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

 

IR-2014-34, March 21, 2014

WASHINGTON — The Internal Revenue Service today released the 2013 IRS Data Book, a snapshot of agency activities for the fiscal year.

The report describes activities conducted by the IRS from Oct. 1, 2012, to Sept. 30, 2013, and includes information about returns filed, taxes collected, enforcement, taxpayer assistance and the IRS budget and workforce, among others.

During fiscal year 2013, the IRS collected almost $2.9 trillion in federal revenue and processed 240 million returns, of which 151 million were filed electronically. Out of the 146 million individual income tax returns filed, almost 83 percent were e-filed. More than 118 million individual income tax return filers received a tax refund, which totaled almost $312.8 billion. On average, the IRS spent 41 cents to collect $100 in tax revenue during the fiscal year, matching low-cost results for 2008 and 2001.

The IRS examined just under one percent of all tax returns filed and about one percent of all individual income tax returns during fiscal year 2013. Of the 1.4 million individual tax returns examined, over 39,000 resulted in additional refunds. The IRS provided taxpayer assistance through 456 million visits to IRS.gov and assisted almost 91 million taxpayers through its toll-free telephone helpline or at walk-in sites.

An electronic version of the 2013 Data Book can be found on the Tax Stats page of IRS.gov.

Printed copies of the IRS Data Book, Publication 55B, will be available by mid-April 2014 from the U.S. Government Printing Office. To obtain a copy, write to the Superintendent of Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954, or call (202) 512-1800 for voicemail, or fax a request to (202) 512-2250.

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Page Last Reviewed or Updated: 21-Mar-2014

The Www Gov Freefile

Www gov freefile 37. Www gov freefile   Other Credits Table of Contents What's New Introduction Useful Items - You may want to see: Nonrefundable CreditsAdoption Credit Alternative Motor Vehicle Credit Alternative Fuel Vehicle Refueling Property Credit Credit to Holders of Tax Credit Bonds Foreign Tax Credit Mortgage Interest Credit Nonrefundable Credit for Prior Year Minimum Tax Plug-in Electric Drive Motor Vehicle Credit Residential Energy Credits Retirement Savings Contributions Credit (Saver's Credit) Refundable CreditsCredit for Tax on Undistributed Capital Gain Health Coverage Tax Credit Credit for Excess Social Security Tax or Railroad Retirement Tax Withheld What's New Adoption credit. Www gov freefile  The maximum adoption credit is $12,970 for 2013. Www gov freefile See Adoption Credit . Www gov freefile Plug-in electric vehicle credit. Www gov freefile  This credit has expired. Www gov freefile Credit for prior year minimum tax. Www gov freefile  The refundable portion of the credit for prior year minimum tax has expired. Www gov freefile Excess withholding of social security and railroad retirement tax. Www gov freefile  Social security tax and tier 1 railroad retirement (RRTA) tax were both withheld during 2013 at a rate of 6. Www gov freefile 2% of wages up to $113,700. Www gov freefile If you worked for more than one employer and had too much social security or RRTA tax withheld during 2013, you may be entitled to a credit for the excess withholding. Www gov freefile See Credit for Excess Social Security Tax or Railroad Retirement Tax Withheld . Www gov freefile Introduction This chapter discusses the following nonrefundable credits. Www gov freefile Adoption credit. Www gov freefile Alternative motor vehicle credit. Www gov freefile Alternative fuel vehicle refueling property credit. Www gov freefile Credit to holders of tax credit bonds. Www gov freefile Foreign tax credit. Www gov freefile Mortgage interest credit. Www gov freefile Nonrefundable credit for prior year minimum tax. Www gov freefile Plug-in electric drive motor vehicle credit. Www gov freefile Residential energy credits. Www gov freefile Retirement savings contributions credit. Www gov freefile This chapter also discusses the following refundable credits. Www gov freefile Credit for tax on undistributed capital gain. Www gov freefile Health coverage tax credit. Www gov freefile Credit for excess social security tax or railroad retirement tax withheld. Www gov freefile Several other credits are discussed in other chapters in this publication. Www gov freefile Child and dependent care credit (chapter 32). Www gov freefile Credit for the elderly or the disabled (chapter 33). Www gov freefile Child tax credit (chapter 34). Www gov freefile Education credits (chapter 35). Www gov freefile Earned income credit (chapter 36). Www gov freefile Nonrefundable credits. Www gov freefile   The first part of this chapter, Nonrefundable Credits , covers ten credits that you subtract from your tax. Www gov freefile These credits may reduce your tax to zero. Www gov freefile If these credits are more than your tax, the excess is not refunded to you. Www gov freefile Refundable credits. Www gov freefile   The second part of this chapter, Refundable Credits , covers three credits that are treated as payments and are refundable to you. Www gov freefile These credits are added to the federal income tax withheld and any estimated tax payments you made. Www gov freefile If this total is more than your total tax, the excess will be refunded to