually pay in used clothing stores, such as consignment or thrift shops, is an indication of the value. Taxaide You cannot take a deduction for clothing donated after August 17, 2006, unless it is in good used condition or better. Taxaide An item of clothing that is not in good used condition or better for which you take a deduction of more than $500 requires a qualified appraisal. Taxaide See Deduction over $500 for certain clothing or household items, later. Taxaide For valuable furs or very expensive gowns, a Form 8283 may have to be sent with your tax return. Taxaide Jewelry and Gems Jewelry and gems are of such a specialized nature that it is almost always necessary to get an appraisal by a specialized jewelry appraiser. Taxaide The appraisal should describe, among other things, the style of the jewelry, the cut and setting of the gem, and whether it is now in fashion. Taxaide If not in fashion, the possibility of having the property redesigned, recut, or reset should be reported in the appraisal. Taxaide The stone's coloring, weight, cut, brilliance, and flaws should be reported and analyzed. Taxaide Sentimental personal value has no effect on FMV. Taxaide But if the jewelry was owned by a famous person, its value might increase. Taxaide Paintings, Antiques, and Other Objects of Art Your deduction for contributions of paintings, antiques, and other objects of art, should be supported by a written appraisal from a qualified and reputable source, unless the deduction is $5,000 or less. Taxaide Examples of information that should be included in appraisals of art objects—paintings in particular—are found later under Qualified Appraisal. Taxaide Art valued at $20,000 or more. Taxaide   If you claim a deduction of $20,000 or more for donations of art, you must attach a complete copy of the signed appraisal to your return. Taxaide For individual objects valued at $20,000 or more, a photograph of a size and quality fully showing the object, preferably an 8 x 10 inch color photograph or a color transparency no smaller than 4 x 5 inches, must be provided upon request. Taxaide Art valued at $50,000 or more. Taxaide   If you donate an item of art that has been appraised at $50,000 or more, you can request a Statement of Value for that item from the IRS. Taxaide You must request the statement before filing the tax return that reports the donation. Taxaide Your request must include the following. Taxaide A copy of a qualified appraisal of the item. Taxaide See Qualified Appraisal, later. Taxaide A $2,500 check or money order payable to the Internal Revenue Service for the user fee that applies to your request regarding one, two, or three items of art. Taxaide Add $250 for each item in excess of three. Taxaide A completed Form 8283, Section B. Taxaide The location of the IRS territory that has examination responsibility for your return. Taxaide If your request lacks essential information, you will be notified and given 30 days to provide the missing information. Taxaide   Send your request to: Internal Revenue Service Attention: Art Appraisal (C:AP:ART) P. Taxaide O. Taxaide Box 27720 McPherson Station Washington, DC 20038 Refunds. Taxaide   You can withdraw your request for a Statement of Value at any time before it is issued. Taxaide However, the IRS will not refund the user fee if you do. Taxaide   If the IRS declines to issue a Statement of Value in the interest of efficient tax administration, the IRS will refund the user fee. Taxaide Authenticity. Taxaide   The authenticity of the donated art must be determined by the appraiser. Taxaide Physical condition. Taxaide   Important items in the valuation of antiques and art are physical condition and extent of restoration. Taxaide These have a significant effect on the value and must be fully reported in an appraisal. Taxaide An antique in damaged condition, or lacking the “original brasses,” may be worth much less than a similar piece in excellent condition. Taxaide Art appraisers. Taxaide   More weight will usually be given to an appraisal prepared by an individual specializing in the kind and price range of the art being appraised. Taxaide Certain art dealers or appraisers specialize, for example, in old masters, modern art, bronze sculpture, etc. Taxaide Their opinions on the authenticity and desirability of such art would usually be given more weight than the opinions of more generalized art dealers or appraisers. Taxaide They can report more recent comparable sales to support their opinion. Taxaide   To identify and locate experts on unique, specialized items or collections, you may wish to use the current Official Museum Directory of the American Association of Museums. Taxaide It lists museums both by state and by category. Taxaide   To help you locate a qualified appraiser for your donation, you may wish to ask an art historian at a nearby college or the director or curator of a local museum. Taxaide The Yellow Pages often list specialized art and antique dealers, auctioneers, and art appraisers. Taxaide You may be able to find a qualified appraiser on the Internet. Taxaide You may also contact associations of dealers for guidance. Taxaide Collections Since many kinds of hobby collections may be the subject of a charitable donation, it is not possible to discuss all of the possible collectibles in this publication. Taxaide Most common are rare books, autographs, sports memorabilia, dolls, manuscripts, stamps, coins, guns, phonograph records, and natural history items. Taxaide Many of the elements of valuation that apply to paintings and other objects of art, discussed earlier, also apply to miscellaneous collections. Taxaide Reference material. Taxaide   Publications available to help you determine the value of many kinds of collections include catalogs, dealers' price lists, and specialized hobby periodicals. Taxaide When using one of these price guides, you must use the current edition at the date of contribution. Taxaide However, these sources are not always reliable indicators of FMV and should be supported by other evidence. Taxaide   For example, a dealer may sell an item for much less than is shown on a price list, particularly after the item has remained unsold for a long time. Taxaide The price an item sold for in an auction may have been the result of a rigged sale or a mere bidding duel. Taxaide The appraiser must analyze the reference material, and recognize and make adjustments for misleading entries. Taxaide If you are donating a valuable collection, you should get an appraisal. Taxaide If your donation appears to be of little value, you may be able to make a satisfactory valuation using reference materials available at a state, city, college, or museum library. Taxaide Stamp collections. Taxaide   Most libraries have catalogs or other books that report the publisher's estimate of values. Taxaide Generally, two price levels are shown for each stamp: the price postmarked and the price not postmarked. Taxaide Stamp dealers generally know the value of their merchandise and are able to prepare satisfactory appraisals of valuable collections. Taxaide Coin collections. Taxaide   Many catalogs and other reference materials show the writer's or publisher's opinion of the value of coins on or near the date of the publication. Taxaide Like many other collectors' items, the value of a coin depends on the demand for it, its age, and its rarity. Taxaide Another important factor is the coin's condition. Taxaide For example, there is a great difference in the value of a coin that is in mint condition and a similar coin that is only in good condition. Taxaide   Catalogs usually establish a category for coins, based on their physical condition—mint or uncirculated, extremely fine, very fine, fine, very good, good, fair, or poor—with a different valuation for each category. Taxaide Books. Taxaide   The value of books is usually determined by selecting comparable sales and adjusting the prices according to the differences between the comparable sales and the item being evaluated. Taxaide This is difficult to do and, except for a collection of little value, should be done by a specialized appraiser. Taxaide Within the general category of literary property, there are dealers who specialize in certain areas, such as Americana, foreign imports, Bibles, and scientific books. Taxaide Modest value of collection. Taxaide   If the collection you are donating is of modest value, not requiring a written appraisal, the following information may help you in determining the FMV. Taxaide   A book that is very old, or very rare, is not necessarily valuable. Taxaide There are many books that are very old or rare, but that have little or no market value. Taxaide Condition of book. Taxaide   The condition of a book may have a great influence on its value. Taxaide Collectors are interested in items that are in fine, or at least good, condition. Taxaide When a book has a missing page, a loose binding, tears, stains, or is otherwise in poor condition, its value is greatly lowered. Taxaide Other factors. Taxaide   Some other factors in the valuation of a book are the kind of binding (leather, cloth, paper), page edges, and illustrations (drawings and photographs). Taxaide Collectors usually want first editions of books. Taxaide However, because of changes or additions, other editions are sometimes worth as much as, or more than, the first edition. Taxaide Manuscripts, autographs, diaries, and similar items. Taxaide   When these items are handwritten, or at least signed by famous people, they are often in demand and are valuable. Taxaide The writings of unknowns also may be of value if they are of unusual historical or literary importance. Taxaide Determining the value of such material is difficult. Taxaide For example, there may be a great difference in value between two diaries that were kept by a famous person—one kept during childhood and the other during a later period in his or her life. Taxaide The appraiser determines a value in these cases by applying knowledge and judgment to such factors as comparable sales and conditions. Taxaide Signatures. Taxaide   Signatures, or sets of signatures, that were cut from letters or other papers usually have little or no value. Taxaide But complete sets of the signatures of U. Taxaide S. Taxaide presidents are in demand. Taxaide Cars, Boats, and Aircraft If you donate a car, a boat, or an aircraft to a charitable organization, its FMV must be determined. Taxaide Certain commercial firms and trade organizations publish monthly or seasonal guides for different regions of the country, containing complete dealer sale prices or dealer average prices for recent model years. Taxaide Prices are reported for each make, model, and year. Taxaide These guides also provide estimates for adjusting for unusual equipment, unusual mileage, and physical condition. Taxaide The prices are not “official,” and these publications are not considered an appraisal of any specific donated property. Taxaide But they do provide clues for making an appraisal and suggest relative prices for comparison with current sales and offerings in your area. Taxaide These publications are sometimes available from public libraries or at a bank, credit union, or finance company. Taxaide You can also find pricing information about used cars on the Internet. Taxaide An acceptable measure of the FMV of a donated car, boat, or airplane is an amount not in excess of the price listed in a used vehicle pricing guide for a private party sale, not the dealer retail value, of a similar vehicle. Taxaide However, the FMV may be less than that amount if the vehicle has engine trouble, body damage, high mileage, or any type of excessive wear. Taxaide The FMV of a donated vehicle is the same as the price listed in a used vehicle pricing guide for a private party sale only if the guide lists a sales price for a vehicle that is the same make, model, and year, sold in the same area, in the same condition, with the same or similar options or accessories, and with the same or similar warranties as the donated vehicle. Taxaide Example. Taxaide You donate a used car in poor condition to a local high school for use by students studying car repair. Taxaide A used car guide shows the dealer retail value for this type of car in poor condition is $1,600. Taxaide However, the guide shows the price for a private party sale of the car is only $750. Taxaide The FMV of the car is considered to be no more than $750. Taxaide Boats. Taxaide   Except for inexpensive small boats, the valuation of boats should be based on an appraisal by a marine surveyor because the physical condition is so critical to the value. Taxaide More information. Taxaide   Your deduction for a donated car, boat, or airplane generally is limited to the gross proceeds from its sale by the qualified organization. Taxaide This rule applies if the claimed value of the donated vehicle is more than $500. Taxaide In certain cases, you can deduct the vehicle's FMV. Taxaide For details, see Publication 526. Taxaide Inventory If you donate any inventory item to a charitable organization, the amount of your deductible contribution generally is the FMV of the item, minus any gain you would have realized if you had sold the item at its FMV on the date of the gift. Taxaide For more information, see Publication 526. Taxaide Patents To determine the FMV of a patent, you must take into account, among other factors: Whether the patented technology has been made obsolete by other technology; Any restrictions on the donee's use of, or ability to transfer, the patented technology; and The length of time remaining before the patent expires. Taxaide However, your deduction for a donation of a patent or other intellectual property is its FMV, minus any gain you would have realized if you had sold the property at its FMV on the date of the gift. Taxaide Generally, this means your deduction is the lesser of the property's FMV or its basis. Taxaide For details, see Publication 526. Taxaide Stocks and Bonds The value of stocks and bonds is the FMV of a share or bond on the valuation date. Taxaide See Date of contribution, earlier, under What Is Fair Market Value (FMV). Taxaide Selling prices on valuation date. Taxaide   If there is an active market for the contributed stocks or bonds on a stock exchange, in an over-the-counter market, or elsewhere, the FMV of each share or bond is the average price between the highest and lowest quoted selling prices on the valuation date. Taxaide For example, if the highest selling price for a share was $11, and the lowest $9, the average price is $10. Taxaide You get the average price by adding $11 and $9 and dividing the sum by 2. Taxaide No sales on valuation date. Taxaide   If there were no sales on the valuation date, but there were sales within a reasonable period