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Taxes Military

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Taxes Military

Taxes military 4. Taxes military   Tax Withholding and Estimated Tax Table of Contents What's New for 2014 Reminders Introduction Useful Items - You may want to see: Tax Withholding for 2014Salaries and Wages Tips Taxable Fringe Benefits Sick Pay Pensions and Annuities Gambling Winnings Unemployment Compensation Federal Payments Backup Withholding Estimated Tax for 2014Who Does Not Have To Pay Estimated Tax Who Must Pay Estimated Tax How To Figure Estimated Tax When To Pay Estimated Tax How To Figure Each Payment How To Pay Estimated Tax Credit for Withholding and Estimated Tax for 2013Withholding Estimated Tax Underpayment Penalty for 2013 What's New for 2014 Tax law changes for 2014. Taxes military  When you figure how much income tax you want withheld from your pay and when you figure your estimated tax, consider tax law changes effective in 2014. Taxes military For more information, see Publication 505. Taxes military Reminders Estimated tax safe harbor for higher income taxpayers. Taxes military  If your 2013 adjusted gross income was more than $150,000 ($75,000 if you are married filing a separate return), you must pay the smaller of 90% of your expected tax for 2014 or 110% of the tax shown on your 2013 return to avoid an estimated tax penalty. Taxes military Introduction This chapter discusses how to pay your tax as you earn or receive income during the year. Taxes military In general, the federal income tax is a pay-as-you-go tax. Taxes military There are two ways to pay as you go. Taxes military Withholding. Taxes military If you are an employee, your employer probably withholds income tax from your pay. Taxes military Tax also may be withheld from certain other income, such as pensions, bonuses, commissions, and gambling winnings. Taxes military The amount withheld is paid to the IRS in your name. Taxes military Estimated tax. Taxes military If you do not pay your tax through withholding, or do not pay enough tax that way, you may have to pay estimated tax. Taxes military People who are in business for themselves generally will have to pay their tax this way. Taxes military Also, you may have to pay estimated tax if you receive income such as dividends, interest, capital gains, rent, and royalties. Taxes military Estimated tax is used to pay not only income tax, but self-employment tax and alternative minimum tax as well. Taxes military This chapter explains these methods. Taxes military In addition, it also explains the following. Taxes military Credit for withholding and estimated tax. Taxes military When you file your 2013 income tax return, take credit for all the income tax withheld from your salary, wages, pensions, etc. Taxes military , and for the estimated tax you paid for 2013. Taxes military Also take credit for any excess social security or railroad retirement tax withheld (discussed in chapter 37). Taxes military Underpayment penalty. Taxes military If you did not pay enough tax during the year, either through withholding or by making estimated tax payments, you may have to pay a penalty. Taxes military In most cases, the IRS can figure this penalty for you. Taxes military See Underpayment Penalty for 2013 at the end of this chapter. Taxes military Useful Items - You may want to see: Publication 505 Tax Withholding and Estimated Tax Form (and Instructions) W-4 Employee's Withholding Allowance Certificate W-4P Withholding Certificate for Pension or Annuity Payments W-4S Request for Federal Income Tax Withholding From Sick Pay W-4V Voluntary Withholding Request 1040-ES Estimated Tax for Individuals 2210 Underpayment of Estimated Tax by Individuals, Estates, and Trusts 2210-F Underpayment of Estimated Tax by Farmers and Fishermen Tax Withholding for 2014 This section discusses income tax withholding on: Salaries and wages, Tips, Taxable fringe benefits, Sick pay, Pensions and annuities, Gambling winnings, Unemployment compensation, and Certain federal payments. Taxes military This section explains the rules for withholding tax from each of these types of income. Taxes military This section also covers backup withholding on interest, dividends, and other payments. Taxes military Salaries and Wages Income tax is withheld from the pay of most employees. Taxes military Your pay includes your regular pay, bonuses, commissions, and vacation allowances. Taxes military It also includes reimbursements and other expense allowances paid under a nonaccountable plan. Taxes military See Supplemental Wages , later, for more information about reimbursements and allowances paid under a nonaccountable plan. Taxes military If your income is low enough that you will not have to pay income tax for the year, you may be exempt from withholding. Taxes military This is explained under Exemption From Withholding , later. Taxes military You can ask your employer to withhold income tax from noncash wages and other wages not subject to withholding. Taxes military If your employer does not agree to withhold tax, or if not enough is withheld, you may have to pay estimated tax, as discussed later under Estimated Tax for 2014 . Taxes military Military retirees. Taxes military   Military retirement pay is treated in the same manner as regular pay for income tax withholding purposes, even though it is treated as a pension or annuity for other tax purposes. Taxes military Household workers. Taxes military   If you are a household worker, you can ask your employer to withhold income tax from your pay. Taxes military A household worker is an employee who performs household work in a private home, local college club, or local fraternity or sorority chapter. Taxes military   Tax is withheld only if you want it withheld and your employer agrees to withhold it. Taxes military If you do not have enough income tax withheld, you may have to pay estimated tax, as discussed later under Estimated Tax for 2014 . Taxes military Farmworkers. Taxes military   Generally, income tax is withheld from your cash wages for work on a farm unless your employer does both of these: Pays you cash wages of less than $150 during the year, and Has expenditures for agricultural labor totaling less than $2,500 during the year. Taxes military Differential wage payments. Taxes military    When employees are on leave from employment for military duty, some employers make up the difference between the military pay and civilian pay. Taxes military Payments to an employee who is on active duty for a period of more than 30 days will be subject to income tax withholding, but not subject to social security or Medicare taxes. Taxes military The wages and withholding will be reported on Form W-2, Wage and Tax Statement. Taxes military   The credit employers can claim for differential wages paid to activated military reservists is scheduled to expire for wages paid after December 31, 2013. Taxes military Determining Amount of Tax Withheld Using Form W-4 The amount of income tax your employer withholds from your regular pay depends on two things. Taxes military The amount you earn in each payroll period. Taxes military The information you give your employer on Form W-4. Taxes military Form W-4 includes four types of information that your employer will use to figure your withholding. Taxes military Whether to withhold at the single rate or at the lower married rate. Taxes military How many withholding allowances you claim (each allowance reduces the amount withheld). Taxes military Whether you want an additional amount withheld. Taxes military Whether you are claiming an exemption from withholding in 2014. Taxes military See Exemption From Withholding , later. Taxes military Note. Taxes military You must specify a filing status and a number of withholding allowances on Form W-4. Taxes military You cannot specify only a dollar amount of withholding. Taxes military New Job When you start a new job, you must fill out Form W-4 and give it to your employer. Taxes military Your employer should have copies of the form. Taxes military If you need to change the information later, you must fill out a new form. Taxes military If you work only part of the year (for example, you start working after the beginning of the year), too much tax may be withheld. Taxes military You may be able to avoid overwithholding if your employer agrees to use the part-year method. Taxes military See Part-Year Method in chapter 1 of Publication 505 for more information. Taxes military Employee also receiving pension income. Taxes military   If you receive pension or annuity income and begin a new job, you will need to file Form W-4 with your new employer. Taxes military However, you can choose to split your withholding allowances between your pension and job in any manner. Taxes military Changing Your Withholding During the year changes may occur to your marital status, exemptions, adjustments, deductions, or credits you expect to claim on your tax return. Taxes military When this happens, you may need to give your employer a new Form W-4 to change your withholding status or your number of allowances. Taxes military If the changes reduce the number of allowances you are claiming or changes your marital status from married to single, you must give your employer a new Form W-4 within 10 days. Taxes military Generally, you can submit a new Form W-4 whenever you wish to change the number of your withholding allowances for any other reason. Taxes military Changing your withholding for 2015. Taxes military   If events in 2014 will decrease the number of your withholding allowances for 2015, you must give your employer a new Form W-4 by December 1, 2014. Taxes military If the event occurs in December 2014, submit a new Form W-4 within 10 days. Taxes military Checking Your Withholding After you have given your employer a Form W-4, you can check to see whether the amount of tax withheld from your pay is too little or too much. Taxes military If too much or too little tax is being withheld, you should give your employer a new Form W-4 to change your withholding. Taxes military You should try to have your withholding match your actual tax liability. Taxes military If not enough tax is withheld, you will owe tax at the end of the year and may have to pay interest and a penalty. Taxes military If too much tax is withheld, you will lose the use of that money until you get your refund. Taxes military Always check your withholding if there are personal or financial changes in your life or changes in the law that might change your tax liability. Taxes military Note. Taxes military You cannot give your employer a payment to cover withholding on salaries and wages for past pay periods or a payment for estimated tax. Taxes military Completing Form W-4 and Worksheets Form W-4 has worksheets to help you figure how many withholding allowances you can claim. Taxes military The worksheets are for your own records. Taxes military Do not give them to your employer. Taxes military Multiple jobs. Taxes military   If you have income from more than one job at the same time, complete only one set of Form W-4 worksheets. Taxes military Then split your allowances between the Forms W-4 for each job. Taxes military You cannot claim the same allowances with more than one employer at the same time. Taxes military You can claim all your allowances with one employer and none with the other(s), or divide them any other way. Taxes military Married individuals. Taxes military   If both you and your spouse are employed and expect to file a joint return, figure your withholding allowances using your combined income, adjustments, deductions, exemptions, and credits. Taxes military Use only one set of worksheets. Taxes military You can divide your total allowances any way, but you cannot claim an allowance that your spouse also claims. Taxes