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Filing 2010 Taxes Online

Filing 2010 taxes online 7. Filing 2010 taxes online   Coverdell Education Savings Account (ESA) Table of Contents Introduction What Is a Coverdell ESAQualified Education Expenses ContributionsContribution Limits Additional Tax on Excess Contributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Transfer Because of Divorce DistributionsTax-Free Distributions Taxable Distributions When Assets Must Be Distributed Introduction If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. Filing 2010 taxes online For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. Filing 2010 taxes online There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. Filing 2010 taxes online However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. Filing 2010 taxes online See Contributions , later. Filing 2010 taxes online This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. Filing 2010 taxes online What is the tax benefit of the Coverdell ESA. Filing 2010 taxes online   Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. Filing 2010 taxes online   If, for a year, distributions from an account are not more than a designated beneficiary's qualified education expenses at an eligible educational institution, the beneficiary will not owe tax on the distributions. Filing 2010 taxes online See Tax-Free Distributions , later. Filing 2010 taxes online    Table 7-1 summarizes the main features of the Coverdell ESA. Filing 2010 taxes online Table 7-1. Filing 2010 taxes online Coverdell ESA at a Glance Do not rely on this table alone. Filing 2010 taxes online It provides only general highlights. Filing 2010 taxes online See the text for definitions of terms in bold type and for more complete explanations. Filing 2010 taxes online Question Answer What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary. Filing 2010 taxes online Where can it be established? It can be opened in the United States at any bank or other IRS-approved entity that offers Coverdell ESAs. Filing 2010 taxes online Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary. Filing 2010 taxes online Who can contribute to a Coverdell ESA? Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return). Filing 2010 taxes online Are distributions tax free? Yes, if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year. Filing 2010 taxes online What Is a Coverdell ESA A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the Designated beneficiary (defined later) of the account. Filing 2010 taxes online When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary. Filing 2010 taxes online To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. Filing 2010 taxes online The document creating and governing the account must be in writing and must satisfy the following requirements. Filing 2010 taxes online The trustee or custodian must be a bank or an entity approved by the IRS. Filing 2010 taxes online The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions. Filing 2010 taxes online The contribution is in cash. Filing 2010 taxes online The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Filing 2010 taxes online The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000. Filing 2010 taxes online Money in the account cannot be invested in life insurance contracts. Filing 2010 taxes online Money in the account cannot be combined with other property except in a common trust fund or common investment fund. Filing 2010 taxes online The balance in the account generally must be distributed within 30 days after the earlier of the following events. Filing 2010 taxes online The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. Filing 2010 taxes online The beneficiary's death. Filing 2010 taxes online Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. Filing 2010 taxes online For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. Filing 2010 taxes online Designated beneficiary. Filing 2010 taxes online   This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account. Filing 2010 taxes online Contributions to a qualified tuition program (QTP). Filing 2010 taxes online   A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. Filing 2010 taxes online In the case of a change in beneficiary, this is a qualified expense only if the new beneficiary is a family member of that designated beneficiary. Filing 2010 taxes online See chapter 8, Qualified Tuition Program . Filing 2010 taxes online Eligible Educational Institution For purposes of Coverdell ESAs, an eligible educational institution can be either an eligible postsecondary school or an eligible elementary or secondary school. Filing 2010 taxes online Eligible postsecondary school. Filing 2010 taxes online   This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Filing 2010 taxes online S. Filing 2010 taxes online Department of Education. Filing 2010 taxes online It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Filing 2010 taxes online The educational institution should be able to tell you if it is an eligible educational institution. Filing 2010 taxes online   Certain educational institutions located outside the United States also participate in the U. Filing 2010 taxes online S. Filing 2010 taxes online