you. Www gov freefile Useful Items - You may want to see: Publication 502 Medical and Dental Expenses 514 Foreign Tax Credit for  Individuals 530 Tax Information for Homeowners 590 Individual Retirement Arrangements (IRAs) Form (and Instructions) 1116 Foreign Tax Credit 2439 Notice to Shareholder of Undistributed Long-Term Capital Gains 5695 Residential Energy Credits 8396 Mortgage Interest Credit 8801 Credit For Prior Year Minimum Tax — Individuals, Estates, and Trusts 8828 Recapture of Federal Mortgage Subsidy 8839 Qualified Adoption Expenses 8880 Credit for Qualified Retirement Savings Contributions 8885 Health Coverage Tax Credit 8910 Alternative Motor Vehicle Credit 8911 Alternative Fuel Vehicle Refueling Property Credit 8912 Credit to Holders of Tax Credit Bonds 8936 Qualified Plug-in Electric Drive Motor Vehicle Credit Nonrefundable Credits The credits discussed in this part of the chapter can reduce your tax. Www gov freefile However, if the total of these credits is more than your tax, the excess is not refunded to you. Www gov freefile Adoption Credit You may be able to take a tax credit of up to $12,970 for qualified expenses paid to adopt an eligible child. Www gov freefile The credit may be allowed for the adoption of a child with special needs even if you do not have any qualified expenses. Www gov freefile If your modified adjusted gross income (AGI) is more than $194,580, your credit is reduced. Www gov freefile If your modified AGI is $234,580 or more, you cannot take the credit. Www gov freefile Qualified adoption expenses. Www gov freefile   Qualified adoption expenses are reasonable and necessary expenses directly related to, and whose principal purpose is for, the legal adoption of an eligible child. Www gov freefile These expenses include: Adoption fees, Court costs, Attorney fees, Travel expenses (including amounts spent for meals and lodging) while away from home, and Re-adoption expenses to adopt a foreign child. Www gov freefile Nonqualified expenses. Www gov freefile   Qualified adoption expenses do not include expenses: That violate state or federal law, For carrying out any surrogate parenting arrangement, For the adoption of your spouse's child, For which you received funds under any federal, state, or local program, Allowed as a credit or deduction under any other federal income tax rule, or Paid or reimbursed by your employer or any other person or organization. Www gov freefile Eligible child. Www gov freefile   The term “eligible child” means any individual: Under 18 years old, or Physically or mentally incapable of caring for himself or herself. Www gov freefile Child with special needs. Www gov freefile   An eligible child is a child with special needs if all three of the following apply. Www gov freefile The child was a citizen or resident of the United States (including U. Www gov freefile S. Www gov freefile possessions) at the time the adoption process began. Www gov freefile A state (including the District of Columbia) has determined that the child cannot or should not be returned to his or her parents' home. Www gov freefile The state has determined that the child will not be adopted unless assistance is provided to the adoptive parents. Www gov freefile Factors used by states to make this determination include: The child's ethnic background, The child's age, Whether the child is a member of a minority or sibling group, and Whether the child has a medical condition or a physical, mental, or emotional handicap. Www gov freefile When to take the credit. Www gov freefile   Generally, until the adoption becomes final, you take the credit in the year after your qualified expenses were paid or incurred. Www gov freefile If the adoption becomes final, you take the credit in the year your expenses were paid or incurred. Www gov freefile See the Instructions for Form 8839 for more specific information on when to take the credit. Www gov freefile Foreign child. Www gov freefile   If the child is not a U. Www gov freefile S. Www gov freefile citizen or resident at the time the adoption process began, you cannot take the credit unless the adoption becomes final. Www gov freefile You treat all adoption expenses paid or incurred in years before the adoption becomes final as paid or incurred in the year it becomes final. Www gov freefile How to take the credit. Www gov freefile   Figure your 2013 nonrefundable credit and any carryforward to 2014 on Form 8839 and attach it to your Form 1040. Www gov freefile Include the credit in your total for Form 1040, line 53. Www gov freefile Check box c and enter “8839” on the line next to that box. Www gov freefile More information. Www gov freefile   For more information, see the Instructions for Form 8839. Www gov freefile Alternative Motor Vehicle Credit You may be able to take this credit if you place a qualified fuel cell vehicle in service in 2013. Www gov freefile Amount of credit. Www gov freefile   Generally, you can rely on the manufacturer's certification to the IRS that a specific make, model, and model year vehicle qualifies for the credit and the amount of the credit for which it qualifies. Www gov freefile In the case of a foreign manufacturer, you generally can rely on its domestic distributor's certification to the IRS. Www gov freefile   Ordinarily the amount of the credit is 100% of the manufacturer's (or domestic distributor's) certification to the IRS of the maximum credit allowable. Www gov freefile