before and after the valuation date, you determine FMV by taking the average price between the highest and lowest sales prices on the nearest date before and on the nearest date after the valuation date. Taxaide Then you weight these averages in inverse order by the respective number of trading days between the selling dates and the valuation date. Taxaide Example. Taxaide   On the day you gave stock to a qualified organization, there were no sales of the stock. Taxaide Sales of the stock nearest the valuation date took place two trading days before the valuation date at an average selling price of $10 and three trading days after the valuation date at an average selling price of $15. Taxaide The FMV on the valuation date was $12, figured as follows: [(3 x $10) + (2 x $15)] ÷ 5 = $12 Listings on more than one stock exchange. Taxaide   Stocks or bonds listed on more than one stock exchange are valued based on the prices of the exchange on which they are principally dealt. Taxaide This applies if these prices are published in a generally available listing or publication of general circulation. Taxaide If this is not applicable, and the stocks or bonds are reported on a composite listing of combined exchanges in a publication of general circulation, use the composite list. Taxaide See also Unavailable prices or closely held corporation, later. Taxaide Bid and asked prices on valuation date. Taxaide   If there were no sales within a reasonable period before and after the valuation date, the FMV is the average price between the bona fide bid and asked prices on the valuation date. Taxaide Example. Taxaide Although there were no sales of Blue Corporation stock on the valuation date, bona fide bid and asked prices were available on that date of $14 and $16, respectively. Taxaide The FMV is $15, the average price between the bid and asked prices. Taxaide No prices on valuation date. Taxaide   If there were no prices available on the valuation date, you determine FMV by taking the average prices between the bona fide bid and asked prices on the closest trading date before and after the valuation date. Taxaide Both dates must be within a reasonable period. Taxaide Then you weight these averages in inverse order by the respective number of trading days between the bid and asked dates and the valuation date. Taxaide Example. Taxaide On the day you gave stock to a qualified organization, no prices were available. Taxaide Bona fide bid and asked prices 3 days before the valuation date were $10 and 2 days after the valuation date were $15. Taxaide The FMV on the valuation date is $13, figured as follows: [(2 x $10) + (3 x $15)] ÷ 5 = $13 Prices only before or after valuation date, but not both. Taxaide   If no selling prices or bona fide bid and asked prices are available on a date within a reasonable period before the valuation date, but are available on a date within a reasonable period after the valuation date, or vice versa, then the average price between the highest and lowest of such available prices may be treated as the value. Taxaide Large blocks of stock. Taxaide   When a large block of stock is put on the market, it may lower the selling price of the stock if the supply is greater than the demand. Taxaide On the other hand, market forces may exist that will afford higher prices for large blocks of stock. Taxaide Because of the many factors to be considered, determining the value of large blocks of stock usually requires the help of experts specializing in underwriting large quantities of securities, or in trading in the securities of the industry of which the particular company is a part. Taxaide Unavailable prices or closely held corporation. Taxaide   If selling prices or bid and asked prices are not available, or if securities of a closely held corporation are involved, determine the FMV by considering the following factors. Taxaide For bonds, the soundness of the security, the interest yield, the date of maturity, and other relevant factors. Taxaide For shares of stock, the company's net worth, prospective earning power and dividend-paying capacity, and other relevant factors. Taxaide Other factors. Taxaide   Other relevant factors include: The nature and history of the business, especially its recent history, The goodwill of the business, The economic outlook in the particular industry, The company's position in the industry, its competitors, and its management, and The value of securities of corporations engaged in the same or similar business. Taxaide For preferred stock, the most important factors are its yield, dividend coverage, and protection of its liquidation preference. Taxaide   You should keep complete financial and other information on which the valuation is based. Taxaide This includes copies of reports of examinations of the company made by accountants, engineers, or any technical experts on or close to the valuation date. Taxaide Restricted securities. Taxaide   Some classes of stock cannot be traded publicly because of restrictions imposed by the Securities and Exchange Commission, or by the corporate charter or a trust agreement. Taxaide These restricted securities usually trade at a discount in relation to freely traded securities. Taxaide   To arrive at the FMV of restricted securities, factors that you must consider include the resale provisions found in the restriction agreements, the relative negotiating strengths of the buyer and seller, and the market experience of freely traded securities of the same class as the restricted securities. Taxaide Real Estate Because each piece of real estate is unique and its valuation is complicated, a detailed appraisal by a professional appraiser is necessary. Taxaide The appraiser must be thoroughly trained in the application of appraisal principles and theory. Taxaide In some instances the opinions of equally qualified appraisers may carry unequal weight, such as when one appraiser has a better knowledge of local conditions. Taxaide The appraisal report must contain a complete description of the property, such as street address, legal description, and lot and block number, as well as physical features, condition, and dimensions. Taxaide The use to which the property is put, zoning and permitted uses, and its potential use for other higher and better uses are also relevant. Taxaide In general, there are three main approaches to the valuation of real estate. Taxaide An appraisal may require the combined use of two or three methods rather than one method only. Taxaide 1. Taxaide Comparable Sales The comparable sales method compares the donated property with several similar properties that have been sold. Taxaide The selling prices, after adjustments for differences in date of sale, size, condition, and location, would then indicate the estimated FMV of the donated property. Taxaide If the comparable sales method is used to determine the value of unimproved real property (land without significant buildings, structures, or any other improvements that add to its value), the appraiser should consider the following factors when comparing the potential comparable property and the donated property: Location, size, and zoning or use restrictions, Accessibility and road frontage, and available utilities and water rights, Riparian rights (right of access to and use of the water by owners of land on the bank of a river) and existing easements, rights-of-way, leases, etc. Taxaide , Soil characteristics, vegetative cover, and status of mineral rights, and Other factors affecting value. Taxaide For each comparable sale, the appraisal must include the names of the buyer and seller, the deed book and page number, the date of sale and selling price, a property description, the amount and terms of mortgages, property surveys, the assessed value, the tax rate, and the assessor's appraised FMV. Taxaide The comparable selling prices must be adjusted to account for differences between the sale property and the donated property. Taxaide Because differences of opinion may arise between appraisers as to the degree of comparability and the amount of the adjustment considered necessary for comparison purposes, an appraiser should document each item of adjustment. Taxaide Only comparable sales having the least adjustments in terms of items and/or total dollar adjustments should be considered as comparable to the donated property. Taxaide 2. Taxaide Capitalization of Income This method capitalizes the net income from the property at a rate that represents a fair return on the particular investment at the particular time, considering the risks involved. Taxaide The key elements are the determination of the income to be capitalized and the rate of capitalization. Taxaide 3. Taxaide Replacement Cost New or Reproduction Cost Minus Observed Depreciation This method, used alone, usually does not result in a determination of FMV. Taxaide Instead, it generally tends to set the upper limit of value, particularly in periods of rising costs, because it is reasonable to assume that an informed buyer will not pay more for the real estate than it would cost to reproduce a similar property. Taxaide Of course, this reasoning does not apply if a similar property cannot be created because of location, unusual construction, or some other reason. Taxaide Generally, this method serves to support the value determined from other methods. Taxaide When the replacement cost method is applied to improved realty, the land and improvements are valued separately. Taxaide The replacement cost of a building is figured by considering the materials, the quality of workmanship, and the number of square feet or cubic feet in the building. Taxaide This cost represents the total cost of labor and material, overhead, and profit. Taxaide After the replacement cost has been figured, consideration must be given to the following factors: Physical deterioration—the wear and tear on the building itself, Functional obsolescence—usually in older buildings with, for example, inadequate lighting, plumbing, or heating, small rooms, or a poor floor plan, and Economic obsolescence—outside forces causing the whole area to become less desirable. Taxaide Interest in a Business The FMV of any interest in a business, whether a sole proprietorship or a partnership, is the amount that a willing buyer would pay for the interest to a willing seller after consideration of all relevant factors. Taxaide The relevant factors to be considered in valuing the business are: The FMV of the assets of the business, The demonstrated earnings capacity of the business, based on a review of past and current earnings, and The other factors used in evaluating corporate stock, if they apply. Taxaide The value of the goodwill of the business should also be taken into consideration. Taxaide You should keep complete financial and other information on which you base the valuation. Taxaide This includes copies of reports of examinations of the business made by accountants, engineers, or any technical experts on or close to the valuation date. Taxaide Annuities, Interests for Life or Terms of Years, Remainders, and Reversions The value of these kinds of property is their present value, except in the case of annuities under contracts issued by companies regularly engaged in their sale. Taxaide The valuation of these commercial annuity contracts and of insurance policies is discussed later under Certain Life Insurance and Annuity Contracts. Taxaide To determine present value, you must know the applicable interest rate and use actuarial tables. Taxaide Interest rate. Taxaide   The applicable interest rate varies. Taxaide It is announced monthly in a news release and published in the Internal Revenue Bulletin as a Revenue Ruling. Taxaide The interest rate to use is under the heading “Rate Under Section 7520” for a given month and year. Taxaide You can call the IRS office at 1-800-829-1040 to obtain this rate. Taxaide Actuarial tables. Taxaide   You need to refer to actuarial tables to determine a qualified interest in the form of an annuity, any interest for life or a term of years, or any remainder interest to a charitable organization. Taxaide   Use the valuation tables set forth in IRS Publications 1457, Actuarial Values (Book Aleph), and 1458, Actuarial Values (Book Beth). Taxaide Both of these publications provide tables containing actuarial factors to be used in determining the present value of an annuity, an interest for life or for a term of years, or a remainder or reversionary interest. Taxaide For qualified charitable transfers, you can use the factor for the month in which you made the contribution or for either of the 2 months preceding that month. Taxaide   Publication 1457 also contains actuarial factors for computing the value of a remainder interest in a charitable remainder annuity trust and a pooled income fund. Taxaide Publication 1458 contains the factors for valuing the remainder interest in a charitable remainder unitrust. Taxaide You can download Publications 1457 and 1458 from www. Taxaide irs. Taxaide gov. Taxaide In addition, they are available for purchase via the website of the U. Taxaide S. Taxaide Government Printing Office, by phone at (202) 512-1800, or by mail from the: Superintendent of Documents P. Taxaide O. Taxaide Box 371954 Pittsburgh, PA 15250-7954 Tables containing actuarial factors for transfers to pooled income funds may also be found in Income Tax Regulation 1. Taxaide 642(c)-6(e)(6), transfers to charitable remainder unitrusts in Regulation 1. Taxaide 664-4(e), and other transfers in Regulation 20. Taxaide 2031-7(d)(6). Taxaide Special factors. Taxaide   If you need a special factor for an actual transaction, you can request a letter ruling. Taxaide Be sure to include the date of birth of each person the duration of whose life may affect the value of the interest. Taxaide Also include copies of the relevant instruments. Taxaide IRS charges a user fee for providing special factors. Taxaide   For more information about requesting a ruling, see Revenue Procedure 2006-1 (or annual update), 2006-1 I. Taxaide R. Taxaide B. Taxaide 1. Taxaide Revenue Procedure 2006-1 is available at www. Taxaide irs. Taxaide gov/irb/2006-01_IRB/ar06. Taxaide html. Taxaide   For information on the circumstances under which a charitable deduction may be allowed for the donation of a partial interest in property not in trust, see Partial Interest in Property Not in Trust, later. Taxaide Certain Life Insurance and Annuity Contracts The value of an annuity contract or a life insurance policy issued by a company regularly engaged in the sale of such contracts or policies is the amount that company would charge for a comparable contract. Taxaide But if the donee of a life insurance policy may reasonably be expected to cash the policy rather than hold it as an investment, then