military   If you and your spouse expect to file separate returns, figure your allowances using separate worksheets based on your own individual income, adjustments, deductions, exemptions, and credits. Taxes military Alternative method of figuring withholding allowances. Taxes military   You do not have to use the Form W-4 worksheets if you use a more accurate method of figuring the number of withholding allowances. Taxes military For more information, see Alternative method of figuring withholding allowances under Completing Form W-4 and Worksheets in Publication 505, chapter 1. Taxes military Personal Allowances Worksheet. Taxes military   Use the Personal Allowances Worksheet on Form W-4 to figure your withholding allowances based on exemptions and any special allowances that apply. Taxes military Deduction and Adjustments Worksheet. Taxes military   Use the Deduction and Adjustments Worksheet on Form W-4 if you plan to itemize your deductions, claim certain credits, or claim adjustments to the income on your 2014 tax return and you want to reduce your withholding. Taxes military Also, complete this worksheet when you have changes to these items to see if you need to change your withholding. Taxes military Two-Earners/Multiple Jobs Worksheet. Taxes military   You may need to complete the Two-Earners/Multiple Jobs Worksheet on Form W-4 if you have more than one job, a working spouse, or are also receiving a pension. Taxes military Also, on this worksheet you can add any additional withholding necessary to cover any amount you expect to owe other than income tax, such as self-employment tax. Taxes military Getting the Right Amount of Tax Withheld In most situations, the tax withheld from your pay will be close to the tax you figure on your return if you follow these two rules. Taxes military You accurately complete all the Form W-4 worksheets that apply to you. Taxes military You give your employer a new Form W-4 when changes occur. Taxes military But because the worksheets and withholding methods do not account for all possible situations, you may not be getting the right amount withheld. Taxes military This is most likely to happen in the following situations. Taxes military You are married and both you and your spouse work. Taxes military You have more than one job at a time. Taxes military You have nonwage income, such as interest, dividends, alimony, unemployment compensation, or self-employment income. Taxes military You will owe additional amounts with your return, such as self-employment tax. Taxes military Your withholding is based on obsolete Form W-4 information for a substantial part of the year. Taxes military Your earnings are more than the amount shown under Check your withholding in the instructions at the top of page 1 of Form W-4. Taxes military You work only part of the year. Taxes military You change the number of your withholding allowances during the year. Taxes military Cumulative wage method. Taxes military   If you change the number of your withholding allowances during the year, too much or too little tax may have been withheld for the period before you made the change. Taxes military You may be able to compensate for this if your employer agrees to use the cumulative wage withholding method for the rest of the year. Taxes military You must ask your employer in writing to use this method. Taxes military   To be eligible, you must have been paid for the same kind of payroll period (weekly, biweekly, etc. Taxes military ) since the beginning of the year. Taxes military Publication 505 To make sure you are getting the right amount of tax withheld, get Publication 505. Taxes military It will help you compare the total tax to be withheld during the year with the tax you can expect to figure on your return. Taxes military It also will help you determine how much, if any, additional withholding is needed each payday to avoid owing tax when you file your return. Taxes military If you do not have enough tax withheld, you may have to pay estimated tax, as explained under Estimated Tax for 2014 , later. Taxes military You can use the IRS Withholding Calculator at www. Taxes military irs. Taxes military gov/Individuals, instead of Publication 505 or the worksheets included with Form W-4, to determine whether you need to have your withholding increased or decreased. Taxes military Rules Your Employer Must Follow It may be helpful for you to know some of the withholding rules your employer must follow. Taxes military These rules can affect how to fill out your Form W-4 and how to handle problems that may arise. Taxes military New Form W-4. Taxes military   When you start a new job, your employer should have you complete a Form W-4. Taxes military Beginning with your first payday, your employer will use the information you give on the form to figure your withholding. Taxes military   If you later fill out a new Form W-4, your employer can put it into effect as soon as possible. Taxes military The deadline for putting it into effect is the start of the first payroll period ending 30 or more days after you turn it in. Taxes military No Form W-4. Taxes military   If you do not give your employer a completed Form W-4, your employer must withhold at the highest rate, as if you were single and claimed no withholding allowances. Taxes military Repaying withheld tax. Taxes military   If you find you are having too much tax withheld because you did not claim all the withholding allowances you are entitled to, you should give your employer a new Form W-4. Taxes military Your employer cannot repay any of the tax previously withheld. Taxes military Instead, claim the full amount withheld when you file your tax return. Taxes military   However, if your employer has withheld more than the correct amount of tax for the Form W-4 you have in effect, you do not have to fill out a new Form W-4 to have your withholding lowered to the correct amount. Taxes military Your employer can repay the amount that was withheld incorrectly. Taxes military If you are not repaid, your Form W-2 will reflect the full amount actually withheld, which you would claim when you file your tax return. Taxes military Exemption From Withholding If you claim exemption from withholding, your employer will not withhold federal income tax from your wages. Taxes military The exemption applies only to income tax, not to social security or Medicare tax. Taxes military You can claim exemption from withholding for 2014 only if both of the following situations apply. Taxes military For 2013 you had a right to a refund of all federal income tax withheld because you had no tax liability. Taxes military For 2014 you expect a refund of all federal income tax withheld because you expect to have no tax liability. Taxes military Students. Taxes military   If you are a student, you are not automatically exempt. Taxes military See chapter 1 to find out if you must file a return. Taxes military If you work only part time or only during the summer, you may qualify for exemption from withholding. Taxes military Age 65 or older or blind. Taxes military   If you are 65 or older or blind, use Worksheet 1-3 or 1-4 in chapter 1 of Publication 505, to help you decide if you qualify for exemption from withholding. Taxes military Do not use either worksheet if you will itemize deductions, claim exemptions for dependents, or claim tax credits on your 2014 return. Taxes military Instead, see Itemizing deductions or claiming exemptions or credits in chapter 1 of Publication 505. Taxes military Claiming exemption from withholding. Taxes military   To claim exemption, you must give your employer a Form W-4. Taxes military Do not complete lines 5 and 6. Taxes military Enter “Exempt” on line 7. Taxes military   If you claim exemption, but later your situation changes so that you will have to pay income tax after all, you must file a new Form W-4 within 10 days after the change. Taxes military If you claim exemption in 2014, but you expect to owe income tax for 2015, you must file a new Form W-4 by December 1, 2014. Taxes military   Your claim of exempt status may be reviewed by the IRS. Taxes military An exemption is good for only 1 year. Taxes military   You must give your employer a new Form W-4 by February 15 each year to continue your exemption. Taxes military Supplemental Wages Supplemental wages include bonuses, commissions, overtime pay, vacation allowances, certain sick pay, and expense allowances under certain plans. Taxes military The payer can figure withholding on supplemental wages using the same method used for your regular wages. Taxes military However, if these payments are identified separately from your regular wages, your employer or other payer of supplemental wages can withhold income tax from these wages at a flat rate. Taxes military Expense allowances. Taxes military   Reimbursements or other expense allowances paid by your employer under a nonaccountable plan are treated as supplemental wages. Taxes military   Reimbursements or other expense allowances paid under an accountable plan that are more than your proven expenses are treated as paid under a nonaccountable plan if you do not return the excess payments within a reasonable period of time. Taxes military   For more information about accountable and nonaccountable expense allowance plans, see Reimbursements in chapter 26. Taxes military Penalties You may have to pay a penalty of $500 if both of the following apply. Taxes military You make statements or claim withholding allowances on your Form W-4 that reduce the amount of tax withheld. Taxes military You have no reasonable basis for those statements or allowances at the time you prepare your Form W-4. Taxes military There is also a criminal penalty for willfully supplying false or fraudulent information on your Form W-4 or for willfully failing to supply information that would increase the amount withheld. Taxes military The penalty upon conviction can be either a fine of up to $1,000 or imprisonment for up to 1 year, or both. Taxes military These penalties will apply if you deliberately and knowingly falsify your Form W-4 in an attempt to reduce or eliminate the proper withholding of taxes. Taxes military A simple error or an honest mistake will not result in one of these penalties. Taxes military For example, a person who has tried to figure the number of withholding allowances correctly, but claims seven when the proper number is six, will not be charged a W-4 penalty. Taxes military Tips The tips you receive while working on your job are considered part of your pay. Taxes military You must include your tips on your tax return on the same line as your regular pay. Taxes military However, tax is not withheld directly from tip income, as it is from your regular pay. Taxes military Nevertheless, your employer will take into account the tips you report when figuring how much to withhold from your regular pay. Taxes military See chapter 6 for information on reporting your tips to your employer. Taxes military For more information on the withholding rules for tip income, see Publication 531, Reporting Tip Income. Taxes military How employer figures amount to withhold. Taxes military   The tips you report to your employer are counted as part of your income for the month you report them. Taxes military Your employer can figure your withholding in either of two ways. Taxes military By withholding at the regular rate on the sum of your pay plus your reported tips. Taxes military By withholding at the regular rate on your pay plus a percentage of your reported tips. Taxes military Not enough pay to cover taxes. Taxes military   If your regular pay is not enough for your employer to withhold all the tax (including income tax and social security and Medicare taxes (or the equivalent railroad retirement tax)) due on your pay plus your tips, you can give your employer money to cover the shortage. Taxes