How to take the credit. Www gov freefile   To take the credit, you must complete Form 8910 and attach it to your Form 1040. Www gov freefile Include the credit in your total for Form 1040, line 53. Www gov freefile Check box c and enter “8910” on the line next to that box. Www gov freefile More information. Www gov freefile   For more information on the credit, see the Instructions for Form 8910. Www gov freefile Alternative Fuel Vehicle Refueling Property Credit You may be able to take a credit if you place qualified alternative fuel vehicle refueling property in service in 2013. Www gov freefile Qualified alternative fuel vehicle refueling property. Www gov freefile   Qualified alternative fuel vehicle refueling property is any property (other than a building or its structural components) used for either of the following. Www gov freefile To store or dispense alternative fuel into the fuel tank of a motor vehicle propelled by the fuel, but only if the storage or dispensing is at the point where the fuel is delivered into that tank. Www gov freefile To recharge an electric vehicle, but only if the recharging property is located at the point where the vehicle is recharged. Www gov freefile   The following are alternative fuels. Www gov freefile Any fuel at least 85% of the volume of which consists of one or more of the following: ethanol, natural gas, compressed natural gas, liquefied natural gas, liquefied petroleum gas, or hydrogen. Www gov freefile Any mixture which consists of two or more of the following: biodiesel, diesel fuel, or kerosene, and at least 20% of the volume of which consists of biodiesel determined without regard to any kerosene. Www gov freefile Electricity. Www gov freefile Amount of the credit. Www gov freefile   For personal use property, the credit is generally the smaller of 30% of the property's cost or $1,000. Www gov freefile For business use property, the credit is generally the smaller of 30% of the property's cost or $30,000. Www gov freefile How to take the credit. Www gov freefile   To take the credit, you must complete Form 8911 and attach it to your Form 1040. Www gov freefile Include the credit in your total for Form 1040, line 53. Www gov freefile Check box c and enter “8911” on the line next to that box. Www gov freefile More information. Www gov freefile   For more information on the credit, see the Form 8911 instructions. Www gov freefile Credit to Holders of Tax Credit Bonds Tax credit bonds are bonds in which the holder receives a tax credit in lieu of some or all of the interest on the bond. Www gov freefile You may be able to take a credit if you are a holder of one of the following bonds. Www gov freefile Clean renewable energy bonds (issued before 2010). Www gov freefile New clean renewable energy bonds. Www gov freefile Qualified energy conservation bonds. Www gov freefile Qualified school construction bonds. Www gov freefile Qualified zone academy bonds. Www gov freefile Build America bonds. Www gov freefile In some instances, an issuer may elect to receive a credit for interest paid on the bond. Www gov freefile If the issuer makes this election, you cannot also claim a credit. Www gov freefile Interest income. Www gov freefile   The amount of any tax credit allowed (figured before applying tax liability limits) must be included as interest income on your tax return. Www gov freefile How to take the credit. Www gov freefile   Complete Form 8912 and attach it to your Form 1040. Www gov freefile Include the credit in your total for Form 1040, line 53. Www gov freefile Check box c and enter “8912” on the line next to that box. Www gov freefile More information. Www gov freefile   For more information, see the Instructions for Form 8912. Www gov freefile Foreign Tax Credit You generally can choose to take income taxes you paid or accrued during the year to a foreign country or U. Www gov freefile S. Www gov freefile possession as a credit against your U. Www gov freefile S. Www gov freefile income tax. Www gov freefile Or, you can deduct them as an itemized deduction (see chapter 22). Www gov freefile You cannot take a credit (or deduction) for foreign income taxes paid on income that you exclude from U. Www gov freefile S. Www gov freefile tax under any of the following. Www gov freefile Foreign earned income exclusion. Www gov freefile Foreign housing exclusion. Www gov freefile Income from Puerto Rico exempt from U. Www gov freefile S. Www gov freefile tax. Www gov freefile Possession exclusion. Www gov freefile Limit on the credit. Www gov freefile   Unless you can elect not to file Form 1116 (see Exception , later), your foreign tax credit cannot be more than your U. Www gov freefile S. Www gov freefile tax liability (Form 1040, line 44), multiplied by a fraction. Www gov freefile The numerator of the fraction is your taxable income from sources outside the United States. Www gov freefile The denominator is your total taxable income from U. Www gov freefile S. Www gov freefile and foreign sources. Www gov freefile See Publication 514 for more information. Www gov freefile How to take the credit. Www gov freefile   Complete Form 1116 and attach it to your Form 1040. Www gov freefile Enter the credit on Form 1040, line 47. Www gov freefile Exception. Www gov freefile   You do not have to complete Form 1116 to take the credit if all of the following apply. Www gov freefile All of your gross foreign source income was from interest and