the FMV is the cash surrender value rather than the replacement cost. Taxaide If an annuity is payable under a combination annuity contract and life insurance policy (for example, a retirement income policy with a death benefit) and there was no insurance element when it was transferred to the charity, the policy is treated as an annuity contract. Taxaide Partial Interest in Property Not in Trust Generally, no deduction is allowed for a charitable contribution, not made in trust, of less than your entire interest in property. Taxaide However, this does not apply to a transfer of less than your entire interest if it is a transfer of: A remainder interest in your personal residence or farm, An undivided part of your entire interest in property, or A qualified conservation contribution. Taxaide Remainder Interest in Real Property The amount of the deduction for a donation of a remainder interest in real property is the FMV of the remainder interest at the time of the contribution. Taxaide To determine this value, you must know the FMV of the property on the date of the contribution. Taxaide Multiply this value by the appropriate factor. Taxaide Publications 1457 and 1458 contain these factors. Taxaide You must make an adjustment for depreciation or depletion using the factors shown in Publication 1459, Actuarial Values (Book Gimel). Taxaide You can use the factors for the month in which you made the contribution or for either of the two months preceding that month. Taxaide See the earlier discussion on Annuities, Interests for Life or Terms of Years, Remainders, and Reversions. Taxaide You can download Publication 1459 from www. Taxaide irs. Taxaide gov. Taxaide For this purpose, the term “depreciable property” means any property subject to wear and tear or obsolescence, even if not used in a trade or business or for the production of income. Taxaide If the remainder interest includes both depreciable and nondepreciable property, for example a house and land, the FMV must be allocated between each kind of property at the time of the contribution. Taxaide This rule also applies to a gift of a remainder interest that includes property that is part depletable and part not depletable. Taxaide Take into account depreciation or depletion only for the property that is subject to depreciation or depletion. Taxaide For more information, see section 1. Taxaide 170A-12 of the Income Tax Regulations. Taxaide Undivided Part of Your Entire Interest A contribution of an undivided part of your entire interest in property must consist of a part of each and every substantial interest or right you own in the property. Taxaide It must extend over the entire term of your interest in the property. Taxaide For example, you are entitled to the income from certain property for your life (life estate) and you contribute 20% of that life estate to a qualified organization. Taxaide You can claim a deduction for the contribution if you do not have any other interest in the property. Taxaide To figure the value of a contribution involving a partial interest, see Publication 1457. Taxaide If the only interest you own in real property is a remainder interest and you transfer part of that interest to a qualified organization, see the previous discussion on valuation of a remainder interest in real property. Taxaide Qualified Conservation Contribution A qualified conservation contribution is a contribution of a qualified real property interest to a qualified organization to be used only for conservation purposes. Taxaide Qualified organization. Taxaide   For purposes of a qualified conservation contribution, a qualified organization is: A governmental unit, A publicly supported charitable, religious, scientific, literary, educational, etc. Taxaide , organization, or An organization that is controlled by, and operated for the exclusive benefit of, a governmental unit or a publicly supported charity. Taxaide The organization also must have a commitment to protect the conservation purposes of the donation and must have the resources to enforce the restrictions. Taxaide Conservation purposes. Taxaide   Your contribution must be made only for one of the following conservation purposes. Taxaide Preserving land areas for outdoor recreation by, or for the education of, the general public. Taxaide Protecting a relatively natural habitat of fish, wildlife, or plants, or a similar ecosystem. Taxaide Preserving open space, including farmland and forest land, if it yields a significant public benefit. Taxaide It must be either for the scenic enjoyment of the general public or under a clearly defined federal, state, or local governmental conservation policy. Taxaide Preserving a historically important land area or a certified historic structure. Taxaide There must be some visual public access to the property. Taxaide Factors used in determining the type and amount of public access required include the historical significance of the property, the remoteness or accessibility of the site, and the extent to which intrusions on the privacy of individuals living on the property would be unreasonable. Taxaide Building in registered historic district. Taxaide   A contribution after July 25, 2006, of a qualified real property interest that is an easement or other restriction on the exterior of a building in a registered historic district is deductible only if it meets all of the following three conditions. Taxaide The restriction must preserve the entire exterior of the building and must prohibit any change to the exterior of the building that is inconsistent with its historical character. Taxaide You and the organization receiving the contribution must enter into a written agreement certifying, that the organization is a qualified organization and that it has the resources and commitment to maintain the property as donated. Taxaide If you make the contribution in a tax year beginning after August 17, 2006, you must include with your return: A qualified appraisal, Photographs of the building's entire exterior, and A description of all restrictions on development of the building, such as zoning laws and restrictive covenants. Taxaide   If you make this type of contribution after February 12, 2007, and claim a deduction of more than $10,000, your deduction will not be allowed unless you pay a $500 filing fee. Taxaide See Form 8283-V, Payment Voucher for Filing Fee Under Section 170(f)(13), and its instructions. Taxaide Qualified real property interest. Taxaide   This is any of the following interests in real property. Taxaide Your entire interest in real estate other than a mineral interest (subsurface oil, gas, or other minerals, and the right of access to these minerals). Taxaide A remainder interest. Taxaide A restriction (granted in perpetuity) on the use that may be made of the real property. Taxaide Valuation. Taxaide   A qualified real property interest described in (1) should be valued in a manner that is consistent with the type of interest transferred. Taxaide If you transferred all the interest in the property, the FMV of the property is the amount of the contribution. Taxaide If you do not transfer the mineral interest, the FMV of the surface rights in the property is the amount of the contribution. Taxaide   If you owned only a remainder interest or an income interest (life estate), see Undivided Part of Your Entire Interest, earlier. Taxaide If you owned the entire property but transferred only a remainder interest (item (2)), see Remainder Interest in Real Property, earlier. Taxaide   In determining the value of restrictions, you should take into account the selling price in arm's-length transactions of other properties that have comparable restrictions. Taxaide If there are no comparable sales, the restrictions are valued indirectly as the difference between the FMVs of the property involved before and after the grant of the restriction. Taxaide   The FMV of the property before contribution of the restriction should take into account not only current use but the likelihood that the property, without the restriction, would be developed. Taxaide You should also consider any zoning, conservation, or historical preservation laws that would restrict development. Taxaide Granting an easement may increase, rather than reduce, the value of property, and in such a situation no deduction would be allowed. Taxaide Example. Taxaide   You own 10 acres of farmland. Taxaide Similar land in the area has an FMV of $2,000 an acre. Taxaide However, land in the general area that is restricted solely to farm use has an FMV of $1,500 an acre. Taxaide Your county wants to preserve open space and prevent further development in your area. Taxaide   You grant to the county an enforceable open space easement in perpetuity on 8 of the 10 acres, restricting its use to farmland. Taxaide The value of this easement is $4,000, determined as follows: FMV of the property before granting easement:   $2,000 × 10 acres $20,000 FMV of the property after granting easement:   $1,500 × 8 acres $12,000   $2,000 × 2 acres 4,000 16,000 Value of easement   $4,000   If you later transfer in fee your remaining interest in the 8 acres to another qualified organization, the FMV of your remaining interest is the FMV of the 8 acres reduced by the FMV of the easement granted to the first organization. Taxaide More information. Taxaide   For more information about qualified conservation contributions, see Publication 526. Taxaide Appraisals Appraisals are not necessary for items of property for which you claim a deduction of $5,000 or less. Taxaide (There is one exception, described next, for certain clothing and household items. Taxaide ) However, you generally will need an appraisal for donated property for which you claim a deduction of more than $5,000. Taxaide There are exceptions. Taxaide See Deductions of More Than $5,000, later. Taxaide The weight given an appraisal depends on the completeness of the report, the qualifications of the appraiser, and the appraiser's demonstrated knowledge of the donated property. Taxaide An appraisal must give all the facts on which to base an intelligent judgment of the value of the property. Taxaide The appraisal will not be given much weight if: All the factors that apply are not considered, The opinion is not supported with facts, such as purchase price and comparable sales, or The opinion is not consistent with known facts. Taxaide The appraiser's opinion is never more valid than the facts on which it is based; without these facts it is simply a guess. Taxaide The opinion of a person claiming to be an expert is not binding on the Internal Revenue Service. Taxaide All facts associated with the donation must be considered. Taxaide Deduction over $500 for certain clothing or household items. Taxaide   You must include with your return a qualified appraisal of any single item of clothing or any household item that is not in good used condition or better, that you donated after August 17, 2006, and for which you deduct more than $500. Taxaide See Household Goods and Used Clothing, earlier. Taxaide Cost of appraisals. Taxaide   You may not take a charitable contribution deduction for fees you pay for appraisals of your donated property. Taxaide However, these fees may qualify as a miscellaneous deduction, subject to the 2% limit, on Schedule A (Form 1040) if paid to determine the amount allowable as a charitable contribution. Taxaide Deductions of More Than $5,000 Generally, if the claimed deduction for an item or group of similar items of donated property is more than $5,000, you must get a qualified appraisal made by a qualified appraiser, and you must attach Section B of Form 8283 to your tax return. Taxaide There are exceptions, discussed later. Taxaide You should keep the appraiser's report with your written records. Taxaide Records are discussed in Publication 526. Taxaide The phrase “similar items” means property of the same generic category or type (whether or not donated to the same donee), such as stamp collections, coin collections, lithographs, paintings, photographs, books, nonpublicly traded stock, nonpublicly traded securities other than nonpublicly traded stock, land, buildings, clothing, jewelry, furniture, electronic equipment, household appliances, toys, everyday kitchenware, china, crystal, or silver. Taxaide For example, if you give books to three schools and you deduct $2,000, $2,500, and $900, respectively, your claimed deduction is more than $5,000 for these books. Taxaide You must get a qualified appraisal of the books and for each school you must attach a fully completed Form 8283, Section B, to your tax return. Taxaide Exceptions. Taxaide   You do not need an appraisal if the property is: Nonpublicly traded stock of $10,000 or less, A vehicle (including a car, boat, or airplane) for which your deduction is limited to the gross proceeds from its sale, Qualified intellectual property, such as a patent, Certain publicly traded securities described next, Inventory and other property donated by a corporation that are “qualified contributions” for the care of the ill, the needy, or infants, within the meaning of section 170(e)(3)(A) of the Internal Revenue Code, or Stock in trade, inventory, or property held primarily for sale to customers in the ordinary course of your trade or business. Taxaide   Although an appraisal is not required for the types of property just listed, you must provide certain information about a donation of any of these types of property on Form 8283. Taxaide Publicly traded securities. Taxaide   Even if your claimed deduction is more than $5,000, neither a qualified appraisal nor Section B of Form 8283 is required for publicly traded securities that are: Listed on a stock exchange in which quotations are published on a daily basis, Regularly traded in a national or regional over-the-counter market for which published quotations are available, or Shares of an open-end investment company (mutual fund) for which quotations are published on a daily basis in a newspaper of general circulation throughout the United States. Taxaide Publicly traded securities that meet these requirements must be reported on Form 8283, Section A. Taxaide   A qualified appraisal is not required, but Form 8283, Section B, Parts I and IV, must be completed, for an issue of a security that does not meet the requirements just listed but does meet these requirements: The issue is regularly traded during the computation period (defined later) in a market for which there is an “interdealer quotation system” (defined later), The issuer or agent computes the “average trading price” (defined later) for the same issue for the computation period, The average trading price and total volume of the issue during the computation period are published in a newspaper of general circulation