military See Giving your employer money for taxes in chapter 6. Taxes military Allocated tips. Taxes military   Your employer should not withhold income tax, Medicare tax, social security tax, or railroad retirement tax on any allocated tips. Taxes military Withholding is based only on your pay plus your reported tips. Taxes military Your employer should refund to you any incorrectly withheld tax. Taxes military See Allocated Tips in chapter 6 for more information. Taxes military Taxable Fringe Benefits The value of certain noncash fringe benefits you receive from your employer is considered part of your pay. Taxes military Your employer generally must withhold income tax on these benefits from your regular pay. Taxes military For information on fringe benefits, see Fringe Benefits under Employee Compensation in chapter 5. Taxes military Although the value of your personal use of an employer-provided car, truck, or other highway motor vehicle is taxable, your employer can choose not to withhold income tax on that amount. Taxes military Your employer must notify you if this choice is made. Taxes military For more information on withholding on taxable fringe benefits, see chapter 1 of Publication 505. Taxes military Sick Pay Sick pay is a payment to you to replace your regular wages while you are temporarily absent from work due to sickness or personal injury. Taxes military To qualify as sick pay, it must be paid under a plan to which your employer is a party. Taxes military If you receive sick pay from your employer or an agent of your employer, income tax must be withheld. Taxes military An agent who does not pay regular wages to you may choose to withhold income tax at a flat rate. Taxes military However, if you receive sick pay from a third party who is not acting as an agent of your employer, income tax will be withheld only if you choose to have it withheld. Taxes military See Form W-4S , later. Taxes military If you receive payments under a plan in which your employer does not participate (such as an accident or health plan where you paid all the premiums), the payments are not sick pay and usually are not taxable. Taxes military Union agreements. Taxes military   If you receive sick pay under a collective bargaining agreement between your union and your employer, the agreement may determine the amount of income tax withholding. Taxes military See your union representative or your employer for more information. Taxes military Form W-4S. Taxes military   If you choose to have income tax withheld from sick pay paid by a third party, such as an insurance company, you must fill out Form W-4S. Taxes military Its instructions contain a worksheet you can use to figure the amount you want withheld. Taxes military They also explain restrictions that may apply. Taxes military   Give the completed form to the payer of your sick pay. Taxes military The payer must withhold according to your directions on the form. Taxes military Estimated tax. Taxes military   If you do not request withholding on Form W-4S, or if you do not have enough tax withheld, you may have to make estimated tax payments. Taxes military If you do not pay enough tax, either through estimated tax or withholding, or a combination of both, you may have to pay a penalty. Taxes military See Underpayment Penalty for 2013 at the end of this chapter. Taxes military Pensions and Annuities Income tax usually will be withheld from your pension or annuity distributions unless you choose not to have it withheld. Taxes military This rule applies to distributions from: A traditional individual retirement arrangement (IRA); A life insurance company under an endowment, annuity, or life insurance contract; A pension, annuity, or profit-sharing plan; A stock bonus plan; and Any other plan that defers the time you receive compensation. Taxes military The amount withheld depends on whether you receive payments spread out over more than 1 year (periodic payments), within 1 year (nonperiodic payments), or as an eligible rollover distribution (ERD). Taxes military Income tax withholding from an ERD is mandatory. Taxes military More information. Taxes military   For more information on taxation of annuities and distributions (including ERDs) from qualified retirement plans, see chapter 10. Taxes military For information on IRAs, see chapter 17. Taxes military For more information on withholding on pensions and annuities, including a discussion of Form W-4P, see Pensions and Annuities in chapter 1 of Publication 505. Taxes military Gambling Winnings Income tax is withheld at a flat 25% rate from certain kinds of gambling winnings. Taxes military Gambling winnings of more than $5,000 from the following sources are subject to income tax withholding. Taxes military Any sweepstakes; wagering pool, including payments made to winners of poker tournaments; or lottery. Taxes military Any other wager, if the proceeds are at least 300 times the amount of the bet. Taxes military It does not matter whether your winnings are paid in cash, in property, or as an annuity. Taxes military Winnings not paid in cash are taken into account at their fair market value. Taxes military Exception. Taxes military   Gambling winnings from bingo, keno, and slot machines generally are not subject to income tax withholding. Taxes military However, you may need to provide the payer with a social security number to avoid withholding. Taxes military See Backup withholding on gambling winnings in chapter 1 of Publication 505. Taxes military If you receive gambling winnings not subject to withholding, you may need to pay estimated tax. Taxes military See Estimated Tax for 2014 , later. Taxes military If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty. Taxes military See Underpayment Penalty for 2013 at the end of this chapter. Taxes military Form W-2G. Taxes military   If a payer withholds income tax from your gambling winnings, you should receive a Form W-2G, Certain Gambling Winnings, showing the amount you won and the amount withheld. Taxes military Report the tax withheld on line 62 of Form 1040. Taxes military Unemployment Compensation You can choose to have income tax withheld from unemployment compensation. Taxes military To make this choice, fill out Form W-4V (or a similar form provided by the payer) and give it to the payer. Taxes military All unemployment compensation is taxable. Taxes military So, if you do not have income tax withheld, you may have to pay estimated tax. Taxes military See Estimated Tax for 2014 , later. Taxes military If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty. Taxes military For information, see Underpayment Penalty for 2013 at the end of this chapter. Taxes military Federal Payments You can choose to have income tax withheld from certain federal payments you receive. Taxes military These payments are: Social security benefits, Tier 1 railroad retirement benefits, Commodity credit corporation loans you choose to include in your gross income, Payments under the Agricultural Act of 1949 (7 U. Taxes military S. Taxes military C. Taxes military 1421 et. Taxes military seq. Taxes military ), as amended, or title II of the Disaster Assistance Act of 1988, that are treated as insurance proceeds and that you receive because: Your crops were destroyed or damaged by drought, flood, or any other natural disaster, or You were unable to plant crops because of a natural disaster described in (a), and Any other payment under Federal law as determined by the Secretary. Taxes military To make this choice, fill out Form W-4V (or a similar form provided by the payer) and give it to the payer. Taxes military If you do not choose to have income tax withheld, you may have to pay estimated tax. Taxes military See Estimated Tax for 2014 , later. Taxes military If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty. Taxes military For information, see Underpayment Penalty for 2013 at the end of this chapter. Taxes military More information. Taxes military   For more information about the tax treatment of social security and railroad retirement benefits, see chapter 11. Taxes military Get Publication 225, Farmer's Tax Guide, for information about the tax treatment of commodity credit corporation loans or crop disaster payments. Taxes military Backup Withholding Banks or other businesses that pay you certain kinds of income must file an information return (Form 1099) with the IRS. Taxes military The information return shows how much you were paid during the year. Taxes military It also includes your name and taxpayer identification number (TIN). Taxes military TINs are explained in chapter 1 under Social Security Number (SSN) . Taxes military These payments generally are not subject to withholding. Taxes military However, “backup” withholding is required in certain situations. Taxes military Backup withholding can apply to most kinds of payments that are reported on Form 1099. Taxes military The payer must withhold at a flat 28% rate in the following situations. Taxes military You do not give the payer your TIN in the required manner. Taxes military The IRS notifies the payer that the TIN you gave is incorrect. Taxes military You are required, but fail, to certify that you are not subject to backup withholding. Taxes military The IRS notifies the payer to start withholding on interest or dividends because you have underreported interest or dividends on your income tax return. Taxes military The IRS will do this only after it has mailed you four notices over at least a 210-day period. Taxes military See Backup Withholding in chapter 1 of Publication 505 for more information. Taxes military Penalties. Taxes military   There are civil and criminal penalties for giving false information to avoid backup withholding. Taxes military The civil penalty is $500. Taxes military The criminal penalty, upon conviction, is a fine of up to $1,000 or imprisonment of up to 1 year, or both. Taxes military Estimated Tax for 2014 Estimated tax is the method used to pay tax on income that is not subject to withholding. Taxes military This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. Taxes military You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough. Taxes military Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. Taxes military If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty. Taxes military If you do not pay enough by the due date of each payment period (see When To Pay Estimated Tax , later), you may be charged a penalty even if you are due a refund when you file your tax return. Taxes military For information on when the penalty applies, see Underpayment Penalty for 2013 at the end of this chapter. Taxes military Who Does Not Have To Pay Estimated Tax If you receive salaries or wages, you can avoid having to pay estimated tax by asking your employer to take more tax out of your earnings. Taxes military To do this, give a new Form W-4 to your employer. Taxes military See chapter 1 of Publication 505. Taxes military Estimated tax not required. Taxes military   You do not have to pay estimated tax for 2014 if you meet all three of the following conditions. Taxes military You had no tax liability for 2013. Taxes military You were a U. Taxes military S. Taxes military citizen or resident alien for the whole year. Taxes military Your 2013 tax year covered a 12-month period. Taxes military   You had no tax liability for 2013 if your total tax was zero or you did not have to file an income tax return. Taxes military For the definition of “total tax” for 2013, see Publication 505, chapter 2. Taxes military Who Must Pay Estimated Tax If you owe additional tax for 2013, you may have to pay estimated tax for 2014. Taxes military You can use the following general rule as a guide during the year to see if you will have enough withholding, or if you should increase your withholding or make estimated tax