Department of Education's Federal Student Aid (FSA) programs. Filing 2010 taxes online Eligible elementary or secondary school. Filing 2010 taxes online   This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. Filing 2010 taxes online Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. Filing 2010 taxes online As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time. Filing 2010 taxes online The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. Filing 2010 taxes online Tuition and fees. Filing 2010 taxes online Books, supplies, and equipment. Filing 2010 taxes online Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school. Filing 2010 taxes online Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). Filing 2010 taxes online The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Filing 2010 taxes online The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Filing 2010 taxes online The actual amount charged if the student is residing in housing owned or operated by the school. Filing 2010 taxes online Half-time student. Filing 2010 taxes online   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. Filing 2010 taxes online Qualified Elementary and Secondary Education Expenses These are expenses related to enrollment or attendance at an eligible elementary or secondary school. Filing 2010 taxes online As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. Filing 2010 taxes online There are special rules for computer-related expenses. Filing 2010 taxes online The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. Filing 2010 taxes online Tuition and fees. Filing 2010 taxes online Books, supplies, and equipment. Filing 2010 taxes online Academic tutoring. Filing 2010 taxes online Special needs services for a special needs beneficiary. Filing 2010 taxes online The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school. Filing 2010 taxes online Room and board. Filing 2010 taxes online Uniforms. Filing 2010 taxes online Transportation. Filing 2010 taxes online Supplementary items and services (including extended day programs). Filing 2010 taxes online The purchase of computer technology, equipment, or Internet access and related services is a qualified elementary and secondary education expense if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in elementary or secondary school. Filing 2010 taxes online (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. Filing 2010 taxes online ) Contributions Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI (defined later under Contribution Limits ) for the year is less than $110,000. Filing 2010 taxes online For individuals filing joint returns, that amount is $220,000. Filing 2010 taxes online Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. Filing 2010 taxes online There is no requirement that an organization's income be below a certain level. Filing 2010 taxes online Contributions must meet all of the following requirements. Filing 2010 taxes online They must be in cash. Filing 2010 taxes online They cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Filing 2010 taxes online They must be made by the due date of the contributor's tax return (not including extensions). Filing 2010 taxes online Contributions can be made to one or several Coverdell ESAs for the same designated beneficiary provided that the total contributions are not more than the contribution limits (defined later) for a year. Filing 2010 taxes online Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary. Filing 2010 taxes online Table 7-2 summarizes many of the features of contributing to a Coverdell ESA. Filing 2010 taxes online When contributions considered made. Filing 2010 taxes online   Contributions made to a Coverdell ESA for the preceding tax year are considered to have been made on the last day of the preceding year. Filing 2010 taxes online They must be made by the due date (not including extensions) for filing your return for the preceding year. Filing 2010 taxes online   For example, if you make a contribution to a Coverdell ESA in February 2014, and you designate it as a contribution for 2013, you are considered to have made that contribution on December 31, 2013. Filing 2010 taxes online Contribution Limits There are two yearly limits: One on the total amount that can be contributed for each designated beneficiary in any year, and One on the amount that any individual can contribute for any one designated beneficiary for a year. Filing 2010 taxes online Limit for each designated beneficiary. Filing 2010 taxes online   For 2013, the total of all contributions to all Coverdell ESAs set up for the benefit of any one designated beneficiary cannot be more than $2,000. Filing 2010 taxes online This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. Filing 2010 taxes online Rollovers are discussed under Rollovers and Other Transfers , later. Filing 2010 taxes online Example. Filing 2010 taxes online When Maria Luna was born in 2012, three separate Coverdell ESAs were set up for her, one by her parents, one by her grandfather, and one by her aunt. Filing 2010 taxes online In 2013, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. Filing 2010 taxes online For example, if her grandfather contributed $2,000 to one of her Coverdell ESAs, no