throughout the United States, not later than the last day of the month following the end of the calendar quarter in which the computation period ends, The issuer or agent keeps books and records that list for each transaction during the computation period the date of settlement of the transaction, the name and address of the broker or dealer making the market in which the transaction occurred, and the trading price and volume, and The issuer or agent permits the Internal Revenue Service to review the books and records described in item (4) with respect to transactions during the computation period upon receiving reasonable notice. Taxaide   An interdealer quotation system is any system of general circulation to brokers and dealers that regularly disseminates quotations of obligations by two or more identified brokers or dealers who are not related to either the issuer or agent who computes the average trading price of the security. Taxaide A quotation sheet prepared and distributed by a broker or dealer in the regular course of business and containing only quotations of that broker or dealer is not an interdealer quotation system. Taxaide   The average trading price is the average price of all transactions (weighted by volume), other than original issue or redemption transactions, conducted through a United States office of a broker or dealer who maintains a market in the issue of the security during the computation period. Taxaide Bid and asked quotations are not taken into account. Taxaide   The computation period is weekly during October through December and monthly during January through September. Taxaide The weekly computation periods during October through December begin with the first Monday in October and end with the first Sunday following the last Monday in December. Taxaide Nonpublicly traded stock. Taxaide   If you contribute nonpublicly traded stock, for which you claim a deduction of $10,000 or less, a qualified appraisal is not required. Taxaide However, you must attach Form 8283 to your tax return, with Section B, Parts I and IV, completed. Taxaide Deductions of More Than $500,000 If you claim a deduction of more than $500,000 for a donation of property, you must attach a qualified appraisal of the property to your return. Taxaide This does not apply to contributions of cash, inventory, publicly traded stock, or intellectual property. Taxaide If you do not attach the appraisal, you cannot deduct your contribution, unless your failure to attach the appraisal is due to reasonable cause and not to willful neglect. Taxaide Qualified Appraisal Generally, if the claimed deduction for an item or group of similar items of donated property is more than $5,000, you must get a qualified appraisal made by a qualified appraiser. Taxaide You must also complete Form 8283, Section B, and attach it to your tax return. Taxaide See Deductions of More Than $5,000, earlier. Taxaide A qualified appraisal is an appraisal document that: Is made, signed, and dated by a qualified appraiser (defined later) in accordance with generally accepted appraisal standards, Meets the relevant requirements of Regulations section 1. Taxaide 170A-13(c)(3) and Notice 2006-96, 2006-46 I. Taxaide R. Taxaide B. Taxaide 902 (available at www. Taxaide irs. Taxaide gov/irb/2006-46_IRB/ar13. Taxaide html), Relates to an appraisal made not earlier than 60 days before the date of contribution of the appraised property, Does not involve a prohibited appraisal fee, and Includes certain information (covered later). Taxaide You must receive the qualified appraisal before the due date, including extensions, of the return on which a charitable contribution deduction is first claimed for the donated property. Taxaide If the deduction is first claimed on an amended return, the qualified appraisal must be received before the date on which the amended return is filed. Taxaide Form 8283, Section B, must be attached to your tax return. Taxaide Generally, you do not need to attach the qualified appraisal itself, but you should keep a copy as long as it may be relevant under the tax law. Taxaide There are four exceptions. Taxaide If you claim a deduction of $20,000 or more for donations of art, you must attach a complete copy of the appraisal. Taxaide See Paintings, Antiques, and Other Objects of Art, earlier. Taxaide If you claim a deduction of more than $500,000 for a donation of property, you must attach the appraisal. Taxaide See Deductions of More Than $500,000, earlier. Taxaide If you claim a deduction of more than $500 for an article of clothing, or a household item, that is not in good used condition or better, that you donated after August 17, 2006, you must attach the appraisal. Taxaide See Deduction over $500 for certain clothing or household items, earlier. Taxaide If you claim a deduction in a tax year beginning after August 17, 2006, for an easement or other restriction on the exterior of a building in a historic district, you must attach the appraisal. Taxaide See Building in registered historic district, earlier. Taxaide Prohibited appraisal fee. Taxaide   Generally, no part of the fee arrangement for a qualified appraisal can be based on a percentage of the appraised value of the property. Taxaide If a fee arrangement is based on what is allowed as a deduction, after Internal Revenue Service examination or otherwise, it is treated as a fee based on a percentage of appraised value. Taxaide However, appraisals are not disqualified when an otherwise prohi
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The Taxaide

Taxaide Publication 559 - Main Content Table of Contents Personal RepresentativeDuties Fees Received by Personal Representatives Final Income Tax Return for Decedent—Form 1040Name, Address, and Signature When and Where To File Filing Requirements Income To Include Exemptions and Deductions Credits, Other Taxes, and Payments Tax Forgiveness for Armed Forces Members, Victims of Terrorism, and Astronauts Filing Reminders Other Tax InformationTax Benefits for Survivors Income in Respect of a Decedent Deductions in Respect of a Decedent Estate Tax Deduction Gifts, Insurance, and Inheritances Other Items of Income Income Tax Return of an Estate— Form 1041Filing Requirements Income To Include Exemption and Deductions Credits, Tax, and Payments Name, Address, and Signature When and Where To File Distributions to BeneficiariesIncome That Must Be Distributed Currently Other Amounts Distributed Discharge of a Legal Obligation Character of Distributions How and When To Report Bequest Termination of Estate Estate and Gift TaxesApplicable Credit Amount Gift Tax Estate Tax Generation-Skipping Transfer Tax Comprehensive ExampleFinal Return for Decedent—Form 1040 Income Tax Return of an Estate—Form 1041 How To Get Tax HelpLow Income Taxpayer Clinics Personal Representative A personal representative of an estate is an executor, administrator, or anyone who is in charge of the decedent's property. Taxaide Generally, an executor (or executrix) is named in a decedent's will to administer the estate and distribute properties as the decedent has directed. Taxaide An administrator (or administratrix) is usually appointed by the court if no will exists, if no executor was named in the will, or if the named executor cannot or will not serve. Taxaide In general, an executor and an administrator perform the same duties and have the same responsibilities. Taxaide For estate tax purposes, if there is no executor or administrator appointed, qualified, and acting within the United States, the term “executor” includes anyone in actual or constructive possession of any property of the decedent. Taxaide It includes, among others, the decedent's agents and representatives; safe-deposit companies, warehouse companies, and other custodians of property in this country; brokers holding securities of the decedent as collateral; and the debtors of the decedent who are in this country. Taxaide Duties The primary duties of a personal representative are to collect all the decedent's assets, pay his or her creditors, and distribute the remaining assets to the heirs or other beneficiaries. Taxaide The personal representative also must perform the following duties. Taxaide Apply for an employer identification number (EIN) for the estate. Taxaide File all tax returns, including income, estate and gift tax returns, when due. Taxaide Pay the tax determined up to the date of discharge from duties. Taxaide Other duties of the personal representative in federal tax matters are discussed in other sections of this publication. Taxaide If any beneficiary is a nonresident alien, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for information on the personal representative's duties as a withholding agent. Taxaide Penalty. Taxaide   There is a penalty for failure to file a tax return when due unless the failure is due to reasonable cause. Taxaide Reliance on an agent (attorney, accountant, etc. Taxaide ) is not reasonable cause for late filing. Taxaide It is the personal representative's duty to file the returns for the decedent and the estate when due. Taxaide Identification number. Taxaide   The first action you should take if you are the personal representative for the decedent is to apply for an EIN for the estate. Taxaide You should apply for this number as soon as possible because you need to enter it on returns, statements, and other documents you file concerning the estate. Taxaide You also must give the number to payers of interest and dividends and other payers who must file a return concerning the estate. Taxaide   You can get an EIN by applying online at www. Taxaide irs. Taxaide gov (click on "Apply for an EIN Online" under the Tools heading). Taxaide Generally, if you apply online, you will receive your EIN immediately upon completing the application. Taxaide You can also apply using Form SS-4, Application for Employer Identification Number. Taxaide Generally, if you apply by mail, it takes about 4 weeks to get your EIN. Taxaide See the form instructions for other ways to apply. Taxaide   Payers of interest and dividends report amounts on Forms 1099 using the identification number of the person to whom the account is payable. Taxaide After a decedent's death, Forms 1099 must reflect the identification number of the estate or beneficiary to whom the amounts are payable. Taxaide As the personal representative handling the estate, you must furnish this identification number to the payer. Taxaide For example, if interest is payable to the estate, the estate's EIN must be provided to the payer and used to report the interest on Form 1099-INT, Interest Income. Taxaide If the interest is payable to a surviving joint owner, the survivor's identification number, such as an SSN or ITIN, must be provided to the payer and used to report the interest. Taxaide   If the estate or a survivor may receive interest or dividends after you inform the payer of the decedent's death, the payer should give you (or the survivor) a Form W-9, Request for Taxpayer Identification Number and Certification (or a similar substitute form). Taxaide Complete this form to inform the payer of the estate's (or if completed by the survivor, the survivor's) identification number and return it to the payer. Taxaide    Do not use the deceased individual's identifying number to file an individual income tax return after the decedent's final tax return. Taxaide Also do not use it to make estimated tax payments for a tax year after the year of death. Taxaide Penalty. Taxaide   If you do not include the EIN or the taxpayer identification number of another person where it is required on a return, statement, or other document, you are liable for a penalty for each failure, unless you can show reasonable cause. Taxaide You also are liable for a penalty if you do not give the taxpayer identification number of another person when required on a return, statement, or other document. Taxaide Notice of fiduciary relationship. Taxaide   The term fiduciary means any person acting for another person. Taxaide It applies to persons who have positions of trust on behalf of others. Taxaide A personal representative for a decedent's estate is a fiduciary. Taxaide Form 56. Taxaide   If you are appointed to act in a fiduciary capacity for another, you must file a written notice with the IRS stating this. Taxaide Form 56, Notice Concerning Fiduciary Relationship, is used for this purpose. Taxaide See the Instructions for Form 56 for filing requirements and other information. Taxaide   File Form 56 as soon as all the necessary information (including the EIN) is available. Taxaide It notifies the IRS that you, as the fiduciary, are assuming the powers, rights, duties, and privileges of the decedent. Taxaide The notice remains in effect until you notify the IRS (by filing another Form 56) that your fiduciary relationship with the estate has terminated. Taxaide Termination of fiduciary relationship. Taxaide   Form 56 should also be filed to notify the IRS if your fiduciary relationship is terminated or when a successor fiduciary is appointed if the estate has not been terminated. Taxaide See Form 56 and its instructions for more information. Taxaide   At the time of termination of the fiduciary relationship, you may want to file Form 4810, Request for Prompt Assessment Under Internal Revenue Code Section 6501(d), and Form 5495, Request for Discharge From Personal Liability Under Internal Revenue Code Section 2204 or 6905, to wind up your duties as fiduciary. Taxaide See below for a discussion of these forms. Taxaide Request for prompt assessment (charge) of tax. Taxaide   The IRS ordinarily has 3 years from the date an income tax return is filed, or its due date, whichever is later, to charge any additional tax due. Taxaide However, as a personal representative, you may request a prompt assessment of tax after the return has been filed. Taxaide This reduces the time for making the assessment to 18 months from the date the written request for prompt assessment was received. Taxaide This request can be made for any tax return (except the estate tax return) of the decedent or the decedent's estate. Taxaide This may permit a quicker settlement of the tax liability of the estate and an earlier final distribution of the assets to the beneficiaries. Taxaide Form 4810. Taxaide   Form 4810 can be used for making this request. Taxaide It must be filed separately from any other document. Taxaide   As the personal representative for the decedent's estate, you are responsible for any additional taxes that may be due. Taxaide You can request prompt assessment of any of the decedent's taxes (other than federal estate taxes) for any years for which the statutory period for assessment is open. Taxaide This applies even though the returns were filed before the decedent's death. Taxaide