payments. Taxes military General rule. Taxes military   In most cases, you must pay estimated tax for 2014 if both of the following apply. Taxes military You expect to owe at least $1,000 in tax for 2014, after subtracting your withholding and refundable credits. Taxes military You expect your withholding plus your refundable credits to be less than the smaller of: 90% of the tax to be shown on your 2014 tax return, or 100% of the tax shown on your 2013 tax return (but see Special rules for farmers, fishermen, and higher income taxpayers, later). Taxes military Your 2013 tax return must cover all 12 months. Taxes military    If the result from using the general rule above suggests that you will not have enough withholding, complete the 2014 Estimated Tax Worksheet in Publication 505 for a more accurate calculation. Taxes military Special rules for farmers, fishermen, and higher income taxpayers. Taxes military   If at least two-thirds of your gross income for tax year 2013 or 2014 is from farming or fishing, substitute 662/3% for 90% in (2a) under the General rule, earlier. Taxes military If your AGI for 2013 was more than $150,000 ($75,000 if your filing status for 2014 is married filing a separate return), substitute 110% for 100% in (2b) under General rule , earlier. Taxes military See Figure 4-A and Publication 505, chapter 2 for more information. Taxes military Figure 4-A. Taxes military Do You Have To Pay Estimated Tax? Please click here for the text description of the image. Taxes military Figure 4-A Do You Have To Pay Estimated Tax? Aliens. Taxes military   Resident and nonresident aliens also may have to pay estimated tax. Taxes military Resident aliens should follow the rules in this chapter unless noted otherwise. Taxes military Nonresident aliens should get Form 1040-ES (NR), U. Taxes military S. Taxes military Estimated Tax for Nonresident Alien Individuals. Taxes military   You are an alien if you are not a citizen or national of the United States. Taxes military You are a resident alien if you either have a green card or meet the substantial presence test. Taxes military For more information about the substantial presence test, see Publication 519, U. Taxes military S. Taxes military Tax Guide for Aliens. Taxes military Married taxpayers. Taxes military   If you qualify to make joint estimated tax payments, apply the rules discussed here to your joint estimated income. Taxes military   You and your spouse can make joint estimated tax payments even if you are not living together. Taxes military   However, you and your spouse cannot make joint estimated tax payments if:  You are legally separated under a decree of divorce or separate maintenance, You and your spouse have different tax years, or Either spouse is a nonresident alien (unless that spouse elected to be treated as a resident alien for tax purposes (see chapter 1 of Publication 519)). Taxes military   If you do not qualify to make joint estimated tax payments, apply these rules to your separate estimated income. Taxes military Making joint or separate estimated tax payments will not affect your choice of filing a joint tax return or separate returns for 2014. Taxes military 2013 separate returns and 2014 joint return. Taxes military   If you plan to file a joint return with your spouse for 2014, but you filed separate returns for 2013, your 2013 tax is the total of the tax shown on your separate returns. Taxes military You filed a separate return if you filed as single, head of household, or married filing separately. Taxes military 2013 joint return and 2014 separate returns. Taxes military   If you plan to file a separate return for 2014 but you filed a joint return for 2013, your 2013 tax is your share of the tax on the joint return. Taxes military You file a separate return if you file as single, head of household, or married filing separately. Taxes military   To figure your share of the tax on the joint return, first figure the tax both you and your spouse would have paid had you filed separate returns for 2013 using the same filing status as for 2014. Taxes military Then multiply the tax on the joint return by the following fraction. Taxes military     The tax you would have paid had you filed a separate return   The total tax you and your spouse would have paid had you filed separate returns Example. Taxes military Joe and Heather filed a joint return for 2013 showing taxable income of $48,500 and a tax of $6,386. Taxes military Of the $48,500 taxable income, $40,100 was Joe's and the rest was Heather's. Taxes military For 2014, they plan to file married filing separately. Taxes military Joe figures his share of the tax on the 2013 joint return as follows. Taxes military   Tax on $40,100 based on a separate return $5,960     Tax on $8,400 based on a separate return 843     Total $6,803     Joe's percentage of total ($5,960 ÷ $6,803) 87. Taxes military 6%     Joe's share of tax on joint return  ($6,386 × 87. Taxes military 6%) $5,594   How To Figure Estimated Tax To figure your estimated tax, you must figure your expected adjusted gross income (AGI), taxable income, taxes, deductions, and credits for the year. Taxes military When figuring your 2014 estimated tax, it may be helpful to use your income, deductions, and credits for 2013 as a starting point. Taxes military Use your 2013 federal tax return as a guide. Taxes military You can use Form 1040-ES and Publication 505 to figure your estimated tax. Taxes military Nonresident aliens use Form 1040-ES (NR) and Publication 505 to figure estimated tax (see chapter 8 of Publication 519 for more information). Taxes military You must make adjustments both for changes in your own situation and for recent changes in the tax law. Taxes military For a discussion of these changes, visit IRS. Taxes military gov. Taxes military For more complete information on how to figure your estimated tax for 2014, see chapter 2 of Publication 505. Taxes military When To Pay Estimated Tax For estimated tax purposes, the tax year is divided into four payment periods. Taxes military Each period has a specific payment due date. Taxes military If you do not pay enough tax by the due date of each payment period, you may be charged a penalty even if you are due a refund when you file your income tax return. Taxes military The payment periods and due dates for estimated tax payments are shown next. Taxes military   For the period: Due date:*     Jan. Taxes military 1 – March 31 April 15     April 1 – May 31 June 16     June 1 – August 31 Sept. Taxes military 15     Sept. Taxes military 1– Dec. Taxes military 31 Jan. Taxes military 15, next year     *See Saturday, Sunday, holiday rule and January payment . Taxes military Saturday, Sunday, holiday rule. Taxes military   If the due date for an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that is not a Saturday, Sunday, or legal holiday. Taxes military January payment. Taxes military   If you file your 2014 Form 1040 or Form 1040A by January 31, 2015, and pay the rest of the tax you owe, you do not need to make the payment due on January 15, 2015. Taxes military Fiscal year taxpayers. Taxes military   If your tax year does not start on January 1, see the Form 1040-ES instructions for your payment due dates. Taxes military When To Start You do not have to make estimated tax payments until you have income on which you will owe income tax. Taxes military If you have income subject to estimated tax during the first payment period, you must make your first payment by the due date for the first payment period. Taxes military You can pay all your estimated tax at that time, or you can pay it in installments. Taxes military If you choose to pay in installments, make your first payment by the due date for the first payment period. Taxes military Make your remaining installment payments by the due dates for the later periods. Taxes military No income subject to estimated tax during first period. Taxes military    If you do not have income subject to estimated tax until a later payment period, you must make your first payment by the due date for that period. Taxes military You can pay your entire estimated tax by the due date for that period or you can pay it in installments by the due date for that period and the due dates for the remaining periods. Taxes military The following chart shows when to make installment payments. Taxes military If you first have income on which you must pay estimated tax: Make a payment  by:* Make later installments by:* Before April 1 April 15 June 16 Sept. Taxes military 15 Jan. Taxes military 15 next year April 1–May 31 June 16 Sept. Taxes military 15 Jan. Taxes military 15 next year June 1–Aug. Taxes military 31 Sept. Taxes military 15 Jan. Taxes military 15 next year After Aug. Taxes military 31 Jan. Taxes military 15 next year (None) *See Saturday, Sunday, holiday rule and January payment . Taxes military How much to pay to avoid a penalty. Taxes military   To determine how much you should pay by each payment due date, see How To Figure Each Payment, next. Taxes military How To Figure Each Payment You should pay enough estimated tax by the due date of each payment period to avoid a penalty for that period. Taxes military You can figure your required payment for each period by using either the regular installment method or the annualized income installment method. Taxes military These methods are described in chapter 2 of Publication 505. Taxes military If you do not pay enough during each payment period, you may be charged a penalty even if you are due a refund when you file your tax return. Taxes military If the earlier discussion of No income subject to estimated tax during first period or the later discussion of Change in estimated tax applies to you, you may benefit from reading Annualized Income Installment Method in chapter 2 of Publication 505 for information on how to avoid a penalty. Taxes military Underpayment penalty. Taxes military   Under the regular installment method, if your estimated tax payment for any period is less than one-fourth of your estimated tax, you may be charged a penalty for underpayment of estimated tax for that period when you file your tax return. Taxes military Under the annualized income installment method, your estimated tax payments vary with your income, but the amount required must be paid each period. Taxes military See chapter 4 of Publication 505 for more information. Taxes military Change in estimated tax. Taxes military   After you make an estimated tax payment, changes in your income, adjustments, deductions, credits, or exemptions may make it necessary for you to refigure your estimated tax. Taxes military Pay the unpaid balance of your amended estimated tax by the next payment due date after the change or in installments by that date and the due dates for the remaining payment periods. Taxes military Estimated Tax Payments Not Required You do not have to pay estimated tax if your withholding in each payment period is at least as much as: One-fourth of your required annual payment, or Your required annualized income installment for that period. Taxes military You also do not have to pay estimated tax if you will pay enough through withholding to keep the amount you owe with your return under $1,000. Taxes military How To Pay Estimated Tax There are several ways to pay estimated tax. Taxes military Credit an overpayment on your 2013 return to your 2014 estimated tax. Taxes military Pay by direct transfer from your bank account, or pay by credit or debit card using a pay-by-phone system or the Internet. Taxes military Send in your payment (check or money order) with a payment voucher from Form 1040-ES. Taxes military Credit an Overpayment If you show an overpayment of tax after completing your Form 1040 or Form 1040A for 2013, you can apply part or all of it to your estimated tax for 2014. Taxes military On line 75 of Form 