dividends and all of that income and the foreign tax paid on it were reported to you on Form 1099-INT, Form 1099-DIV, or Schedule K-1 (or substitute statement). Www gov freefile If you had dividend income from shares of stock, you held those shares for at least 16 days. Www gov freefile You are not filing Form 4563 or excluding income from sources within Puerto Rico. Www gov freefile The total of your foreign taxes was not more than $300 (not more than $600 if married filing jointly). Www gov freefile All of your foreign taxes were: Legally owed and not eligible for a refund, and Paid to countries that are recognized by the United States and do not support terrorism. Www gov freefile More information. Www gov freefile   For more information on the credit and these requirements, see the Instructions for Form 1116. Www gov freefile Mortgage Interest Credit The mortgage interest credit is intended to help lower-income individuals own a home. Www gov freefile If you qualify, you can take the credit each year for part of the home mortgage interest you pay. Www gov freefile Who qualifies. Www gov freefile   You may be eligible for the credit if you were issued a qualified mortgage credit certificate (MCC) from your state or local government. Www gov freefile Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home. Www gov freefile Amount of credit. Www gov freefile   Figure your credit on Form 8396. Www gov freefile If your mortgage loan amount is equal to (or smaller than) the certified indebtedness (loan) amount shown on your MCC, enter on Form 8396, line 1, all the interest you paid on your mortgage during the year. Www gov freefile   If your mortgage loan amount is larger than the certified indebtedness amount shown on your MCC, you can figure the credit on only part of the interest you paid. Www gov freefile To find the amount to enter on line 1, multiply the total interest you paid during the year on your mortgage by the following fraction. Www gov freefile      Certified indebtedness amount on your MCC     Original amount of your mortgage   Limit based on credit rate. Www gov freefile   If the certificate credit rate is more than 20%, the credit you are allowed cannot be more than $2,000. Www gov freefile If two or more persons (other than a married couple filing a joint return) hold an interest in the home to which the MCC relates, this $2,000 limit must be divided based on the interest held by each person. Www gov freefile See Publication 530 for more information. Www gov freefile Carryforward. Www gov freefile   Your credit (after applying the limit based on the credit rate) is also subject to a limit based on your tax that is figured using Form 8396. Www gov freefile If your allowable credit is reduced because of this tax liability limit, you can carry forward the unused portion of the credit to the next 3 years or until used, whichever comes first. Www gov freefile   If you are subject to the $2,000 limit because your certificate credit rate is more than 20%, you cannot carry forward any amount more than $2,000 (or your share of the $2,000 if you must divide the credit). Www gov freefile How to take the credit. Www gov freefile    Figure your 2013 credit and any carryforward to 2014 on Form 8396, and attach it to your Form 1040. Www gov freefile Be sure to include any credit carryforward from 2010, 2011, and 2012. Www gov freefile   Include the credit in your total for Form 1040, line 53. Www gov freefile Check box c and enter “8396” on the line next to that box. Www gov freefile Reduced home mortgage interest deduction. Www gov freefile   If you itemize your deductions on Schedule A (Form 1040), you must reduce your home mortgage interest deduction by the amount of the mortgage interest credit shown on Form 8396, line 3. Www gov freefile You must do this even if part of that amount is to be carried forward to 2014. Www gov freefile For more information about the home mortgage interest deduction, see chapter 23. Www gov freefile Recapture of federal mortgage subsidy. Www gov freefile   If you received an MCC with your mortgage loan, you may have to recapture (pay back) all or part of the benefit you received from that program. Www gov freefile The recapture may be required if you sell or dispose of your home at a gain during the first 9 years after the date you closed your mortgage loan. Www gov freefile See the Instructions for Form 8828 and chapter 15 for more information. Www gov freefile More information. Www gov freefile   For more information on the credit, see the Form 8396 instructions. Www gov freefile Nonrefundable Credit for Prior Year Minimum Tax The tax laws give special treatment to some kinds of income and allow special deductions and credits for some kinds of expenses. Www gov freefile If you benefit from these laws, you may have to pay at least a minimum amount of tax in addition to any other tax on these items. Www gov freefile This is called the alternative minimum tax. Www gov freefile The special treatment of some items of income and expenses only allows you to postpone paying tax until a later year. Www gov freefile If in prior years you paid alternative minimum tax because of these tax postponement items, you may be able to take a credit for prior year minimum tax against your current year's regular tax. Www gov freefile You may be able to take a credit against your regular tax if for 2012 you had: An alternative minimum tax liability and adjustments