Failure to report income. Taxaide   If you or the decedent failed to report substantial amounts of gross income (more than 25% of the gross income reported on the return) or filed a false or fraudulent return, your request for prompt assessment will not shorten the period during which the IRS may assess the additional tax. Taxaide However, such a request may relieve you of personal liability for the tax if you did not have knowledge of the unpaid tax. Taxaide Request for discharge from personal liability for tax. Taxaide   An executor can make a request for discharge from personal liability for a decedent's income, gift, and estate taxes. Taxaide The request must be made after the returns for those taxes are filed. Taxaide To make the request, file Form 5495. Taxaide For this purpose, an executor is an executor or administrator that is appointed, qualified, and acting within the United States. Taxaide   Within 9 months after receipt of the request, the IRS will notify the executor of the amount of taxes due. Taxaide If this amount is paid, the executor will be discharged from personal liability for any future deficiencies. Taxaide If the IRS has not notified the executor, he or she will be discharged from personal liability at the end of the 9-month period. Taxaide    Even if the executor is discharged from personal liability, the IRS will still be able to assess tax deficiencies against the executor to the extent he or she still has any of the decedent's property. Taxaide Insolvent estate. Taxaide   Generally, if a decedent's estate is insufficient to pay all the decedent's debts, the debts due to the United States must be paid first. Taxaide Both the decedent's federal income tax liabilities at the time of death and the estate's income tax liability are debts due to the United States. Taxaide The personal representative of an insolvent estate is personally responsible for any tax liability of the decedent or of the estate if he or she had notice of such tax obligations or failed to exercise due care in determining if such obligations existed before distribution of the estate's assets and before being discharged from duties. Taxaide The extent of such personal responsibility is the amount of any other payments made before paying the debts due to the United States, except where such other debt paid has priority over the debts due to the United States. Taxaide Income tax liabilities need not be formally assessed for the personal representative to be liable if he or she was aware or should have been aware of their existence. Taxaide Fees Received by Personal Representatives All personal representatives must include fees paid to them from an estate in their gross income. Taxaide If you are not in the trade or business of being an executor (for instance, you are the executor of a friend's or relative's estate), report these fees on your Form 1040, line 21. Taxaide If you are in the trade or business of being an executor, report fees received from the estate as self-employment income on Schedule C or Schedule C-EZ of your Form 1040. Taxaide If the estate operates a trade or business and you, as executor, actively participate in the trade or business while fulfilling your duties, any fees you receive related to the operation of the trade or business must be reported as self-employment income on Schedule C (or Schedule C-EZ) of your Form 1040. Taxaide Final Income Tax Return for Decedent—Form 1040 The personal representative (defined earlier) must file the final income tax return (Form 1040) of the decedent for the year of death and any returns not filed for preceding years. Taxaide A surviving spouse, under certain circumstances, may have to file the returns for the decedent. Taxaide See Joint Return, later. Taxaide Return for preceding year. Taxaide   If an individual died after the close of the tax year, but before the return for that year was filed, the return for the year just closed will not be the final return. Taxaide The return for that year will be a regular return and the personal representative must file it. Taxaide Example. Taxaide Samantha Smith died on March 21, 2013, before filing her 2012 tax return. Taxaide Her personal representative must file her 2012 return by April 15, 2013. Taxaide Her final tax return covering the period from January 1, 2013, to March 20, 2013, is due April 15, 2014. Taxaide Name, Address, and Signature Write the word “DECEASED,” the decedent's name, and the date of death across the top of the tax return. Taxaide If filing a joint return, write the name and address of the decedent and the surviving spouse in the name and address fields. Taxaide If a joint return is not being filed, write the decedent's name in the name field and the personal representative's name and address in the address field. Taxaide Third party designee. Taxaide   You can check the “Yes” box in the Third Party Designee area on page 2 of the return to authorize the IRS to discuss the return with a friend, family member, or any other person you choose. Taxaide This allows the IRS to call the person you identified as the designee to answer any questions that may arise during the processing of the return. Taxaide It also allows the designee to perform certain actions. Taxaide See the Instructions for Form 1040 for details. Taxaide Signature. Taxaide   If a personal representative has been appointed, that person must sign the return. Taxaide If it is a joint return, the surviving spouse must also sign it. Taxaide If no personal representative has been appointed, the surviving spouse (on a joint return) signs the return and writes in the signature area “Filing as surviving spouse. Taxaide ” If no personal representative has been appointed and if there is no surviving spouse, the person in charge of the decedent's property must file and sign the return as “personal representative. Taxaide ” Paid preparer. Taxaide   If you pay someone to prepare, assist in preparing, or review the tax return, that person must sign the return and fill in the other blanks in the Paid Preparer Use Only area of the return. Taxaide See the Form 1040 instructions for details. Taxaide When and Where To File The final income tax return is due at the same time the decedent's return would have been due had death not occurred. Taxaide A final return for a decedent who was a calendar year taxpayer is generally due on April 15 following the year of death, regardless of when during that year death occurred. Taxaide However, when the due date falls on a Saturday, Sunday, or legal holiday, the return is filed timely if filed by the next business day. Taxaide The tax return must be prepared for the year of death regardless of when during the year death occurred. Taxaide Generally, you must file the final income tax return of the decedent with the Internal Revenue Service Center for the place where you live. Taxaide A tax return for a decedent can be electronically filed. Taxaide A personal representative may also obtain an income tax filing extension on behalf of a decedent. Taxaide Filing Requirements The gross income, age, and filing status of a decedent generally determine whether a return must be filed. Taxaide Gross income is all income received by an individual from any source in the form of money, goods, property, and services that is not tax-exempt. Taxaide It includes gross receipts from self-employment, but if the business involves manufacturing, merchandising, or mining, subtract any cost of goods sold. Taxaide In general, filing status depends on whether the decedent was considered single or married at the time of death. Taxaide See the income tax return instructions or Publication 501, Exemptions, Standard Deduction, and Filing Information. Taxaide Refund A return must be filed to obtain a refund if tax was withheld from salaries, wages, pensions, or annuities, or if estimated tax was paid, even if a return is not otherwise required to be filed. Taxaide Also, the decedent may be entitled to other credits that result in a refund. Taxaide These advance payments of tax and credits are discussed later under Credits, Other Taxes, and Payments. Taxaide Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer. Taxaide   Form 1310 does not have to be filed if you are claiming a refund and you are: A surviving spouse filing an original or amended joint return with the decedent, or A court-appointed or certified personal representative filing the decedent’s original return and a copy of the court certificate showing your appointment is attached to the return. Taxaide   If the personal representative is filing a claim for refund on Form 1040X, Amended U. Taxaide S. Taxaide Individual Income Tax Return, or Form 843, Claim for Refund and Request for Abatement, and the court certificate has already been filed with the IRS, attach Form 1310 and write “Certificate Previously Filed” at the bottom of the form. Taxaide Example. Taxaide Edward Green died before filing his tax return. Taxaide You were appointed the personal representative for Edward's estate, and you file his Form 1040 showing a refund due. Taxaide You do not need Form 1310 to claim the refund if you attach a copy of the court certificate showing you were appointed the personal representative. Taxaide    If you are a surviving spouse and you receive a tax refund check in both your name and your deceased spouse's name, you can have the check reissued in your name alone. Taxaide Return the joint-name check marked “VOID” to your local IRS office or the service center where you mailed your return, along with a written request for reissuance of the refund check. Taxaide A new check will be issued in your name and mailed to you. Taxaide Death certificate. Taxaide   When filing the decedent's final income tax return, do not attach the death certificate or other proof of death to the final return. Taxaide Instead, keep it for your records and provide it if requested. Taxaide Nonresident Alien If the decedent was a nonresident alien who would have had to file Form 1040NR, U. Taxaide S. Taxaide Nonresident Alien Income Tax Return, you must file that form for the decedent's final tax year. Taxaide See the Instructions for Form 1040NR for the filing requirements, due date, and where to file. Taxaide Joint Return Generally, the personal representative and the surviving spouse can file a joint return for the decedent and the surviving spouse. Taxaide However, the surviving spouse alone can file the joint return if no personal representative has been appointed before the due date for filing the final joint return for the year of death. Taxaide This also applies to the return for the preceding year if the decedent died after the close of the preceding tax year and before filing the return for that year. Taxaide The income of the decedent that was includible on his or her return for the year up to the date of death (see Income To Include, later) and the income of the surviving spouse for the entire year must be included in the final joint return. Taxaide A final joint return with the decedent cannot be filed if the surviving spouse remarried before the end of the year of the decedent's death. Taxaide The filing status of the decedent in this instance is married filing a separate return. Taxaide For information about tax benefits to which a surviving spouse may be entitled, see Tax Benefits for Survivors, later, under Other Tax Information. Taxaide Personal representative may revoke joint return election. Taxaide   A court-appointed personal representative may revoke an election to file a joint return previously made by the surviving spouse alone. Taxaide This is done by filing a separate return for the decedent within one year from the due date of the return (including any extensions). Taxaide The joint return made by the surviving spouse will then be regarded as the separate return of that spouse by excluding the decedent's items and refiguring the tax liability. Taxaide Relief from joint liability. Taxaide   In some cases, one spouse may be relieved of joint liability for tax, interest, and penalties on a joint return for items of the other spouse that were incorrectly reported on the joint return. Taxaide If the decedent qualified for this relief while alive, the personal representative can pursue an existing request, or file a request, for relief from joint liability. Taxaide For information on requesting this relief, see Publication 971, Innocent Spouse Relief. Taxaide Income To Include The decedent's income includible on the final return is generally determined as if the person were still alive except that the taxable period is usually shorter because it ends on the date of death. Taxaide The method of accounting regularly used by the decedent before death also determines the income includible on the final return. Taxaide This section explains how some types of income are reported on the final return. Taxaide For more information about accounting methods, see Publication 538, Accounting Periods and Methods. Taxaide Cash Method If the decedent accounted for income under the cash method, only those items actually or constructively received before death are included on the final return. Taxaide Constructive receipt of income. Taxaide   Interest from coupons on the decedent's bonds is constructively received by the decedent if the coupons matured in the decedent's final tax year, but had not been cashed. Taxaide Include the interest income on the final return. Taxaide   Generally, a dividend is considered constructively received if it was available for use by the decedent without restriction. Taxaide If the corporation customarily mailed its dividend checks, the dividend was includible when received. Taxaide If the individual died between the time the dividend was declared and the time it was received in the mail, the decedent did not constructively receive it before death. Taxaide Do not include the dividend in the final return. Taxaide Accrual Method Generally, under an accrual method of accounting, income is reported when earned. Taxaide If the decedent used an accrual method, only the income items normally accrued before death are included on the final return. Taxaide Interest and Dividend Income (Forms 1099) Form(s) 1099 reporting interest and dividends earned by the decedent before death should be received and the amounts included on the decedent's final return. Taxaide A separate Form 1099 should show the interest and dividends earned after the date of the decedent's death and paid to the estate or other recipient that must include those amounts on its return. Taxaide You can request corrected Forms 1099 if these forms do not properly reflect the right recipient or amounts. Taxaide For example, a Form 1099-INT, reporting interest payable to the decedent, may include income that should be reported on the final income tax