one else could contribute to any of her three accounts. Filing 2010 taxes online Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. Filing 2010 taxes online These contributions could be put into any of Maria's Coverdell ESA accounts. Filing 2010 taxes online Limit for each contributor. Filing 2010 taxes online   Generally, you can contribute up to $2,000 for each designated beneficiary for 2013. Filing 2010 taxes online This is the most you can contribute for the benefit of any one beneficiary for the year, regardless of the number of Coverdell ESAs set up for the beneficiary. Filing 2010 taxes online Example. Filing 2010 taxes online The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. Filing 2010 taxes online If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2013, he could also contribute $2,000 to Edgar's Coverdell ESA. Filing 2010 taxes online Reduced limit. Filing 2010 taxes online   Your contribution limit may be reduced. Filing 2010 taxes online If your MAGI (defined on this page) is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced (see Figuring the limit , later). Filing 2010 taxes online If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you cannot contribute to anyone's Coverdell ESA. Filing 2010 taxes online Table 7-2. Filing 2010 taxes online Coverdell ESA Contributions at a Glance Do not rely on this table alone. Filing 2010 taxes online It provides only general highlights. Filing 2010 taxes online See the text for more complete explanations. Filing 2010 taxes online Question Answer Are contributions deductible? No. Filing 2010 taxes online What is the annual contribution limit per designated beneficiary? $2,000 for each designated beneficiary. Filing 2010 taxes online What if more than one Coverdell ESA has been opened for the same designated beneficiary? The annual contribution limit is $2,000 for each beneficiary, no matter how many Coverdell ESAs are set up for that beneficiary. Filing 2010 taxes online What if more than one individual makes contributions for the same designated beneficiary? The annual contribution limit is $2,000 per beneficiary, no matter how many individuals contribute. Filing 2010 taxes online Can contributions other than cash be made to a Coverdell ESA? No. Filing 2010 taxes online When must contributions stop? No contributions can be made to a beneficiary's Coverdell ESA after he or she reaches age 18, unless the beneficiary is a special needs beneficiary. Filing 2010 taxes online Modified adjusted gross income (MAGI). Filing 2010 taxes online   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Filing 2010 taxes online MAGI when using Form 1040A. Filing 2010 taxes online   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Filing 2010 taxes online MAGI when using Form 1040. Filing 2010 taxes online   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Filing 2010 taxes online MAGI when using Form 1040NR. Filing 2010 taxes online   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form. Filing 2010 taxes online MAGI when using Form 1040NR-EZ. Filing 2010 taxes online   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form. Filing 2010 taxes online   If you have any of these adjustments, you can use Worksheet 7-1. Filing 2010 taxes online MAGI for a Coverdell ESA , later, to figure your MAGI for Form 1040. Filing 2010 taxes online Worksheet 7-1. Filing 2010 taxes online MAGI for a Coverdell ESA 1. Filing 2010 taxes online Enter your adjusted gross income  (Form 1040, line 38)   1. Filing 2010 taxes online   2. Filing 2010 taxes online Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Filing 2010 taxes online       3. Filing 2010 taxes online Enter your foreign housing deduction (Form 2555, line 50)   3. Filing 2010 taxes online         4. Filing 2010 taxes online Enter the amount of income from Puerto Rico you are excluding   4. Filing 2010 taxes online       5. Filing 2010 taxes online Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Filing 2010 taxes online       6. Filing 2010 taxes online Add lines 2, 3, 4, and 5   6. Filing 2010 taxes online   7. Filing 2010 taxes online Add lines 1 and 6. Filing 2010 taxes online This is your  modified adjusted gross income   7. Filing 2010 taxes online   Figuring the limit. Filing 2010 taxes online    To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. Filing 2010 taxes online The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). Filing 2010 taxes online The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). Filing 2010 taxes online Subtract the result from $2,000. Filing 2010 taxes online This is the amount you can contribute for each beneficiary. Filing 2010 taxes online You can use Worksheet 7-2. Filing 2010 taxes online Coverdell ESA Contribution Limit to figure the limit on contributions. Filing 2010 taxes online    Worksheet 7-2. Filing 2010 taxes online Coverdell ESA Contribution Limit 1. Filing 2010 taxes online Maximum contribution   1. Filing 2010 taxes online $2,000 2. Filing 2010 taxes online Enter your modified adjusted gross income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. Filing 2010 taxes online   3. Filing 2010 taxes online Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Filing 2010 taxes online   4. Filing 2010 taxes online