or preferences other than exclusion items, A minimum tax credit that you are carrying forward to 2013, or An unallowed qualified electric vehicle credit. Www gov freefile How to take the credit. Www gov freefile    Figure your 2013 nonrefundable credit (if any), and any carryforward to 2014 on Form 8801, and attach it to your Form 1040. Www gov freefile Include the credit in your total for Form 1040, line 53, and check box b. Www gov freefile You can carry forward any unused credit for prior year minimum tax to later years until it is completely used. Www gov freefile More information. Www gov freefile   For more information on the credit, see the Instructions for Form 8801. Www gov freefile Plug-in Electric Drive Motor Vehicle Credit You may be able to take this credit if you placed in service for business or personal use a qualified plug-in electric drive motor vehicle or a qualified two- or three-wheeled plug-in electric vehicle in 2013 and you meet some other requirements. Www gov freefile Qualified plug-in electric drive motor vehicle. Www gov freefile   This is a new vehicle with at least four wheels that: Is propelled to a significant extent by an electric motor that draws electricity from a battery that has a capacity of not less than 4 kilowatt hours and is capable of being recharged from an external source of electricity, and Has a gross vehicle weight of less than 14,000 pounds. Www gov freefile Qualified two- or three-wheeled plug-in electric vehicle. Www gov freefile   This is a new vehicle with two or three wheels that: Is capable of achieving a speed of 45 miles per hour or greater, Is propelled to a significant extent by an electric motor that draws electricity from a battery that has a capacity of not less than 2. Www gov freefile 5 kilowatt hours and is capable of being recharged from an external source of electricity, and Has a gross vehicle weight of less than 14,000 pounds. Www gov freefile Certification and other requirements. Www gov freefile   Generally, you can rely on the manufacturer's (or, in the case of a foreign manufacturer, its domestic distributor's) certification to the IRS that a specific make, model, and model year vehicle qualifies for the credit and, if applicable, the amount of the credit for which it qualifies. Www gov freefile However, if the IRS publishes an announcement that the certification for any specific make, model, and model year vehicle has been withdrawn, you cannot rely on the certification for such a vehicle purchased after the date of publication of the withdrawal announcement. Www gov freefile   The following requirements must also be met to qualify for the credit. Www gov freefile You are the owner of the vehicle. Www gov freefile If the vehicle is leased, only the lessor, and not the lessee, is entitled to the credit. Www gov freefile You placed the vehicle in service during 2013. Www gov freefile The vehicle is manufactured primarily for use on public streets, roads, and highways. Www gov freefile The original use of the vehicle began with you. Www gov freefile You acquired the vehicle for your use or to lease to others, and not for resale. Www gov freefile In the case of the qualified two- or three-wheeled plug-in electric vehicle, the vehicle is acquired after 2011 and before 2014. Www gov freefile You use the vehicle primarily in the United States. Www gov freefile How to take the credit. Www gov freefile   To take the credit, you must complete Form 8936 and attach it to your Form 1040. Www gov freefile Include the credit in your total for Form 1040, line 53. Www gov freefile Check box c and enter “8936” on the line next to that box. Www gov freefile More information. Www gov freefile   For more information on the credit, see the Form 8936 instructions. Www gov freefile Residential Energy Credits You may be able to take one or both of the following credits if you made energy saving improvements to your home located in the United States in 2013. Www gov freefile Nonbusiness energy property credit. Www gov freefile Residential energy efficient property credit. Www gov freefile If you are a member of a condominium management association for a condominium you own or a tenant-stockholder in a cooperative housing corporation, you are treated as having paid your proportionate share of any costs of the association or corporation for purposes of these credits. Www gov freefile Nonbusiness energy property credit. Www gov freefile   You may be able to take a credit equal to the sum of: 10% of the amount paid or incurred for qualified energy efficiency improvements installed during 2013, and Any residential energy property costs paid or incurred in 2013. Www gov freefile   There is a lifetime limit of $500 for all years after 2005, of which only $200 can be for windows; $50 for any advanced main air circulating fan; $150 for any qualified natural gas, propane, or oil furnace or hot water boiler; and $300 for any item of energy efficient building property. Www gov freefile    If the total of nonbusiness energy property credits you have taken in previous years (after 2005) is more than $500, you cannot take this credit in 2013. Www gov freefile   Qualified energy efficiency improvements are the following improvements that are new, can be expected to remain in use at least 5 years, and meet certain requirements for energy efficiency. Www gov freefile Any insulation material or system that is specifically and primarily designed to reduce