1040, or line 44 of Form 1040A, enter the amount you want credited to your estimated tax rather than refunded. Taxes military Take the amount you have credited into account when figuring your estimated tax payments. Taxes military You cannot have any of the amount you credited to your estimated tax refunded to you until you file your tax return for the following year. Taxes military You also cannot use that overpayment in any other way. Taxes military Pay Online Paying online is convenient and secure and helps make sure we get your payments on time. Taxes military You can pay using either of the following electronic payment methods. Taxes military Direct transfer from your bank account. Taxes military Credit or debit card. Taxes military To pay your taxes online or for more information, go to www. Taxes military irs. Taxes military gov/e-pay. Taxes military Pay by Phone Paying by phone is another safe and secure method of paying electronically. Taxes military Use one of the following methods. Taxes military Direct transfer from your bank account. Taxes military Credit or debit card. Taxes military To pay by direct transfer from your bank account, call 1-800-555-4477 (English), 1-800-244-4829 (Espanol). Taxes military People who are deaf, hard of hearing, or have a speech disability and who have access to TTY/TDD can call 1-800-733-4829. Taxes military To pay using a credit or debit card, you can call one of the following service providers. Taxes military There is a convenience fee charged by these providers that varies by provider, card type, and payment amount. Taxes military WorldPay 1-888-9-PAY-TAXTM(1-888-972-9829) www. Taxes military payUSAtax. Taxes military com Official Payments Corporation 1-888-UPAY-TAXTM (1-888-872-9829) www. Taxes military officialpayments. Taxes military com Link2Gov Corporation 1-888-PAY-1040TM (1-888-729-1040) www. Taxes military PAY1040. Taxes military com For the latest details on how to pay by phone, go to www. Taxes military irs. Taxes military gov/e-pay. Taxes military Pay by Check or Money Order Using the Estimated Tax Payment Voucher Each payment of estimated tax by check or money order must be accompanied by a payment voucher from Form 1040-ES. Taxes military During 2013, if you: made at least one estimated tax payment but not by electronic means, did not use software or a paid preparer to prepare or file your return,  then you should receive a copy of the 2014 Form 1040-ES/V. Taxes military The enclosed payment vouchers will be preprinted with your name, address, and social security number. Taxes military Using the preprinted vouchers will speed processing, reduce the chance of error, and help save processing costs. Taxes military Use the window envelopes that came with your Form 1040-ES package. Taxes military If you use your own envelopes, make sure you mail your payment vouchers to the address shown in the Form 1040-ES instructions for the place where you live. Taxes military Note. Taxes military These criteria can change without notice. Taxes military If you do not receive a Form 1040-ES/V package and you are required to make an estimated tax payment, you should go to www. Taxes military irs. Taxes military gov and print a copy of Form 1040-ES which includes four blank payment vouchers. Taxes military Complete one of these and make your payment timely to avoid penalties for paying late. Taxes military Do not use the address shown in the Form 1040 or Form 1040A instructions for your estimated tax payments. Taxes military If you did not pay estimated tax last year, you can order Form 1040-ES from the IRS (see inside back cover of this publication) or download it from IRS. Taxes military gov. Taxes military Follow the instructions to make sure you use the vouchers correctly. Taxes military Joint estimated tax payments. Taxes military   If you file a joint return and are making joint estimated tax payments, enter the names and social security numbers on the payment voucher in the same order as they will appear on the joint return. Taxes military Change of address. Taxes military   You must notify the IRS if you are making estimated tax payments and you changed your address during the year. Taxes military Complete Form 8822, Change of Address, and mail it to the address shown in the instructions for that form. Taxes military Credit for Withholding and Estimated Tax for 2013 When you file your 2013 income tax return, take credit for all the income tax and excess social security or railroad retirement tax withheld from your salary, wages, pensions, etc. Taxes military Also take credit for the estimated tax you paid for 2013. Taxes military These credits are subtracted from your total tax. Taxes military Because these credits are refundable, you should file a return and claim these credits, even if you do not owe tax. Taxes military Two or more employers. Taxes military   If you had two or more employers in 2013 and were paid wages of more than $113,700, too much social security or tier 1 railroad retirement tax may have been withheld from your pay. Taxes military You may be able to claim the excess as a credit against your income tax when you file your return. Taxes military See Credit for Excess Social Security Tax or Railroad Retirement Tax Withheld in chapter 37. Taxes military Withholding If you had income tax withheld during 2013, you should be sent a statement by January 31, 2014, showing your income and the tax withheld. Taxes military Depending on the source of your income, you should receive: Form W-2, Wage and Tax Statement, Form W-2G, Certain Gambling Winnings, or A form in the 1099 series. Taxes military Forms W-2 and W-2G. Taxes military   If you file a paper return, always file Form W-2 with your income tax return. Taxes military File Form W-2G with your return only if it shows any federal income tax withheld from your winnings. Taxes military   You should get at least two copies of each form. Taxes military If you file a paper return, attach one copy to the front of your federal income tax return. Taxes military Keep one copy for your records. Taxes military You also should receive copies to file with your state and local returns. Taxes military Form W-2 Your employer is required to provide or send Form W-2 to you no later than January 31, 2014. Taxes military You should receive a separate Form W-2 from each employer you worked for. Taxes military If you stopped working before the end of 2013, your employer could have given you your Form W-2 at any time after you stopped working. Taxes military However, your employer must provide or send it to you by January 31, 2014. Taxes military If you ask for the form, your employer must send it to you within 30 days after receiving your written request or within 30 days after your final wage payment, whichever is later. Taxes military If you have not received your Form W-2 by January 31, you should ask your employer for it. Taxes military If you do not receive it by February 15, call the IRS. Taxes military Form W-2 shows your total pay and other compensation and the income tax, social security tax, and Medicare tax that was withheld during the year. Taxes military Include the federal income tax withheld (as shown in box 2 of Form W-2) on: Line 62 if you file Form 1040, Line 36 if you file Form 1040A, or Line 7 if you file Form 1040EZ. Taxes military In addition, Form W-2 is used to report any taxable sick pay you received and any income tax withheld from your sick pay. Taxes military Form W-2G If you had gambling winnings in 2013, the payer may have withheld income tax. Taxes military If tax was withheld, the payer will give you a Form W-2G showing the amount you won and the amount of tax withheld. Taxes military Report the amounts you won on line 21 of Form 1040. Taxes military Take credit for the tax withheld on line 62 of Form 1040. Taxes military If you had gambling winnings, you must use Form 1040; you cannot use Form 1040A or Form 1040EZ. Taxes military The 1099 Series Most forms in the 1099 series are not filed with your return. Taxes military These forms should be furnished to you by January 31, 2014 (or, for Forms 1099-B, 1099-S, and certain Forms 1099-MISC, by February 15, 2014). Taxes military Unless instructed to file any of these forms with your return, keep them for your records. Taxes military There are several different forms in this series, including: Form 1099-B, Proceeds From Broker and Barter Exchange Transactions; Form 1099-DIV, Dividends and Distributions; Form 1099-G, Certain Government Payments; Form 1099-INT, Interest Income; Form 1099-K, Payment Card and Third Party Network Transactions; Form 1099-MISC, Miscellaneous Income; Form 1099-OID, Original Issue Discount; Form 1099-PATR, Taxable Distributions Received from Cooperatives; Form 1099-Q, Payments From Qualified Education Programs; Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Taxes military ; Form 1099-S, Proceeds From Real Estate Transactions; Form RRB-1099, Payments by the Railroad Retirement Board. Taxes military If you received the types of income reported on some forms in the 1099 series, you may not be able to use Form 1040A or Form 1040EZ. Taxes military See the instructions to these forms for details. Taxes military Form 1099-R. Taxes military   Attach Form 1099-R to your paper return if box 4 shows federal income tax withheld. Taxes military Include the amount withheld in the total on line 62 of Form 1040 or line 36 of Form 1040A. Taxes military You cannot use Form 1040EZ if you received payments reported on Form 1099-R. Taxes military Backup withholding. Taxes military   If you were subject to backup withholding on income you received during 2013, include the amount withheld, as shown on your Form 1099, in the total on line 62 of Form 1040, line 36 of Form 1040A, or line 7 of Form 1040EZ. Taxes military Form Not Correct If you receive a form with incorrect information on it, you should ask the payer for a corrected form. Taxes military Call the telephone number or write to the address given for the payer on the form. Taxes military The corrected Form W-2G or Form 1099 you receive will have an “X” in the “CORRECTED” box at the top of the form. Taxes military A special form, Form W-2c, Corrected Wage and Tax Statement, is used to correct a Form W-2. Taxes military In certain situations, you will receive two forms in place of the original incorrect form. Taxes military This will happen when your taxpayer identification number is wrong or missing, your name and address are wrong, or you received the wrong type of form (for example, a Form 1099-DIV instead of a Form 1099-INT). Taxes military One new form you receive will be the same incorrect form or have the same incorrect information, but all money amounts will be zero. Taxes military This form will have an “X” in the “CORRECTED” box at the top of the form. Taxes military The second new form should have all the correct information, prepared as though it is the original (the “CORRECTED” box will not be checked). Taxes military Form Received After Filing If you file your return and you later receive a form for income that you did not include on your return, you should report the income and take credit for any income tax withheld by filing Form 1040X, Amended U. Taxes military S. Taxes military Individual Income Tax Return. Taxes military Separate Returns If you are married but file a separate return, you can take credit only for the tax withheld from your own income. Taxes military Do not include any amount withheld from your spouse's income. Taxes military However, different rules may apply if you live in a community property state. Taxes military Community property states are listed in chapter 2. Taxes military For more information on these rules, and some exceptions, see Publication 555, Community Property. Taxes military Fiscal Years If you file your tax return on the basis of a fiscal year (a 12-month period