Subtract line 3 from line 2. Filing 2010 taxes online If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Filing 2010 taxes online   5. Filing 2010 taxes online Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Filing 2010 taxes online     Note. Filing 2010 taxes online If the amount on line 4 is greater than or equal to the amount on line 5, stop here. Filing 2010 taxes online You are not allowed to contribute to a Coverdell ESA for 2013. Filing 2010 taxes online       6. Filing 2010 taxes online Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Filing 2010 taxes online . Filing 2010 taxes online 7. Filing 2010 taxes online Multiply line 1 by line 6   7. Filing 2010 taxes online   8. Filing 2010 taxes online Subtract line 7 from line 1   8. Filing 2010 taxes online   Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Filing 2010 taxes online Example. Filing 2010 taxes online Paul, who is single, had a MAGI of $96,500 for 2013. Filing 2010 taxes online Paul can contribute up to $1,800 in 2013 for each beneficiary, as shown in the illustrated Worksheet 7-2, Coverdell ESA Contribution Limit–Illustrated. Filing 2010 taxes online Worksheet 7-2. Filing 2010 taxes online Coverdell ESA Contribution Limit—Illustrated 1. Filing 2010 taxes online Maximum contribution   1. Filing 2010 taxes online $2,000 2. Filing 2010 taxes online Enter your modified adjusted gross  income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. Filing 2010 taxes online 96,500 3. Filing 2010 taxes online Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Filing 2010 taxes online 95,000 4. Filing 2010 taxes online Subtract line 3 from line 2. Filing 2010 taxes online If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Filing 2010 taxes online 1,500 5. Filing 2010 taxes online Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Filing 2010 taxes online 15,000   Note. Filing 2010 taxes online If the amount on line 4 is greater than or equal to the amount on line 5,  stop here. Filing 2010 taxes online You are not allowed to  contribute to a Coverdell ESA for 2013. Filing 2010 taxes online       6. Filing 2010 taxes online Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Filing 2010 taxes online . Filing 2010 taxes online 100 7. Filing 2010 taxes online Multiply line 1 by line 6   7. Filing 2010 taxes online 200 8. Filing 2010 taxes online Subtract line 7 from line 1   8. Filing 2010 taxes online 1,800 Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Filing 2010 taxes online Additional Tax on Excess Contributions The beneficiary must pay a 6% excise tax each year on excess contributions that are in a Coverdell ESA at the end of the year. Filing 2010 taxes online Excess contributions are the total of the following two amounts. Filing 2010 taxes online Contributions to any designated beneficiary's Coverdell ESA for the year that are more than $2,000 (or, if less, the total of each contributor's limit for the year, as discussed earlier). Filing 2010 taxes online Excess contributions for the preceding year, reduced by the total of the following two amounts: Distributions (other than those rolled over as discussed later) during the year, and The contribution limit for the current year minus the amount contributed for the current year. Filing 2010 taxes online Exceptions. Filing 2010 taxes online   The excise tax does not apply if excess contributions made during 2013 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2014, for a calendar year taxpayer). Filing 2010 taxes online   However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. Filing 2010 taxes online You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. Filing 2010 taxes online Box 2 of that form will show the amount of earnings on your excess contributions. Filing 2010 taxes online Code “2” or “3” entered in the blank box below boxes 5 and 6 indicate the year in which the earnings are taxable. Filing 2010 taxes online See Instructions for Recipient on the back of copy B of your Form 1099-Q. Filing 2010 taxes online Enter the amount of earnings on line 21 of Form 1040 (or Form 1040NR) for the applicable tax year. Filing 2010 taxes online For more information, see Taxable Distributions , later. Filing 2010 taxes online   The excise tax does not apply to any rollover contribution. Filing 2010 taxes online Note. Filing 2010 taxes online Contributions made in one year for the preceding tax year are considered to have been made on the last day of the preceding year. Filing 2010 taxes online Example. Filing 2010 taxes online In 2012, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. Filing 2010 taxes online Because Greta did not withdraw the excess before June 1, 2013, she had to pay an additional tax of $18 (6% × $300) when she filed her 2012 tax return. Filing 2010 taxes online In 2013, excess contributions of $500 were made to Greta's account, however, she withdrew $250 from that account to use for qualified education expenses. Filing 2010 taxes online Using the steps shown earlier under Additional Tax on Excess Contributions , Greta figures the excess contribution in her account at the end of 2013 as follows. Filing 2010 taxes online (1)   $500 excess contributions made in 2013     + (2)   $300 excess contributions in ESA at end of 2012     − (2a)   $250 distribution during 2013         $550 excess at end of 2013   × 6%=$33           If Greta limits 2014 contributions to $1,450 ($2,000 maximum allowed − $550 excess contributions from 2013), she will not owe any additional tax in 2014 for excess contributions. Filing 2010 taxes online Figuring and reporting the additional tax. Filing 2010 taxes online   You figure this excise tax in Part V of Form 5329. Filing 2010 taxes online Report the additional tax on Form 1040, line 58 (or Form 1040NR, line 56). Filing 2010 taxes online Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary can be changed. Filing 2010 taxes online The beneficiary's interest can be transferred to a spouse or former spouse because of divorce. Filing 2010 taxes online Rollovers Any amount distributed from a Coverdell ESA is not taxable if it is rolled over to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary's family (including the beneficiary's spouse) who is under age 30. Filing 2010 taxes online This age limitation does not apply if the new beneficiary is a special needs beneficiary. Filing 2010 taxes online An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution. Filing 2010 taxes online Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. Filing 2010 taxes online These are not taxable distributions. Filing 2010 taxes online Members of the beneficiary's family. Filing 2010 taxes online   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. Filing 2010 taxes online Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. Filing 2010 taxes online Brother, sister, stepbrother, or stepsister. Filing 2010 taxes online Father or mother or ancestor of either. Filing 2010 taxes online Stepfather or stepmother. Filing 2010 taxes online Son or daughter of a brother or sister. Filing 2010 taxes online Brother or sister of father or mother. Filing 2010 taxes online Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Filing 2010 taxes online The spouse of any individual listed above. Filing 2010 taxes online First cousin. Filing 2010 taxes online Example. Filing 2010 taxes online When Aaron graduated from college last year he had $5,000 left in his Coverdell ESA. Filing 2010 taxes online He wanted to give this money to his younger sister, who was still in high school. Filing 2010 taxes online In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his sister's Coverdell ESA within 60 days of the distribution. Filing 2010 taxes online Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or distribution. Filing 2010 taxes online This rule does not apply to the rollover of a military death gratuity or payment from Servicemembers' Group Life Insurance (SGLI). Filing 2010 taxes online Military death gratuity. Filing 2010 taxes online   If you received a military death gratuity or a payment from Servicemembers' Group Life Insurance (SGLI), you may roll over all or part of the amount received to one or more Coverdell ESAs for the benefit of members of the beneficiary's family (see Members of the beneficiary's family , earlier). Filing 2010 taxes online Such payments are made to an eligible survivor upon the death of a member of the armed forces. Filing 2010 taxes online The contribution to a Coverdell ESA from survivor benefits received cannot be made later than 1 year after the date on which you receive the gratuity or SGLI payment. Filing 2010 taxes online   This rollover contribution is not subject to (but is in addition to) the contribution limits discussed earlier under Contribution Limits . Filing 2010 taxes online The amount you roll over cannot exceed the total survivor benefits you received, reduced by contributions from these benefits to a Roth IRA or other Coverdell ESAs. Filing 2010 taxes online   The amount contributed from the survivor benefits is treated as part of your basis (cost) in the Coverdell ESA, and will not be taxed when distributed. Filing 2010 taxes online See Distributions , later. Filing 2010 taxes online The limit of one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment. Filing 2010 taxes online Changing the Designated Beneficiary The designated beneficiary can be changed. Filing 2010 taxes online See Members of the beneficiary's family , earlier. Filing 2010 taxes online There are no tax consequences if, at the time of the change, the new beneficiary is under age 30 or is a special needs beneficiary. Filing 2010 taxes online Example. Filing 2010 taxes online Assume the same situation for Aaron as in the last example (see Rollovers , earlier). Filing 2010 taxes online Instead of closing his Coverdell ESA and paying the distribution into his sister's Coverdell ESA, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his sister. Filing 2010 taxes online Transfer Because of Divorce If a spouse or former spouse receives a Coverdell ESA under a divorce or separation instrument, it is not a taxable transfer. Filing 2010 taxes online After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own. Filing 2010 taxes online Example. Filing 2010 taxes online In their divorce settlement, Peg received her ex-husband's Coverdell ESA. Filing 2010 taxes online In this process, the account was transferred into her name. Filing 2010 taxes online Peg now treats the funds in this Coverdell ESA as if she