heat loss or gain of a home. Www gov freefile Exterior window (including skylights). Www gov freefile Exterior doors. Www gov freefile Any metal or asphalt roof that has appropriate pigmented coatings or cooling granules specifically and primarily designed to reduce heat gain of the home. Www gov freefile   Residential energy property is any of the following. Www gov freefile Certain electric heat pump water heaters; electric heat pumps; central air conditioners; natural gas, propane, or oil water heater; and stoves that use biomass fuel. Www gov freefile Qualified natural gas, propane, or oil furnaces; and qualified natural gas, propane, or oil hot water boilers. Www gov freefile Certain advanced main air circulating fans used in natural gas, propane, or oil furnaces. Www gov freefile Residential energy efficient property credit. Www gov freefile   You may be able to take a credit of 30% of your costs of qualified solar electric property, solar water heating property, fuel cell property, small wind energy property, and geothermal heat pump property. Www gov freefile The credit amount for costs paid for qualified fuel cell property is limited to $500 for each one-half kilowatt of capacity of the property. Www gov freefile Basis reduction. Www gov freefile   You must reduce the basis of your home by the amount of any credit allowed. Www gov freefile How to take the credit. Www gov freefile   Complete Form 5695 and attach it to your Form 1040. Www gov freefile Enter the credit on Form 1040, line 52. Www gov freefile More information. Www gov freefile   For more information on these credits, see the Form 5695 instructions. Www gov freefile Retirement Savings Contributions Credit (Saver's Credit) You may be able to take this credit if you, or your spouse if filing jointly, made: Contributions (other than rollover contributions) to a traditional or Roth IRA, Elective deferrals to a 401(k) or 403(b) plan (including designated Roth contributions) or to a governmental 457, SEP, or SIMPLE plan, Voluntary employee contributions to a qualified retirement plan (including the federal Thrift Savings Plan), or Contributions to a 501(c)(18)(D) plan. Www gov freefile However, you cannot take the credit if either of the following applies. Www gov freefile The amount on Form 1040, line 38, or Form 1040A, line 22, is more than $29,500 ($44,250 if head of household; $59,000 if married filing jointly). Www gov freefile The person(s) who made the qualified contribution or elective deferral (a) was born after January 1, 1996, (b) is claimed as a dependent on someone else's 2013 tax return, or (c) was a student (defined next). Www gov freefile Student. Www gov freefile   You were a student if during any part of 5 calendar months of 2013 you: Were enrolled as a full-time student at a school, or Took a full-time, on-farm training course given by a school or a state, county, or local government agency. Www gov freefile School. Www gov freefile   A school includes a technical, trade, or mechanical school. Www gov freefile It does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet. Www gov freefile How to take the credit. Www gov freefile   Figure the credit on Form 8880. Www gov freefile Enter the credit on your Form 1040, line 50, or your Form 1040A, line 32, and attach Form 8880 to your return. Www gov freefile More information. Www gov freefile   For more information on the credit, see the Form 8880 instructions. Www gov freefile Refundable Credits The credits discussed in this part of the chapter are treated as payments of tax. Www gov freefile If the total of these credits, withheld federal income tax, and estimated tax payments is more than your total tax, the excess can be refunded to you. Www gov freefile Credit for Tax on Undistributed Capital Gain You must include in your income any amounts that regulated investment companies (commonly called mutual funds) or real estate investment trusts (REITs) allocated to you as capital gain distributions, even if you did not actually receive them. Www gov freefile If the mutual fund or REIT paid a tax on the capital gain, you are allowed a credit for the tax since it is considered paid by you. Www gov freefile The mutual fund or REIT will send you Form 2439 showing your share of the undistributed capital gains and the tax paid, if any. Www gov freefile How to take the credit. Www gov freefile   To take the credit, attach Copy B of Form 2439 to your Form 1040. Www gov freefile Include the amount from box 2 of your Form 2439 in the total for Form 1040, line 71, and check box a. Www gov freefile More information. Www gov freefile   See Capital Gain Distributions in chapter 8 for more information on undistributed capital gains. Www gov freefile Health Coverage Tax Credit You may be able to take this credit for any month in which all the following statements were true on the first day of the month. Www gov freefile You were an eligible trade adjustment assistance (TAA) recipient, alternative TAA (ATAA) recipient, reemployment TAA (RTAA) recipient, or Pension Benefit Guaranty Corporation (PBGC) pension recipient (defined later); or you were a qualified family member of one of these individuals when the individual died or you finalized a divorce with one of these individuals. Www gov freefile You and/or your family members were covered by a qualified health insurance plan for which you paid the entire premiums, or your portion of the premiums, directly to your health