return of the decedent, as well as income that the estate or other recipient should report, either as income earned after death or as income in respect of the decedent (discussed later). Taxaide For income earned after death, you should ask the payer for a Form 1099 that properly identifies the recipient (by name and identification number) and the proper amount. Taxaide If that is not possible, or if the form includes an amount that represents income in respect of the decedent, report the interest as shown next under How to report. Taxaide See U. Taxaide S. Taxaide savings bonds acquired from decedent under Income in Respect of a Decedent, later, for information on savings bond interest that may have to be reported on the final return. Taxaide How to report. Taxaide   If you are preparing the decedent's final return and you have received a Form 1099-INT for the decedent that includes amounts belonging to the decedent and to another recipient (the decedent's estate or another beneficiary), report the total interest shown on Form 1099-INT on Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. Taxaide Next, enter a subtotal of the interest shown on Forms 1099, and the interest reportable from other sources for which you did not receive Forms 1099. Taxaide Then, show any interest (including any interest you receive as a nominee) belonging to another recipient separately and subtract it from the subtotal. Taxaide Identify the amount of this adjustment as “Nominee Distribution” or other appropriate designation. Taxaide   Report dividend income for which you received a Form 1099-DIV, Dividends and Distributions, on the appropriate schedule using the same procedure. Taxaide    Note. Taxaide If the decedent received amounts as a nominee, you must give the actual owner a Form 1099, unless the owner is the decedent's spouse. Taxaide See General Instructions for Certain Information Returns (Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G) for more information on filing Forms 1099. Taxaide Partnership Income The death of a partner closes the partnership's tax year for that partner. Taxaide Generally, it does not close the partnership's tax year for the remaining partners. Taxaide The decedent's distributive share of partnership items must be figured as if the partnership's tax year ended on the date the partner died. Taxaide To avoid an interim closing of the partnership books, the partners can agree to estimate the decedent's distributive share by prorating the amounts the partner would have included for the entire partnership tax year. Taxaide On the decedent's final return, include the decedent's distributive share of partnership items for the following periods. Taxaide The partnership's tax year that ended within or with the decedent's final tax year (the year ending on the date of death). Taxaide The period, if any, from the end of the partnership's tax year in (1) to the decedent's date of death. Taxaide Example. Taxaide Mary Smith was a partner in XYZ partnership and reported her income on a tax year ending December 31. Taxaide The partnership uses a tax year ending June 30. Taxaide Mary died August 31, 2013, and her estate established its tax year through August 31. Taxaide The distributive share of partnership items based on the decedent's partnership interest is reported as follows. Taxaide Final Return for the Decedent—January 1 through August 31, 2013, includes XYZ partnership items from (a) the partnership tax year ending June 30, 2013, and (b) the partnership tax year beginning July 1, 2013, and ending August 31, 2013 (the date of death). Taxaide Income Tax Return of the Estate—September 1, 2013, through August 31, 2014, includes XYZ partnership items for the period September 1, 2013, through June 30, 2014. Taxaide S Corporation Income If the decedent was a shareholder in an S corporation, include on the final return the decedent's share of the S corporation's items of income, loss, deduction, and credit for the following periods. Taxaide The corporation's tax year that ended within or with the decedent's final tax year (the year ending on the date of death). Taxaide The period, if any, from the end of the corporation's tax year in (1) to the decedent's date of death. Taxaide Self-Employment Income Include self-employment income actually or constructively received or accrued, depending on the decedent's accounting method. Taxaide For self-employment tax purposes only, the decedent's self-employment income will include the decedent's distributive share of a partnership's income or loss through the end of the month in which death occurred. Taxaide For this purpose, the partnership's income or loss is considered to be earned ratably over the partnership's tax year. Taxaide Community Income If the decedent was married and domiciled in a community property state, half of the income received and half of the expenses paid during the decedent's tax year by either the decedent or spouse may be considered to be the income and expenses of the other. Taxaide For more information, see Publication 555, Community Property. Taxaide HSA, Archer MSA, or Medicare Advantage MSA The treatment of an HSA (health savings account), an Archer MSA (medical savings account), or a Medicare Advantage MSA at the death of the account holder, depends on who acquires the interest in the account. Taxaide If the decedent's estate acquires the interest, the fair market value (FMV) of the assets in the account on the date of death is included in income on the decedent's final return. Taxaide The estate tax deduction, discussed later, does not apply to this amount. Taxaide If a beneficiary acquires the interest, see the discussion under Income in Respect of a Decedent, later. Taxaide For other information on HSAs, Archer MSAs, or Medicare Advantage MSAs, see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. Taxaide Coverdell Education Savings Account (ESA) Generally, the balance in a Coverdell ESA must be distributed within 30 days after the individual for whom the account was established reaches age 30, or dies, whichever is earlier. Taxaide The treatment of the Coverdell ESA at the death of an individual under age 30 depends on who acquires the interest in the account. Taxaide If the decedent's estate acquires the interest, the earnings on the account must be included on the final income tax return of the decedent. Taxaide The estate tax deduction, discussed later, does not apply to this amount. Taxaide If a beneficiary acquires the interest, see the discussion under Income in Respect of a Decedent, later. Taxaide The age 30 limitation does not apply if the individual for whom the account was established or the beneficiary that acquires the account is an individual with special needs. Taxaide This includes an individual who, because of a physical, mental, or emotional condition (including a learning disability), requires additional time to complete his or her education. Taxaide For more information on Coverdell ESAs, see Publication 970, Tax Benefits for Education. Taxaide Accelerated Death Benefits Accelerated death benefits are amounts received under a life insurance contract before the death of the insured individual. Taxaide These benefits also include amounts received on the sale or assignment of the contract to a viatical settlement provider. Taxaide Generally, if the decedent received accelerated death benefits on the life of a terminally or chronically ill individual, whether on his or her own life or on the life of another person, those benefits are not included in the decedent's income. Taxaide For more information, see the discussion under Gifts, Insurance, and Inheritances under Other Tax Information, later. Taxaide Exemptions and Deductions Generally, the rules for exemptions and deductions allowed to an individual also apply to the decedent's final income tax return. Taxaide Show on the final return deductible items the decedent paid (or accrued, if the decedent reported deductions on an accrual method) before death. Taxaide This section contains a detailed discussion of medical expenses because the tax treatment of the decedent's medical expenses can be different. Taxaide See Medical Expenses, later. Taxaide Exemptions You can claim the decedent's personal exemption on the final income tax return. Taxaide If the decedent was another person's dependent (for example, a parent's), you cannot claim the personal exemption on the decedent's final return. Taxaide Standard Deduction If you do not itemize deductions on the final return, the full amount of the appropriate standard deduction is allowed regardless of the date of death. Taxaide For information on the appropriate standard deduction, see the Form 1040 income tax return instructions or Publication 501. Taxaide Medical Expenses Medical expenses paid before death by the decedent are deductible, subject to limits, on the final income tax return if deductions are itemized. Taxaide This includes expenses for the decedent, as well as for the decedent's spouse and dependents. Taxaide Beginning in 2013, medical expenses exceeding 10% of adjusted gross income (AGI) may be deducted, unless the decedent or their spouse is age 65 or older. Taxaide In that case medical expenses exceeding 7. Taxaide 5% of AGI may be deducted. Taxaide Qualified medical expenses are not deductible if paid with a tax-free distribution from an HSA or an Archer MSA. Taxaide Election for decedent's expenses. Taxaide   Medical expenses not paid before death are liabilities of the estate and are shown on the federal estate tax return (Form 706). Taxaide However, if medical expenses for the decedent are paid out of the estate during the 1-year period beginning with the day after death, you can elect to treat all or part of the expenses as paid by the decedent at the time they were incurred. Taxaide   If you make the election, you can claim all or part of the expenses on the decedent's income tax return (if deductions are itemized) rather than on the federal estate tax return (Form 706). Taxaide You can deduct expenses incurred in the year of death on the final income tax return. Taxaide You should file an amended return (Form 1040X) for medical expenses incurred in an earlier year, unless the statutory period for filing a claim for that year has expired. Taxaide   The amount you can deduct on the income tax return is the amount above 10% of adjusted gross income (or 7. Taxaide 5% of adjusted gross income if the decedent or the decedent's spouse was born before January 2, 1949). Taxaide Amounts not deductible because of this percentage cannot be claimed on the federal estate tax return. Taxaide Making the election. Taxaide   You make the election by attaching a statement, in duplicate, to the decedent's income tax return or amended return. Taxaide The statement must state that you have not claimed the amount as an estate tax deduction, and that the estate waives the right to claim the amount as a deduction. Taxaide This election applies only to expenses incurred for the decedent, not to expenses incurred to provide medical care for dependents. Taxaide Example. Taxaide Richard Brown used the cash method of accounting and filed his income tax return on a calendar year basis. Taxaide Richard died on June 1, 2013, at the age of 78, after incurring $800 in medical expenses. Taxaide Of that amount, $500 was incurred in 2012 and $300 was incurred in 2013. Taxaide Richard itemized his deductions when he filed his 2012 income tax return. Taxaide The personal representative of the estate paid the entire $800 liability in August 2013. Taxaide The personal representative may file an amended return (Form 1040X) for 2012 claiming the $500 medical expense as a deduction, subject to the 7. Taxaide 5% limit. Taxaide The $300 of expenses incurred in 2013 can be deducted on the final income tax return if deductions are itemized, subject to the 7. Taxaide 5% limit. Taxaide The personal representative must file a statement in duplicate with each return stating that these amounts have not been claimed on the federal estate tax return (Form 706), and waiving the right to claim such a deduction on Form 706 in the future. Taxaide Medical expenses not paid by estate. Taxaide   If you paid medical expenses for your deceased spouse or dependent, claim the expenses on your tax return for the year in which you paid them, whether they are paid before or after the decedent's death. Taxaide If the decedent was a child of divorced or separated parents, the medical expenses can usually be claimed by both the custodial and noncustodial parent to the extent paid by that parent during the year. Taxaide Insurance reimbursements. Taxaide   Insurance reimbursements of previously deducted medical expenses due a decedent at the time of death and later received by the decedent's estate are includible in the income tax return of the estate (Form 1041) for the year the reimbursements are received. Taxaide The reimbursements are also includible in the decedent's gross estate. Taxaide No deduction for funeral expenses can be taken on the final Form 1040 of a decedent. Taxaide These expenses may be deductible for estate tax purposes on Form 706. Taxaide Deduction for Losses A decedent's net operating loss deduction from a prior year and any capital losses (including capital loss carryovers) can be deducted only on the decedent's final income tax return. Taxaide A net operating loss on the decedent's final income tax return can be carried back to prior years. Taxaide (See Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts. Taxaide ) You cannot deduct any unused net operating loss or capital loss on the estate's income tax return. Taxaide At-risk loss limits. Taxaide   Special at-risk rules apply to most activities that are engaged in as a trade or business or for the production of income. Taxaide   These rules limit the deductible loss to the amount which the individual was considered at-risk in the activity. Taxaide An individual generally will be considered at-risk to the extent of the money and the adjusted basis of property that he or she contributed to the activity and certain amounts the individual borrowed for use in the activity. Taxaide An individual will be considered at-risk for amounts borrowed only if he or she was personally liable for the repayment or if the amounts borrowed were secured by property other than that used in the activity. Taxaide The individual is not considered at-risk for borrowed amounts if the lender has an interest in the activity or if the lender is related to a person who has an interest in the activity. Taxaide For more information, see Publication 925, Passive Activity and At-Risk Rules. Taxaide Passive activity rules. Taxaide   A passive activity is any trade or business activity in which the taxpayer does not materially participate. Taxaide