were the original owner. Filing 2010 taxes online Distributions The designated beneficiary of a Coverdell ESA can take a distribution at any time. Filing 2010 taxes online Whether the distributions are tax free depends, in part, on whether the distributions are equal to or less than the amount of Adjusted qualified education expenses (defined later) that the beneficiary has in the same tax year. Filing 2010 taxes online See Table 7-3, Coverdell ESA Distributions at a Glance, for highlights. Filing 2010 taxes online Table 7-3. Filing 2010 taxes online Coverdell ESA Distributions at a Glance Do not rely on this table alone. Filing 2010 taxes online It provides only general highlights. Filing 2010 taxes online See the text for definitions of terms in bold type and for more complete explanations. Filing 2010 taxes online Question Answer Is a distribution from a Coverdell ESA to pay for a designated beneficiary's qualified education expenses tax free? Generally, yes, to the extent the amount of the distribution is not more than the designated beneficiary's adjusted qualified education expenses. Filing 2010 taxes online After the designated beneficiary completes his or her education at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed? Yes. Filing 2010 taxes online Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. Filing 2010 taxes online Also, certain transfers to members of the beneficiary's family are permitted. Filing 2010 taxes online Does the designated beneficiary need to be enrolled for a minimum number of courses to take a tax-free distribution? No. Filing 2010 taxes online Adjusted qualified education expenses. Filing 2010 taxes online   To determine if total distributions for the year are more than the amount of qualified education expenses, reduce total qualified education expenses by any tax-free educational assistance. Filing 2010 taxes online Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Filing 2010 taxes online The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses. Filing 2010 taxes online Tax-Free Distributions Generally, distributions are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year. Filing 2010 taxes online Do not report tax-free distributions (including qualifying rollovers) on your tax return. Filing 2010 taxes online Taxable Distributions A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the beneficiary's adjusted qualified education expenses for the year. Filing 2010 taxes online Excess distribution. Filing 2010 taxes online   This is the part of the total distribution that is more than the beneficiary's adjusted qualified education expenses for the year. Filing 2010 taxes online Earnings and basis. Filing 2010 taxes online   You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2013. Filing 2010 taxes online The amount of your gross distribution will be shown in box 1. Filing 2010 taxes online For 2013, instead of dividing the gross distribution between your earnings (box 2) and your basis (already-taxed amount) (box 3), the payer or trustee may report the fair market value (account balance) of the Coverdell ESA as of December 31, 2013. Filing 2010 taxes online This will be shown in the blank box below boxes 5 and 6. Filing 2010 taxes online   The amount contributed from survivor benefits (see Military death gratuity , earlier) is treated as part of your basis and will not be taxed when distributed. Filing 2010 taxes online Figuring the Taxable Portion of a Distribution The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. Filing 2010 taxes online Figure the taxable portion for 2013 as shown in the following steps. Filing 2010 taxes online Multiply the total amount distributed by a fraction. Filing 2010 taxes online The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the value (balance) of the account at the end of 2013 plus the amount distributed during 2013. Filing 2010 taxes online Subtract the amount figured in (1) from the total amount distributed during 2013. Filing 2010 taxes online The result is the amount of earnings included in the distribution(s). Filing 2010 taxes online Multiply the amount of earnings figured in (2) by a fraction. Filing 2010 taxes online The numerator is the adjusted qualified education expenses paid during 2013 and the denominator is the total amount distributed during 2013. Filing 2010 taxes online Subtract the amount figured in (3) from the amount figured in (2). Filing 2010 taxes online The result is the amount the beneficiary must include in income. Filing 2010 taxes online The taxable amount must be reported on Form 1040 or Form 1040NR, line 21. Filing 2010 taxes online Example. Filing 2010 taxes online You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2013. Filing 2010 taxes online There were no contributions in 2013. Filing 2010 taxes online This is your first distribution from the account, so your basis in the account on December 31, 2012, was $1,500. Filing 2010 taxes online The value (balance) of your account on December 31, 2013, was $950. Filing 2010 taxes online You had $700 of adjusted qualified education expenses (AQEE) for the year. Filing 2010 taxes online Using the steps in Figuring the Taxable Portion of a Distribution , earlier, figure the taxable portion of your distribution