plan or to “U. Www gov freefile S. Www gov freefile Treasury–HCTC. Www gov freefile ” You were not enrolled in Medicare Part A, B, or C, or you were enrolled in Medicare but your family member(s) qualified for the HCTC. Www gov freefile You were not enrolled in Medicaid or the Children's Health Insurance Program (CHIP). Www gov freefile You were not enrolled in the Federal Employees Health Benefits program (FEHBP) or eligible to receive benefits under the U. Www gov freefile S. Www gov freefile military health system (TRICARE). Www gov freefile You were not imprisoned under federal, state, or local authority. Www gov freefile Your employer did not pay 50% or more of the cost of coverage. Www gov freefile You did not receive a 65% COBRA premium reduction from your former employer or COBRA administrator. Www gov freefile But, you cannot take the credit if you can be claimed as a dependent on someone else's 2013 tax return. Www gov freefile If you meet all of these conditions, you may be able to take a credit of up to 72. Www gov freefile 5% of the amount you paid directly to a qualified health plan for you and any qualifying family members. Www gov freefile You cannot take the credit for insurance premiums on coverage that was actually paid for with a National Emergency Grant. Www gov freefile The amount you paid for qualified health insurance coverage must be reduced by any Archer MSA and health savings account distributions used to pay for the coverage. Www gov freefile You can take this credit on your tax return or have it paid on your behalf in advance to your insurance company. Www gov freefile If the credit is paid on your behalf in advance, that amount will reduce the amount of the credit you can take on your tax return. Www gov freefile TAA recipient. Www gov freefile   You were an eligible TAA recipient on the first day of the month if, for any day in that month or the prior month, you: Received a trade readjustment allowance, or Would have been entitled to receive such an allowance except that you had not exhausted all rights to any unemployment insurance (except additional compensation that is funded by a state and is not reimbursed from any federal funds) to which you were entitled (or would be entitled if you applied). Www gov freefile Example. Www gov freefile You received a trade adjustment allowance for January 2013. Www gov freefile You were an eligible TAA recipient on the first day of January and February. Www gov freefile Alternative TAA recipient. Www gov freefile   You were an eligible alternative TAA recipient on the first day of the month if, for that month or the prior month, you received benefits under an alternative trade adjustment assistance program for older workers established by the Department of Labor. Www gov freefile Example. Www gov freefile You received benefits under an alternative trade adjustment assistance program for older workers for October 2013. Www gov freefile The program was established by the Department of Labor. Www gov freefile You were an eligible alternative TAA recipient on the first day of October and November. Www gov freefile RTAA recipient. Www gov freefile   You were an eligible RTAA recipient on the first day of the month if, for that month or the prior month, you received benefits under a reemployment trade adjustment assistance program for older workers established by the Department of Labor. Www gov freefile PBGC pension recipient. Www gov freefile   You were an eligible PBGC pension recipient on the first day of the month, if both of the following apply. Www gov freefile You were age 55 or older on the first day of the month. Www gov freefile You received a benefit for that month paid by the PBGC under title IV of the Employee Retirement Income Security Act of 1974 (ERISA). Www gov freefile If you received a lump-sum payment from the PBGC after August 5, 2002, you meet item (2) above for any month that you would have received a PBGC benefit if you had not received the lump-sum payment. Www gov freefile How to take the credit. Www gov freefile   To take the credit, complete Form 8885 and attach it to your Form 1040. Www gov freefile Include your credit in the total for Form 1040, line 71, and check box c. Www gov freefile   You must attach health insurance bills (or COBRA payment coupons) and proof of payment for any amounts you include on Form 8885, line 2. Www gov freefile For details, see Publication 502 or Form 8885. Www gov freefile More information. Www gov freefile   For definitions and special rules, including those relating to qualified health insurance plans, qualifying family members, the effect of certain life events, and employer-sponsored health insurance plans, see Publication 502 and the Form 8885 instructions. Www gov freefile Credit for Excess Social Security Tax or Railroad Retirement Tax Withheld Most employers must withhold social security tax from your wages. Www gov freefile If you work for a railroad employer, that employer must withhold tier 1 railroad retirement (RRTA) tax and tier 2 RRTA tax. Www gov freefile If you worked for two or more employers in 2013, you may have had too much social security tax withheld from your pay. Www gov freefile If one or more of those employers was a railroad employer, too much tier 1 RRTA tax may also have been withheld at the 6. Www gov freefile 2% rate. Www gov freefile You can claim the excess social security or tier 1 RRTA tax as a credit against your income