To determine material participation, see Publication 925. Taxaide Rental activities are passive activities regardless of the taxpayer's participation, unless the taxpayer meets certain eligibility requirements. Taxaide   Individuals, estates, and trusts can offset passive activity losses only against passive activity income. Taxaide Passive activity losses or credits not allowed in one tax year can be carried forward to the next year. Taxaide   If a passive activity interest is transferred because a taxpayer dies, the accumulated unused passive activity losses are allowed as a deduction against the decedent's income in the year of death. Taxaide Losses are allowed only to the extent they are greater than the excess of the transferee's (recipient of the interest transferred) basis in the property over the decedent's adjusted basis in the property immediately before death. Taxaide The part of the accumulated losses equal to the excess is not allowed as a deduction for any tax year. Taxaide   Use Form 8582, Passive Activity Loss Limitations, to summarize losses and income from passive activities and to figure the amounts allowed. Taxaide For more information, see Publication 925. Taxaide Credits, Other Taxes, and Payments Discussed below are some of the tax credits, types of taxes that may be owed, income tax withheld, and estimated tax payments reported on the final return of a decedent. Taxaide Credits On the final income tax return, you can claim any tax credits that applied to the decedent before death. Taxaide Some of these credits are discussed next. Taxaide Earned income credit. Taxaide   If the decedent was an eligible individual, you can claim the earned income credit on the decedent's final return even though the return covers less than 12 months. Taxaide If the allowable credit is more than the tax liability for the year, the excess is refunded. Taxaide   For more information, see Publication 596, Earned Income Credit (EIC). Taxaide Credit for the elderly or the disabled. Taxaide   This credit is allowable on a decedent's final income tax return if the decedent met both of the following requirements in the year of death. Taxaide The decedent: Was a “qualified individual,” and Had income (adjusted gross income (AGI) and nontaxable social security and pensions) less than certain limits. Taxaide   For details on qualifying for or figuring the credit, see Publication 524, Credit for the Elderly or the Disabled. Taxaide Child tax credit. Taxaide   If the decedent had a qualifying child, you may be able to claim the child tax credit on the decedent's final return even though the return covers less than 12 months. Taxaide You may be able to claim the additional child tax credit and get a refund if the credit is more than the decedent's liability. Taxaide For more information, see the Instructions for Form 1040. Taxaide Adoption credit. Taxaide   Depending upon when the adoption was finalized, this credit may be taken on a decedent's final income tax return if the decedent: Adopted an eligible child and paid qualified adoption expenses, or Has a carryforward of an adoption credit from a prior year. Taxaide   Also, if the decedent is survived by a spouse who meets the filing status of qualifying widow(er), unused adoption credit may be carried forward and used following the death of the decedent. Taxaide See Form 8839, Qualified Adoption Expenses, and its instructions for more details. Taxaide General business tax credit. Taxaide   The general business credit available to a taxpayer is limited. Taxaide Any credit arising in a tax year beginning before 1998 that has not been used up can be carried forward for up to 15 years. Taxaide Any unused credit arising in a tax year beginning after 1997 has a 1-year carryback and a 20-year carryforward period. Taxaide   After the carryforward period, a deduction may be allowed for any unused business credit. Taxaide If the taxpayer dies before the end of the carryforward period, the deduction generally is allowed in the year of death. Taxaide   For more information on the general business credit, see Publication 334, Tax Guide for Small Business. Taxaide Other Taxes Taxes other than income tax that may be owed on the final return of a decedent include self-employment tax and alternative minimum tax, which are reported on Form 1040. Taxaide Self-employment tax. Taxaide   Self-employment tax may be owed on the final return if either of the following applied to the decedent in the year of death: Net earnings from self-employment (excluding income described in (2)) were $400 or more; or Wages from services performed as a church employee were $108. Taxaide 28 or more. Taxaide Alternative minimum tax (AMT). Taxaide   The tax laws give special treatment to certain types of income and allow special deductions and credits for certain types of expenses. Taxaide The alternative minimum tax (AMT) was enacted so taxpayers who benefit from these laws still pay at least a minimum amount of tax. Taxaide In general, the AMT is the excess of the tentative minimum tax over the regular tax shown on the return. Taxaide Form 6251. Taxaide    Use Form 6251, Alternative Minimum Tax—Individuals, to determine if this tax applies to the decedent. Taxaide See the form instructions for information on when you must attach Form 6251 to Form 1040. Taxaide Form 8801. Taxaide   If the decedent paid AMT in a previous year or had a credit carryforward, the decedent may be eligible for a minimum tax credit. Taxaide See Form 8801, Credit for Prior Year Minimum Tax—Individuals, Estates, and Trusts. Taxaide Payments of Tax The income tax withheld from the decedent's salary, wages, pensions, or annuities, and the amount paid as estimated tax are credits (advance payments of tax) that must be claimed on the final return. Taxaide Tax Forgiveness for Armed Forces Members, Victims of Terrorism, and Astronauts Income tax liability may be forgiven for a decedent who dies due to service in a combat zone, due to military or terrorist actions, as a result of a terrorist attack, or while serving in the line of duty as an astronaut. Taxaide Combat Zone If a member of the Armed Forces of the United States dies while in active service in a combat zone or from wounds, disease, or injury incurred in a combat zone, the decedent's income tax liability is abated (forgiven) for the entire year in which death occurred and for any prior tax year ending on or after the first day the person served in a combat zone in active service. Taxaide For this purpose, a qualified hazardous duty area is treated as a combat zone. Taxaide If the tax (including interest, additions to the tax, and additional amounts) for these years has been assessed, the assessment will be forgiven. Taxaide If the tax has been collected (regardless of the date of collection), that tax will be credited or refunded. Taxaide Any of the decedent's income tax for tax years before those mentioned above that remains unpaid as of the actual (or presumptive) date of death will not be assessed. Taxaide If any unpaid tax (including interest, additions to the tax, and additional amounts) has been assessed, this assessment will be forgiven. Taxaide Also, if any tax was collected after the date of death, that amount will be credited or refunded. Taxaide The date of death of a member of the Armed Forces reported as missing in action or as a prisoner of war is the date his or her name is removed from missing status for military pay purposes. Taxaide This is true even if death actually occurred earlier. Taxaide For other tax information for members of the Armed Forces, see Publication 3, Armed Forces' Tax Guide. Taxaide Military or Terrorist Actions The decedent's income tax liability is forgiven if, at death, he or she was a military or civilian employee of the United States who died because of wounds or injury incurred: While a U. Taxaide S. Taxaide employee, and In a military or terrorist action. Taxaide The forgiveness applies to the tax year in which death occurred and for any earlier tax year, beginning with the year before the year in which the wounds or injury occurred. Taxaide Example. Taxaide The income tax liability of a civilian employee of the United States who died in 2013 because of wounds incurred while a U. Taxaide S. Taxaide employee in a terrorist attack that occurred in 2008 will be forgiven for 2013 and for all prior tax years in the period 2007 through 2012. Taxaide Refunds are allowed for the tax years for which the period for filing a claim for refund has not ended, as discussed later. Taxaide Military or terrorist action defined. Taxaide   A military or terrorist action means the following. Taxaide Any terrorist activity that most of the evidence indicates was directed against the United States or any of its allies. Taxaide Any military action involving the U. Taxaide S. Taxaide Armed Forces and resulting from violence or aggression against the United States or any of its allies, or the threat of such violence or aggression. Taxaide   Terrorist activity includes criminal offenses intended to coerce, intimidate, or retaliate against the government or civilian population. Taxaide Military action does not include training exercises. Taxaide Any multinational force in which the United States is participating is treated as an ally of the United States. Taxaide Determining if a terrorist activity or military action has occurred. Taxaide   You may rely on published guidance from the IRS to determine if a particular event is considered a terrorist activity or military action. Taxaide Specified Terrorist Victim The Victims of Terrorism Tax Relief Act of 2001 (the Act) provides tax relief for those injured or killed as a result of terrorist attacks, certain survivors of those killed as a result of terrorist attacks, and others who were affected by terrorist attacks. Taxaide Under the Act, the federal income tax liability of those killed in the following attacks (specified terrorist victim) is forgiven for certain tax years. Taxaide The April 19, 1995, terrorist attack on the Alfred P. Taxaide Murrah Federal Building (Oklahoma City). Taxaide The September 11, 2001, terrorist attacks. Taxaide The terrorist attacks involving anthrax occurring after September 10, 2001, and before January 1, 2002. Taxaide The Act also exempts from federal income tax the following types of income. Taxaide Qualified disaster relief payments made after September 10, 2001, to cover personal, family, living, or funeral expenses incurred because of a terrorist attack. Taxaide Certain disability payments received in tax years ending after September 10, 2001, for injuries sustained in a terrorist attack. Taxaide Certain death benefits paid by an employer to the survivor of an employee because the employee died as a result of a terrorist attack. Taxaide Payments from the September 11th Victim Compensation Fund 2001. Taxaide The Act also reduces the estate tax of individuals who die as a result of a terrorist attack. Taxaide See Publication 3920, Tax Relief for Victims of Terrorist Attacks, for more information. Taxaide Astronauts Legislation extended the tax relief available under the Victims of Terrorism Tax Relief Act of 2001 (the Act) to astronauts who died in the line of duty after December 31, 2002. Taxaide The decedent's income tax liability is forgiven for the tax year in which death occurs, and for the tax year prior to death. Taxaide For information on death benefit payments and the reduction of federal estate taxes, see Publication 3920. Taxaide However, the discussions in that publication under Death Benefits and Estate Tax Reduction should be modified for astronauts (for example, by using the date of death of the astronaut instead of September 11, 2001). Taxaide For more information on the Act, see Publication 3920. Taxaide Claim for Credit or Refund If any of these tax-forgiveness situations applies to a prior year tax, any tax paid for which the period for filing a claim has not ended will be credited or refunded. Taxaide If any tax is still due, it will be canceled. Taxaide The normal period for filing a claim for credit or refund is 3 years after the return was filed or 2 years after the tax was paid, whichever is later. Taxaide If death occurred in a combat zone or from wounds, disease, or injury incurred in a combat zone, the period for filing the claim is extended by: The amount of time served in the combat zone (including any period in which the individual was in missing status), plus The period of continuous qualified hospitalization for injury from service in the combat zone, if any, plus The next 180 days. Taxaide Qualified hospitalization means any hospitalization outside the United States and any hospitalization in the United States of not more than 5 years. Taxaide This extended period for filing the claim also applies to a member of the Armed Forces who was deployed outside the United States in a designated contingency operation. Taxaide Filing a claim. Taxaide   Use the following procedures to file a claim. Taxaide If a U. Taxaide S. Taxaide individual income tax return (Form 1040, 1040A, or 1040EZ) has not been filed, you should make a claim for refund of any withheld income tax or estimated tax payments by filing Form 1040. Taxaide Form W-2, Wage and Tax Statement, must accompany all returns. Taxaide If a U. Taxaide S. Taxaide individual income tax return has been filed, you should make a claim for refund by filing Form 1040X. Taxaide You must file a separate Form 1040X for each year in question. Taxaide   You must file these returns and claims at the following address for regular mail (U. Taxaide S. Taxaide Postal Service). Taxaide    Internal Revenue Service 333 W. Taxaide Pershing, P5–6503 Kansas City, MO 64108   Identify all returns and claims for refund by writing “Iraq—KIA,” “Enduring Freedom—KIA,” “Kosovo Operation—KIA,” “Desert Storm—KIA,” or “Former Yugoslavia—KIA” in bold letters on the top of page 1 of the return or claim. Taxaide On the applicable return, write the same phrase on the line for total tax. Taxaide If the individual was killed in a terrorist or military action, put “KITA” on the front of the return and on the line for total tax. Taxaide   Include an attachment showing the computation of the decedent's tax liability and a computation of the amount to be forgiven. Taxaide On joint returns, make an allocation of the tax as described below under Joint returns. Taxaide If you cannot make a proper allocation, attach a statement of all income and deductions allocable to each spouse and the IRS will make the proper allocation. Taxaide   You must attach Form 1310 to all returns and claims for refund. Taxaide However, for exceptions to filing Form 1310, see Form 1310. Taxaide Statement of Person Claiming Refund Due a Deceased Taxpayer, under Refund, earlier. Taxaide   You