ending on the last day of any month except December), you must follow special rules to determine your credit for federal income tax withholding. Taxes military For a discussion of how to take credit for withholding on a fiscal year return, see Fiscal Years (FY) in chapter 3 of Publication 505. Taxes military Estimated Tax Take credit for all your estimated tax payments for 2013 on line 63 of Form 1040 or line 37 of Form 1040A. Taxes military Include any overpayment from 2012 that you had credited to your 2013 estimated tax. Taxes military You must use Form 1040 or Form 1040A if you paid estimated tax. Taxes military You cannot use Form 1040EZ. Taxes military Name changed. Taxes military   If you changed your name, and you made estimated tax payments using your old name, attach a brief statement to the front of your paper tax return indicating: When you made the payments, The amount of each payment, Your name when you made the payments, and Your social security number. Taxes military The statement should cover payments you made jointly with your spouse as well as any you made separately. Taxes military   Be sure to report the change to the Social Security Administration. Taxes military This prevents delays in processing your return and issuing any refunds. Taxes military Separate Returns If you and your spouse made separate estimated tax payments for 2013 and you file separate returns, you can take credit only for your own payments. Taxes military If you made joint estimated tax payments, you must decide how to divide the payments between your returns. Taxes military One of you can claim all of the estimated tax paid and the other none, or you can divide it in any other way you agree on. Taxes military If you cannot agree, you must divide the payments in proportion to each spouse's individual tax as shown on your separate returns for 2013. Taxes military Divorced Taxpayers If you made joint estimated tax payments for 2013, and you were divorced during the year, either you or your former spouse can claim all of the joint payments, or you each can claim part of them. Taxes military If you cannot agree on how to divide the payments, you must divide them in proportion to each spouse's individual tax as shown on your separate returns for 2013. Taxes military If you claim any of the joint payments on your tax return, enter your former spouse's social security number (SSN) in the space provided on the front of Form 1040 or Form 1040A. Taxes military If you divorced and remarried in 2013, enter your present spouse's SSN in that space and write your former spouse's SSN, followed by “DIV,” to the left of Form 1040, line 63, or Form 1040A, line 37. Taxes military Underpayment Penalty for 2013 If you did not pay enough tax, either through withholding or by making timely estimated tax payments, you will have an underpayment of estimated tax and you may have to pay a penalty. Taxes military Generally, you will not have to pay a penalty for 2013 if any of the following apply. Taxes military The total of your withholding and estimated tax payments was at least as much as your 2012 tax (or 110% of your 2012 tax if your AGI was more than $150,000, $75,000 if your 2013 filing status is married filing separately) and you paid all required estimated tax payments on time. Taxes military The tax balance due on your 2013 return is no more than 10% of your total 2013 tax, and you paid all required estimated tax payments on time. Taxes military Your total 2013 tax minus your withholding and refundable credits is less than $1,000. Taxes military You did not have a tax liability for 2012 and your 2012 tax year was 12 months, or You did not have any withholding taxes and your current year tax less any household employment taxes is less than $1,000. Taxes military See Publication 505, chapter 4, for a definition of “total tax” for 2012 and 2013. Taxes military Farmers and fishermen. Taxes military   Special rules apply if you are a farmer or fisherman. Taxes military See Farmers and Fishermen in chapter 4 of Publication 505 for more information. Taxes military IRS can figure the penalty for you. Taxes military   If you think you owe the penalty but you do not want to figure it yourself when you file your tax return, you may not have to. Taxes military Generally, the IRS will figure the penalty for you and send you a bill. Taxes military However, if you think you are able to lower or eliminate your penalty, you must complete Form 2210 or Form 2210-F and attach it to your paper return. Taxes military See chapter 4 of Publication 505. Taxes military Prev  Up  Next   Home   More Online Publications
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The Taxes Military

Taxes military 1. Taxes military   Deducting Business Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: What Can I Deduct?Cost of Goods Sold Capital Expenses Capital versus Deductible Expenses Personal versus Business Expenses How Much Can I Deduct?Not-for-profit limits. Taxes military At-risk limits. Taxes military Passive activities. Taxes military Net operating loss. Taxes military When Can I Deduct an Expense?Economic performance. Taxes military Not-for-Profit ActivitiesGross Income Limit on Deductions What's New Optional safe harbor method to determine the business use of a home deduction. Taxes military  Beginning in 2013, you can use the optional safe harbor method to determine the deduction for the business use of your home. Taxes military See Optional safe harbor method under Business use of your home , later. Taxes military Introduction This chapter covers the general rules for deducting business expenses. Taxes military Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated to make a profit. Taxes military Topics - This chapter discusses: What you can deduct How much you can deduct When you can deduct Not-for-profit activities Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 538 Accounting Periods and Methods 542 Corporations 547 Casualties, Disasters, and Thefts 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction 946 How To Depreciate Property Form (and Instructions) Sch A (Form 1040) Itemized Deductions 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit See chapter 12 for information about getting publications and forms. Taxes military What Can I Deduct? To be deductible, a business expense must be both ordinary and necessary. Taxes military An ordinary expense is one that is common and accepted in your industry. Taxes military A necessary expense is one that is helpful and appropriate for your trade or business. Taxes military An expense does not have to be indispensable to be considered necessary. Taxes military Even though an expense may be ordinary and necessary, you may not be allowed to deduct the expense in the year you paid or incurred it. Taxes military In some cases you may not be allowed to deduct the expense at all. Taxes military Therefore, it is important to distinguish usual business expenses from expenses that include the following. Taxes military The expenses used to figure cost of goods sold, Capital expenses, and Personal expenses. Taxes military Cost of Goods Sold If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Taxes military Some of your business expenses may be included in figuring cost of goods sold. Taxes military Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. Taxes military If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. Taxes military The following are types of expenses that go into figuring cost of goods sold. Taxes military The cost of products or raw materials, including freight. Taxes military Storage. Taxes military Direct labor (including contributions to pension or annuity plans) for workers who produce the products. Taxes military Factory overhead. Taxes military Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Taxes military Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. Taxes military This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million. Taxes military For more information, see the following sources. Taxes military Cost of goods sold—chapter 6 of Publication 334. Taxes military Inventories—Publication 538. Taxes military Uniform capitalization rules—Publication 538 and section 263A of the Internal Revenue Code and the related regulations. Taxes military Capital Expenses You must capitalize, rather than deduct, some costs. Taxes military These costs are a part of your investment in your business and are called “capital expenses. Taxes military ” Capital expenses are considered assets in your business. Taxes military In general, you capitalize three types of costs. Taxes military Business start-up costs (See Tip below). Taxes military Business assets. Taxes military Improvements. Taxes military You can elect to deduct or amortize certain business start-up costs. Taxes military See chapters 7 and 8. Taxes military Cost recovery. Taxes military   Although you generally cannot take a current deduction for a capital expense, you may be able to recover the amount you spend through depreciation, amortization, or depletion. Taxes military These recovery methods allow you to deduct part of your cost each year. Taxes military In this way, you are able to recover your capital expense. Taxes military See Amortization (chapter 8) and Depletion (chapter 9) in this publication. Taxes military A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduction. Taxes military A greater portion of these costs can be deducted if the property is qualified disaster assistance property. Taxes military See Publication 946 for details. Taxes military Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. Taxes military These costs may include expenses for advertising, travel, or wages for training employees. Taxes military If you go into business. Taxes military   When you go into business, treat all costs you had to get your business started as capital expenses. Taxes military   Usually you recover costs for a particular asset through depreciation. Taxes military Generally, you cannot recover other costs until you sell the business or otherwise go out of business. Taxes military However, you can choose to amortize certain costs for setting up your business. Taxes military See Starting a Business in chapter 8 for more information on business start-up costs. Taxes military If your attempt to go into business is unsuccessful. Taxes military   If you are an individual and your attempt to go into business is not successful, the expenses you had in trying to establish yourself in business fall into two categories. Taxes military The costs you had before making a decision to acquire or begin a specific business. Taxes military These costs are personal and nondeductible. Taxes military They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. Taxes military The costs you had in your attempt to acquire or begin a specific business. Taxes military These costs are capital expenses and you can deduct them as a capital loss. Taxes military   If you are a corporation and your attempt to go into a new trade or business is not successful, you may be able to deduct all investigatory costs as a loss. Taxes military   The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. Taxes military You cannot take a deduction for these costs. Taxes military You will recover the costs of these assets when you dispose of them. Taxes military Business Assets There are many different kinds of business assets; for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. Taxes military You must fully capitalize the cost of these assets, including freight and installation charges. Taxes military Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. Taxes military See Regulations section 1. Taxes military 263A-2 for information on these rules. Taxes military Improvements Improvements are generally major expenditures. Taxes military Some examples are: new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall, and lighting improvements. Taxes military The costs of making improvements to a business asset are capital expenses if the improvements add to the value of the asset, appreciably lengthen the time you can use it, or adapt it to a different use. Taxes military Beginning in 2014, you must capitalize as improvements costs that are for the betterment of a unit of property, restore the unit of property, or adapt the unit of property to a new or different use. Taxes military Temporary regulations allow you to capitalize costs meeting the above criteria for tax years beginning after 2011. Taxes military However, you can currently deduct repairs that keep your property in a normal efficient operating condition as a business expense. Taxes military Treat as repairs amounts paid to replace parts of a machine that only keep it in a normal operating condition. Taxes military Restoration plan. Taxes military   Capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration plan to make it suitable for your business. Taxes military This applies even if some of the work would by itself be classified as repairs. Taxes military Capital versus Deductible Expenses To help you distinguish between capital and deductible expenses, different examples are given below. Taxes military Motor vehicles. Taxes military   You usually capitalize the cost of a motor vehicle you use in your business. Taxes military You can recover its cost through annual deductions for depreciation. Taxes military   There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business. Taxes military See Publication 463. Taxes military   Generally, repairs you make to your business vehicle are currently deductible. Taxes military However, amounts you pay to recondition and overhaul a business vehicle are capital expenses and are recovered through depreciation. Taxes military Roads and driveways. Taxes military    The cost of building a private road on your business property and the cost of replacing a gravel driveway with a concrete one are capital expenses you may be able to depreciate. Taxes military The cost of maintaining a private road on your business property is a deductible expense. Taxes military Tools. Taxes military   Unless the uniform capitalization rules apply, amounts spent for tools used in your business are deductible expenses if the tools have a life expectancy of less than 1 year or their cost is minor. Taxes military Machinery parts. Taxes military   Unless the uniform capitalization rules apply, the cost of replacing short-lived parts of a machine to keep it in good working condition, but not add to its life, is a deductible expense. Taxes military Heating equipment. Taxes military   The cost of changing from one heating system to another is a capital expense. Taxes military Personal versus Business Expenses Generally, you cannot deduct personal, living, or family expenses. Taxes military However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. Taxes military You can deduct the business part. Taxes military For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you generally can deduct 70% of the interest as a business expense. Taxes military The remaining 30% is personal interest and generally is not deductible. Taxes military See chapter 4 for information on deducting interest and the allocation rules. Taxes military Business use of your home. Taxes military   If you use part of your home for business, you may be able to deduct expenses for the business use of your home. Taxes military These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Taxes military   To qualify to claim expenses for the business use of your home, you must meet both of the following tests. Taxes military The business part of your home must be used exclusively and regularly for your trade or business. Taxes military The business part of your home must be: Your principal place of business, or A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) used in connection with your trade or business. Taxes military   You generally do not have to meet the exclusive use test for the part of your home that you regularly use either for the storage of inventory or product samples, or as a daycare facility. Taxes military   Your home office qualifies as your principal place of business if you meet the following requirements. Taxes military You use the office exclusively and regularly for administrative or management activities of your trade or business. Taxes military You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Taxes military   If you have more than one business location, determine your principal place of business based on the following factors. Taxes military The relative importance of the activities performed at each location. Taxes military If the relative importance factor does not determine your principal place of business, consider the time spent at each location. Taxes military Optional safe harbor method. Taxes military   Beginning in 2013, individual taxpayers can use the optional safe harbor method to determine the amount of deductible expenses attributable to certain business use of a residence during the tax year. Taxes military This method is an alternative to the calculation, allocation, and substantiation of actual expenses. Taxes military   The deduction under the optional method is limited to $1,500 per year based on $5 a square foot for up to 300 square feet. Taxes military Under this method, you claim your allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A (Form 1040). Taxes military You are not required to allocate these deductions between personal and business use, as is required under the regular method. Taxes military If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. Taxes military   Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. Taxes military All of the requirements discussed earlier under Business use of your home still apply. Taxes military   For more information on the deduction for business use of your home, including the optional safe harbor method, see Publication 587. Taxes military    If you were entitled to deduct depreciation on the part of your home used for business, you cannot exclude the part of the gain from the sale of your home that equals any depreciation you deducted (or could have deducted) for periods after May 6, 1997. Taxes military Business use of your car. Taxes military   If you use your car exclusively in your business, you can deduct car expenses. Taxes military If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Taxes military Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible. Taxes military   You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Taxes military Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. Taxes military Beginning in 2013, the standard mileage rate is 56. Taxes military 5 cents per mile. Taxes military   If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate. Taxes military   For more information on car expenses and the rules for using the standard mileage rate, see Publication 463. Taxes military How Much Can I Deduct? Generally, you can deduct the full amount of a business expense if it meets the criteria of ordinary and necessary and it is not a capital expense. Taxes military Recovery of amount deducted (tax benefit rule). Taxes military   If you recover part of an expense in the same tax year in which you would have claimed a deduction, reduce your current year expense by the amount of the recovery. Taxes military If you have a recovery in a later year, include the recovered amount in income in that year. Taxes military However, if part of the deduction for the expense did not reduce your tax, you do not have to include that part of the recovered amount in income. Taxes military   For more information on recoveries and the tax benefit rule, see Publication 525. Taxes military Payments in kind. Taxes military   If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. Taxes military You cannot deduct the cost of your own labor. Taxes military   Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. Taxes military If these costs are included in the cost of goods sold, do not deduct them again as a business expense. Taxes military Limits on losses. Taxes military   If your deductions for an investment or business activity are more than the income it brings in, you have a loss. Taxes military There may be limits on how much of the loss you can deduct. Taxes military Not-for-profit limits. Taxes military   If you carry on your business activity without the intention of making a profit, you cannot use a loss from it to offset other income. Taxes military See Not-for-Profit Activities , later. Taxes military At-risk limits. Taxes military   Generally, a deductible loss from a trade or business or other income-producing activity is limited to the investment you have “at risk” in the activity. Taxes military You are at risk in any activity for the following. Taxes military The money and adjusted basis of property you contribute to the activity. Taxes military Amounts you borrow for use in the activity if: You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan. Taxes military For more information, see Publication 925. Taxes military Passive activities. Taxes military   Generally, you are in a passive activity if you have a trade or business activity in which you do not materially participate, or a rental activity. Taxes military In general, deductions for losses from passive activities only offset income from passive activities. Taxes military You cannot use any excess deductions to offset other income. Taxes military In addition, passive activity credits can only offset the tax on net passive income. Taxes military Any excess loss or credits are carried over to later years. Taxes military Suspended passive losses are fully deductible in the year you completely dispose of the activity. Taxes military For more information, see Publication 925. Taxes military Net operating loss. Taxes military   If your deductions are more than your income for the year, you may have a “net operating loss. Taxes military ” You can use a net operating loss to lower your taxes in other years. Taxes military See Publication 536 for more information. Taxes military   See Publication 542 for information about net operating losses of corporations. Taxes military When Can I Deduct an Expense? When you can deduct an expense depends on your accounting method. Taxes military An accounting method is a set of rules used to determine when and how income and expenses are reported. Taxes military The two basic methods are the cash method and the accrual method. Taxes military Whichever method you choose must clearly reflect income. Taxes military For more information on accounting methods, see Publication 538. Taxes military Cash method. Taxes military   Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them. Taxes military Accrual method. Taxes military   Under an accrual method of accounting, you generally deduct business expenses when both of the following apply. Taxes military The all-events test has been met. Taxes military The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Taxes military Economic performance has occurred. Taxes military Economic performance. Taxes military   You generally cannot deduct or capitalize a business expense until economic performance occurs. Taxes military If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided, or the property is used. Taxes military If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Taxes military Example. Taxes military Your tax year is the calendar year. Taxes military In December 2013, the Field Plumbing Company did some repair work at your place of business and sent you a bill for $600. Taxes military You paid it by check in January 2014. Taxes military If you use the accrual method of accounting, deduct