tax when you file your return. Www gov freefile For the tier 1 RRTA tax, only use the portion of the tier 1 RRTA tax that was taxed at the 6. Www gov freefile 2% rate when figuring if excess tier 1 RRTA tax was withheld; do not include any portion of the tier 1 RRTA tax that was withheld at the Medicare tax rate (1. Www gov freefile 45%) or the Additional Medicare Tax rate (. Www gov freefile 9%). Www gov freefile The following table shows the maximum amount of wages subject to tax and the maximum amount of tax that should have been withheld for 2013. Www gov freefile Type of tax Maximum  wages subject to tax Maximum tax that should have been withheld Social security or RRTA tier 1 $113,700 $7,049. Www gov freefile 40 RRTA tier 2 $84,300 $3,709. Www gov freefile 20 All wages are subject to Medicare tax withholding. Www gov freefile   Use Form 843, Claim for Refund and Request for Abatement, to claim a refund of excess tier 2 RRTA tax. Www gov freefile Be sure to attach a copy of all of your W-2 forms. Www gov freefile Use Worksheet 3-3 in Publication 505, Tax Withholding and Estimated Tax, to help you figure the excess amount. Www gov freefile Employer's error. Www gov freefile   If any one employer withheld too much social security or tier 1 RRTA tax, you cannot take the excess as a credit against your income tax. Www gov freefile The employer should adjust the tax for you. Www gov freefile If the employer does not adjust the overcollection, you can file a claim for refund using Form 843. Www gov freefile Joint return. Www gov freefile   If you are filing a joint return, you cannot add the social security or tier 1 RRTA tax withheld from your spouse's wages to the amount withheld from your wages. Www gov freefile Figure the withholding separately for you and your spouse to determine if either of you has excess withholding. Www gov freefile How to figure the credit if you did not work for a railroad. Www gov freefile   If you did not work for a railroad during 2013, figure the credit as follows: 1. Www gov freefile Add all social security tax withheld (but not more than $7,049. Www gov freefile 40 for each employer). Www gov freefile Enter the total here   2. Www gov freefile Enter any uncollected social security tax on tips or group-term life insurance included in the total on Form 1040, line 60, identified by “UT”   3. Www gov freefile Add lines 1 and 2. Www gov freefile If $7,049. Www gov freefile 40 or less, stop here. Www gov freefile You cannot take  the credit   4. Www gov freefile Social security tax limit 7,049. Www gov freefile 40 5. Www gov freefile Credit. Www gov freefile Subtract line 4 from line 3. Www gov freefile Enter the result here and on Form 1040, line 69 (or Form 1040A, line 41) $ Example. Www gov freefile You are married and file a joint return with your spouse who had no gross income in 2013. Www gov freefile During 2013, you worked for the Brown Technology Company and earned $60,000 in wages. Www gov freefile Social security tax of $3,720 was withheld. Www gov freefile You also worked for another employer in 2013 and earned $55,000 in wages. Www gov freefile $3,410 of social security tax was withheld from these wages. Www gov freefile Because you worked for more than one employer and your total wages were more than $113,700, you can take a credit of $80. Www gov freefile 60 for the excess social security tax withheld. Www gov freefile 1. Www gov freefile Add all social security tax withheld (but not more than $7,049. Www gov freefile 40 for each employer). Www gov freefile Enter the total here $7,130. Www gov freefile 00 2. Www gov freefile Enter any uncollected social security tax on tips or group-term life insurance included in the total on Form 1040, line 60, identified by “UT” -0- 3. Www gov freefile Add lines 1 and 2. Www gov freefile If $7,049. Www gov freefile 40 or less, stop here. Www gov freefile You cannot take the credit 7,130. Www gov freefile 00 4. Www gov freefile Social security tax limit 7,049. Www gov freefile 40 5. Www gov freefile Credit. Www gov freefile Subtract line 4 from line 3. Www gov freefile Enter the result here and on Form 1040, line 69 (or Form 1040A, line 41) $80. Www gov freefile 60 How to figure the credit if you worked for a railroad. Www gov freefile   If you were a railroad employee at any time during 2013, figure the credit as follows: 1. Www gov freefile Add all social security and tier 1 RRTA tax withheld at the 6. Www gov freefile 2% rate (but not more than $7,049. Www gov freefile 40 for each employer). Www gov freefile Enter the total here   2. Www gov freefile Enter any uncollected social security and tier 1 RRTA tax on tips or group-term life insurance included in the total on Form 1040, line 60, identified by “UT”   3. Www gov freefile Add lines 1 and 2. Www gov freefile If $7,049. Www gov freefile 40 or less, stop here. Www gov freefile You cannot take  the credit   4. Www gov freefile Social security and tier 1 RRTA  tax limit 7,049. Www gov freefile 40 5. Www gov freefile Credit. Www gov freefile Subtract line 4 from line 3. Www gov freefile Enter the result here and on Form 1040, line 69 (or Form 1040A, line 41) $ How to take the credit. Www gov freefile   Enter the credit on Form 1040, line 69, or include it in the total for Form 1040A, line 41. Www gov freefile More information. Www gov freefile   For more information on the credit, see Publication 505. 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