must also attach proof of death that includes a statement that the individual was a U. Taxaide S. Taxaide employee on the date of injury and on the date of death and died as the result of a military or terrorist action. Taxaide For military and civilian employees of the Department of Defense, attach DD Form 1300, Report of Casualty. Taxaide For other U. Taxaide S. Taxaide civilian employees killed in the United States, attach a death certificate and a certification (letter) from the federal employer. Taxaide For other U. Taxaide S. Taxaide civilian employees killed overseas, attach a certification from the Department of State. Taxaide   If you do not have enough tax information to file a timely claim for refund, you can suspend the period for filing a claim by filing Form 1040X. Taxaide Attach Form 1310, any required documentation currently available, and a statement that you will file an amended claim as soon as you have the required tax information. Taxaide Joint returns. Taxaide   If a joint return was filed, only the decedent's part of the income tax liability is eligible for forgiveness. Taxaide Determine the decedent's tax liability as follows. Taxaide Figure the income tax for which the decedent would have been liable if a separate return had been filed. Taxaide Figure the income tax for which the spouse would have been liable if a separate return had been filed. Taxaide Multiply the joint tax liability by a fraction. Taxaide The numerator of the fraction is the amount in (1), above. Taxaide The denominator of the fraction is the total of (1) and (2). Taxaide   The resulting amount from (3) above is the decedent's tax liability eligible for forgiveness. Taxaide Filing Reminders To minimize the time needed to process the decedent's final return and issue any refund, be sure to follow these procedures. Taxaide Write “DECEASED,” the decedent's name, and the date of death across the top of the tax return. Taxaide If a personal representative has been appointed, the personal representative must sign the return. Taxaide If it is a joint return, the surviving spouse must also sign it. Taxaide If you are the decedent's spouse filing a joint return with the decedent and no personal representative has been appointed, write “Filing as surviving spouse” in the area where you sign the return. Taxaide If no personal representative has been appointed and if there is no surviving spouse, the person in charge of the decedent's property must file and sign the return as “personal representative. Taxaide ” To claim a refund for the decedent, do the following. Taxaide If you are the decedent's spouse filing a joint return with the decedent, file only the tax return to claim the refund. Taxaide If you are the personal representative and the return is not a joint return filed with the decedent's surviving spouse, file the return and attach a copy of the certificate that shows your appointment by the court. Taxaide (A power of attorney or a copy of the decedent's will is not acceptable evidence of your appointment as the personal representative. Taxaide ) If you are filing an amended return, attach Form 1310 and a copy of the certificate of appointment (or, if you have already sent the certificate of appointment to IRS, write “Certificate Previously Filed” at the bottom of Form 1310). Taxaide If you are not filing a joint return as the surviving spouse and a personal representative has not been appointed, file the return and attach Form 1310. Taxaide Other Tax Information Discussed below is information about the effect of an individual's death on the income tax liability of the survivors (including widows and widowers), the beneficiaries, and the estate. Taxaide Tax Benefits for Survivors Survivors can qualify for certain benefits when filing their own income tax returns. Taxaide Joint return by surviving spouse. Taxaide   A surviving spouse can file a joint return for the year of death and may qualify for special tax rates for the following 2 years, as explained under Qualifying widows and widowers, later. Taxaide Decedent as your dependent. Taxaide   If the decedent qualified as your dependent for a part of the year before death, you can claim the exemption for the dependent on your tax return, regardless of when death occurred during the year. Taxaide   If the decedent was your qualifying child, you may be able to claim the child tax credit or the earned income credit. Taxaide To determine if you qualify for the child tax credit, see the instructions for Form 1040, line 51; Form 1040A, line 33; or Form 1040NR, line 48. Taxaide To determine if you qualify for the earned income credit, see the instructions for Form 1040, lines 64a and 64b or Form 1040A, lines 38a and 38b. Taxaide Qualifying widows and widowers. Taxaide   If your spouse died within the 2 tax years preceding the year for which your return is being filed, you may be eligible to claim the filing status of qualifying widow(er) with dependent child and qualify to use the married-filing-jointly tax rates. Taxaide Requirements. Taxaide   Generally, you qualify for this special benefit if you meet all of the following requirements. Taxaide You were entitled to file a joint return with your spouse for the year of death—whether or not you actually filed jointly. Taxaide You did not remarry before the end of the current tax year. Taxaide You have a child, stepchild, or foster child who qualifies as your dependent for the tax year. Taxaide You provide more than half the cost of maintaining your home, which is the principal residence of that child for the entire year except for temporary absences. Taxaide Example. Taxaide William Burns' wife died in 2010. Taxaide William has not remarried and continued throughout 2011 and 2012 to maintain a home for himself and his dependent child. Taxaide For 2010, he was entitled to file a joint return for himself and his deceased wife. Taxaide For 2011 and 2012, he qualifies to file as a qualifying widower with dependent child. Taxaide For later years, he may qualify to file as a head of household. Taxaide Figuring your tax. Taxaide   Check the box on line 5 (Form 1040 or 1040A) under Filing Status on your tax return. Taxaide Use the Tax Rate Schedule or the column in the Tax Table for Married filing jointly, which gives you the split-income benefits. Taxaide   The last year you can file jointly with, or claim an exemption for, your deceased spouse is the year of death. Taxaide Joint return filing rules. Taxaide   If you are the surviving spouse and a personal representative is handling the estate for the decedent, you should coordinate filing your return for the year of death with this personal representative. Taxaide See Joint Return under Final Income Tax Return for Decedent—Form 1040, earlier. Taxaide Income in Respect of a Decedent All income the decedent would have received had death not occurred that was not properly includible on the final return, discussed earlier, is income in respect of a decedent. Taxaide If the decedent is a specified terrorist victim (see Specified Terrorist Victim, earlier), income received after the date of death and before the end of the decedent's tax year (determined without regard to death) is excluded from the recipient's gross income. Taxaide This exclusion does not apply to certain income. Taxaide For more information, see Publication 3920. Taxaide How To Report Income in respect of a decedent must be included in the income of one of the following. Taxaide The decedent's estate, if the estate receives it. Taxaide The beneficiary, if the right to income is passed directly to the beneficiary and the beneficiary receives it. Taxaide Any person to whom the estate properly distributes the right to receive it. Taxaide If you have to include income in respect of a decedent in your gross income and an estate tax return (Form 706) was filed for the decedent, you may be able to claim a deduction for the estate tax paid on that income. Taxaide See Estate Tax Deduction, later. Taxaide Example 1. Taxaide Frank Johnson owned and operated an apple orchard. Taxaide He used the cash method of accounting. Taxaide He sold and delivered 1,000 bushels of apples to a canning factory for $2,000, but did not receive payment before his death. Taxaide The proceeds from the sale are income in respect of a decedent. Taxaide When the estate was settled, payment had not been made and the estate transferred the right to the payment to his widow. Taxaide When Frank's widow collects the $2,000, she must include that amount in her return. Taxaide It is not reported on the final return of the decedent or on the return of the estate. Taxaide Example 2. Taxaide Assume the same facts as in Example 1, except that Frank used the accrual method of accounting. Taxaide The amount accrued from the sale of the apples would be included on his final return. Taxaide Neither the estate nor the widow would realize income in respect of a decedent when the money is later paid. Taxaide Example 3. Taxaide On February 1, George High, a cash method taxpayer, sold his tractor for $3,000, payable March 1 of the same year. Taxaide His adjusted basis in the tractor was $2,000. Taxaide George died on February 15, before receiving payment. Taxaide The gain to be reported as income in respect of a decedent is the $1,000 difference between the decedent's basis in the property and the sale proceeds. Taxaide In other words, the income in respect of a decedent is the gain the decedent would have realized had he lived. Taxaide Example 4. Taxaide Cathy O'Neil was entitled to a large salary payment at the date of her death. Taxaide The amount was to be paid in five annual installments. Taxaide The estate, after collecting two installments, distributed the right to the remaining installments to you, the beneficiary. Taxaide The payments are income in respect of a decedent. Taxaide None of the payments were includible on Cathy's final return. Taxaide The estate must include in its income the two installments it received, and you must include in your income each of the three installments as you receive them. Taxaide Example 5. Taxaide You inherited the right to receive renewal commissions on life insurance sold by your father before his death. Taxaide You inherited the right from your mother, who acquired it by bequest from your father. Taxaide Your mother died before she received all the commissions she had the right to receive, so you received the rest. Taxaide The commissions are income in respect of a decedent. Taxaide None of these commissions were includible in your father's final return. Taxaide The commissions received by your mother were included in her income. Taxaide The commissions you received are not includible in your mother's income, even on her final return. Taxaide You must include them in your income. Taxaide Character of income. Taxaide   The character of the income you receive in respect of a decedent remains the same as it would have been to the decedent if he or she were alive. Taxaide If the income would have been a capital gain to the decedent, it will be a capital gain to you. Taxaide Transfer of right to income. Taxaide   If you transfer your right to income in respect of a decedent, you must include in your income the greater of: The amount you receive for the right, or The fair market value of the right you transfer. Taxaide   If you make a gift of such a right, you must include in your income the fair market value of the right at the time of the gift. Taxaide   If the right to income from an installment obligation is transferred, the amount you must include in income is reduced by the basis of the obligation. Taxaide See Installment obligations, later. Taxaide Transfer defined. Taxaide   A transfer for this purpose includes a sale, exchange, or other disposition, the satisfaction of an installment obligation at other than face value, or the cancellation of an installment obligation. Taxaide Installment obligations. Taxaide   If the decedent sold property using the installment method and you are collecting payments on an installment obligation acquired from the decedent, use the same gross profit percentage the decedent used to figure the part of each payment that represents profit. Taxaide Include in your income the same profit the decedent would have included had death not occurred. Taxaide For more information, see Publication 537, Installment Sales. Taxaide   If you dispose of an installment obligation acquired from a decedent (other than by transfer to the obligor), the rules explained in Publication 537 for figuring gain or loss on the disposition apply to you. Taxaide Transfer to obligor. Taxaide   A transfer of a right to income, discussed earlier, has occurred if the decedent (seller) sold property using the installment method and the installment obligation was transferred to the obligor (buyer or person legally obligated to pay the installments). Taxaide A transfer also occurs if the obligation was canceled either at death or by the estate or person receiving the obligation from the decedent. Taxaide An obligation that becomes unenforceable is treated as having been canceled. Taxaide   If such a transfer occurs, the amount included in the income of the transferor (the estate or beneficiary) is the greater of the amount received or the fair market value of the installment obligation at the time of transfer, reduced by the basis of the obligation. Taxaide The basis of the obligation is the decedent's basis, adjusted for all installment payments received after the decedent's death and before the transfer. Taxaide   If the decedent and obligor were related persons, the fair market value of the obligation cannot be less than its face value. Taxaide Specific Types of Income in Respect of a Decedent This section explains and provides examples of some specific types of income in respect of a decedent. Taxaide Wages. Taxaide   The entire amount of wages or other employee compensation earned by the decedent but unpaid at the time of death is income in respect of a decedent. Taxaide The income is not reduced by any amounts withheld by the employer. Taxaide If the income is $600 or more, the employer should report it in box 3 of Form 1099-MISC, Miscellaneous Income, and give the recipient a copy of the form or a similar statement. Taxaide   Wages paid as income in respect of a decedent are not subject to federal income tax withholding. Taxaide However, if paid during the calendar year of death, they are subject to withholding for social security and Medicare taxes. Taxaide These taxes should be included on the decedent's Form W-2 along with the taxes withheld before death. Taxaide These wages are not included in box 1 of Form W-2. Taxaide   Wages paid as income in respect of a decedent after the year of death generally are not subject to withholding for any federal taxe