the $600 on your tax return for 2013 because all events have occurred to “fix” the fact of liability (in this case the work was completed), the liability can be determined, and economic performance occurred in that year. Taxes military If you use the cash method of accounting, deduct the expense on your 2014 return. Taxes military Prepayment. Taxes military   You generally cannot deduct expenses in advance, even if you pay them in advance. Taxes military This rule applies to both the cash and accrual methods. Taxes military It applies to prepaid interest, prepaid insurance premiums, and any other expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Taxes military Example. Taxes military In 2013, you sign a 10-year lease and immediately pay your rent for the first 3 years. Taxes military Even though you paid the rent for 2013, 2014, and 2015, you can only deduct the rent for 2013 on your 2013 tax return. Taxes military You can deduct the rent for 2014 and 2015 on your tax returns for those years. Taxes military Contested liability. Taxes military   Under the cash method, you can deduct a contested liability only in the year you pay the liability. Taxes military Under the accrual method, you can deduct contested liabilities such as taxes (except foreign or U. Taxes military S. Taxes military possession income, war profits, and excess profits taxes) either in the tax year you pay the liability (or transfer money or other property to satisfy the obligation) or in the tax year you settle the contest. Taxes military However, to take the deduction in the year of payment or transfer, you must meet certain conditions. Taxes military See Regulations section 1. Taxes military 461-2. Taxes military Related person. Taxes military   Under an accrual method of accounting, you generally deduct expenses when you incur them, even if you have not yet paid them. Taxes military However, if you and the person you owe are related and that person uses the cash method of accounting, you must pay the expense before you can deduct it. Taxes military Your deduction is allowed when the amount is includible in income by the related cash method payee. Taxes military See Related Persons in Publication 538. Taxes military Not-for-Profit Activities If you do not carry on your business or investment activity to make a profit, you cannot use a loss from the activity to offset other income. Taxes military Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit. Taxes military The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. Taxes military It does not apply to corporations other than S corporations. Taxes military In determining whether you are carrying on an activity for profit, several factors are taken into account. Taxes military No one factor alone is decisive. Taxes military Among the factors to consider are whether: You carry on the activity in a businesslike manner, The time and effort you put into the activity indicate you intend to make it profitable, You depend on the income for your livelihood, Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business), You change your methods of operation in an attempt to improve profitability, You (or your advisors) have the knowledge needed to carry on the activity as a successful business, You were successful in making a profit in similar activities in the past, The activity makes a profit in some years, and You can expect to make a future profit from the appreciation of the assets used in the activity. Taxes military Presumption of profit. Taxes military   An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. Taxes military Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. Taxes military The activity must be substantially the same for each year within this period. Taxes military You have a profit when the gross income from an activity exceeds the deductions. Taxes military   If a taxpayer dies before the end of the 5-year (or 7-year) period, the “test” period ends on the date of the taxpayer's death. Taxes military   If your business or investment activity passes this 3- (or 2-) years-of-profit test, the IRS will presume it is carried on for profit. Taxes military This means the limits discussed here will not apply. Taxes military You can take all your business deductions from the activity, even for the years that you have a loss. Taxes military You can rely on this presumption unless the IRS later shows it to be invalid. Taxes military Using the presumption later. Taxes military   If you are starting an activity and do not have 3 (or 2) years showing a profit, you can elect to have the presumption made after you have the 5 (or 7) years of experience allowed by the test. Taxes military   You can elect to do this by filing Form 5213. Taxes military Filing this form postpones any determination that your activity is not carried on for profit until 5 (or 7) years have passed since you started the activity. Taxes military   The benefit gained by making this election is that the IRS will not immediately question whether your activity is engaged in for profit. Taxes military Accordingly, it will not restrict your deductions. Taxes military Rather, you will gain time to earn a profit in the required number of years. Taxes military If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. Taxes military If you do not have 3 (or 2) years of profit, the limit can be applied retroactively to any year with a loss in the 5-year (or 7-year) period. Taxes military   Filing Form 5213 automatically extends the period of limitations on any year in the 5-year (or 7-year) period to 2 years after the due date of the return for the last year of the period. Taxes military The period is extended only for deductions of the activity and any related deductions that might be affected. Taxes military    You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. Taxes military Gross Income Gross income from a not-for-profit activity includes the total of all gains from the sale, exchange, or other disposition of property, and all other gross receipts derived from the activity. Taxes military Gross income from the activity also includes capital gains and rents received for the use of property which is held in connection with the activity. Taxes military You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. Taxes military However, if you determine gross income by subtracting cost of goods sold from gross receipts, you must do so consistently, and in a manner that follows generally accepted methods of accounting. Taxes military Limit on Deductions If your activity is not carried on for profit, take deductions in the following order and only to the extent stated in the three categories. Taxes military If you are an individual, these deductions may be taken only if you itemize. Taxes military These deductions may be taken on Schedule A (Form 1040). Taxes military Category 1. Taxes military   Deductions you can take for personal as well as for business activities are allowed in full. Taxes military For individuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, belong in this category. Taxes military Deduct them on the appropriate lines of Schedule A (Form 1040). Taxes military For tax years beginning after December 31, 2008, you can deduct a casualty loss on property you own for personal use only to the extent it is more than $500 and exceeds 10% of your adjusted gross income (AGI). Taxes military The 10% AGI limitation does not apply to net disaster losses resulting from federally declared disasters in 2008 and 2009, and individuals are allowed to claim the net disaster losses even if they do not itemize their deductions. Taxes military The reduction amount returns to $100 for tax years beginning after December 31, 2009. Taxes military See Publication 547 for more information on casualty losses. Taxes military For the limits that apply to home mortgage interest, see Publication 936. Taxes military Category 2. Taxes military   Deductions that do not result in an adjustment to the basis of property are allowed next, but only to the extent your gross income from the activity is more than your deductions under the first category. Taxes military Most business deductions, such as those for advertising, insurance premiums, interest, utilities, and wages, belong in this category. Taxes military Category 3. Taxes military   Business deductions that decrease the basis of property are allowed last, but only to the extent the gross income from the activity exceeds the deductions you take under the first two categories. Taxes military Deductions for depreciation, amortization, and the part of a casualty loss an individual could not deduct in category (1) belong in this category. Taxes military Where more than one asset is involved, allocate depreciation and these other deductions proportionally. Taxes military    Individuals must claim the amounts in categories (2) and (3) as miscellaneous deductions on Schedule A (Form 1040). Taxes military They are subject to the 2%-of-adjusted-gross-income limit. Taxes military See Publication 529 for information on this limit. Taxes military Example. Taxes military Adriana is engaged in a not-for-profit activity. Taxes military The income and expenses of the activity are as follows. Taxes military Gross income $3,200 Subtract:     Real estate taxes $700   Home mortgage interest 900   Insurance 400   Utilities 700   Maintenance 200   Depreciation on an automobile 600   Depreciation on a machine 200 3,700 Loss $(500)   Adriana must limit her deductions to $3,200, the gross income she earned from the activity. Taxes military The limit is reached in category (3), as follows. Taxes military Limit on deduction $3,200 Category 1: Taxes and interest $1,600   Category 2: Insurance, utilities, and maintenance 1,300 2,900 Available for Category 3 $ 300   The $800 of depreciation is allocated between the automobile and machine as follows. Taxes military $600 $800 x $300 = $225 depreciation for the automobile             $200 $800 x $300 = $75 depreciation for the machine The basis of each asset is reduced accordingly. Taxes military Adriana includes the $3,200 of gross income on line 21 (other income) of Form 1040. Taxes military The $1,600 for category (1) is deductible in full on the appropriate lines for taxes and interest on Schedule A (Form 1040). Taxes military Adriana deducts the remaining $1,600 ($1,300 for category (2) and $300 for category (3)) as other miscellaneous deductions on Schedule A (Form 1040) subject to the 2%-of-adjusted-gross-income limit. Taxes military Partnerships and S corporations. Taxes military   If a partnership or S corporation carries on a not-for-profit activity, these limits apply at the partnership or S corporation level. Taxes military They are reflected in the individual shareholder's or partner's distributive shares. Taxes military More than one activity. Taxes military   If you have several undertakings, each may be a separate activity or several undertakings may be combined. Taxes military The following are the most significant facts and circumstances in making this determination. Taxes military The degree of organizational and economic interrelationship of various undertakings. Taxes military The business purpose that is (or might be) served by carrying on the various undertakings separately or together in a business or investment setting. Taxes military The similarity of the undertakings. Taxes military   The IRS will generally accept your characterization if it is supported by facts and circumstances. Taxes military    If you are carrying on two or more different activities, keep the deductions and income from each one separate. Taxes military Figure separately whether each is a not-for-profit activity. Taxes military Then figure the limit on deductions and losses separately for each activity that is not for profit. Taxes military Prev  Up  Next   Home   More Online Publications