as follows. Filing 2010 taxes online   1. Filing 2010 taxes online $850 (distribution) × $1,500 basis + $0 contributions  $950 value + $850 distribution       =$708 (basis portion of distribution)     2. Filing 2010 taxes online $850 (distribution)−$708 (basis portion of distribution)     =$142 (earnings included in distribution)   3. Filing 2010 taxes online $142 (earnings) × $700 AQEE  $850 distribution           =$117 (tax-free earnings)     4. Filing 2010 taxes online $142 (earnings)−$117 (tax-free earnings)=$25 (taxable earnings)                 You must include $25 in income as distributed earnings not used for qualified education expenses. Filing 2010 taxes online Report this amount on Form 1040, line 21, listing the type and amount of income on the dotted line. Filing 2010 taxes online Worksheet 7-3, Coverdell ESA–Taxable Distributions and Basis , at the end of this chapter, can help you figure your adjusted qualified education expenses, how much of your distribution must be included in income, and the remaining basis in your Coverdell ESA(s). Filing 2010 taxes online Coordination With American Opportunity and Lifetime Learning Credits The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. Filing 2010 taxes online This means the beneficiary must reduce qualified higher education expenses by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit. Filing 2010 taxes online Example. Filing 2010 taxes online Derek Green had $5,800 of qualified higher education expenses for 2013, his first year in college. Filing 2010 taxes online He paid his college expenses from the following sources. Filing 2010 taxes online     Partial tuition scholarship (tax free) $1,500     Coverdell ESA distribution 1,000     Gift from parents 2,100     Earnings from part-time job 1,200           Of his $5,800 of qualified higher education expenses, $4,000 was tuition and related expenses that also qualified for an American opportunity credit. Filing 2010 taxes online Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. Filing 2010 taxes online Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses. Filing 2010 taxes online     Total qualified higher education expenses $5,800     Minus: Tax-free educational assistance −1,500     Minus: Expenses taken into account in  figuring American opportunity credit − 4,000     Equals: Adjusted qualified higher education  expenses (AQHEE) $ 300           Since the adjusted qualified higher education expenses ($300) are less than the Coverdell ESA distribution ($1,000), part of the distribution will be taxable. Filing 2010 taxes online The balance in Derek's account was $1,800 on December 31, 2013. Filing 2010 taxes online Prior to 2013, $2,100 had been contributed to this account. Filing 2010 taxes online Contributions for 2013 totaled $400. Filing 2010 taxes online Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below. Filing 2010 taxes online   1. Filing 2010 taxes online $1,000 (distribution) × $2,100 basis + $400 contributions  $1,800 value + $1,000 distribution           =$893 (basis portion of distribution)     2. Filing 2010 taxes online $1,000 (distribution)−$893 (basis portion of distribution)     = $107 (earnings included in distribution)   3. Filing 2010 taxes online $107 (earnings) × $300 AQHEE  $1,000 distribution       =$32 (tax-free earnings)     4. Filing 2010 taxes online $107 (earnings)−$32 (tax-free earnings)=$75 (taxable earnings)                 Derek must include $75 in income (Form 1040, line 21). Filing 2010 taxes online This is the amount of distributed earnings not used for adjusted qualified higher education expenses. Filing 2010 taxes online Coordination With Qualified Tuition Program (QTP) Distributions If a designated beneficiary receives distributions from both a Coverdell ESA and a QTP in the same year, and the total distribution is more than the beneficiary's adjusted qualified higher education expenses, those expenses must be allocated between the distribution from the Coverdell ESA and the distribution from the QTP before figuring how much of each distribution is taxable. Filing 2010 taxes online The following two examples illustrate possible allocations. Filing 2010 taxes online Example 1. Filing 2010 taxes online In 2013, Beatrice graduated from high school and began her first semester of college. Filing 2010 taxes online That year, she had $1,000 of qualified elementary and secondary education expenses (QESEE) for high school and $3,000 of qualified higher education expenses (QHEE) for college. Filing 2010 taxes online To pay these expenses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. Filing 2010 taxes online No one claimed Beatrice as a dependent, nor was she eligible for an education credit. Filing 2010 taxes online She did not receive any tax-free educational assistance in 2013. Filing 2010 taxes online Beatrice must allocate her total qualified education expenses between the two distributions. Filing 2010 taxes online Beatrice knows that tax-free treatment will be available if she applies her $800 Coverdell ESA distribution toward her $1,000 of qualified education expenses for high school. Filing 2010 taxes online The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free. Filing 2010 taxes online Next, Beatrice matches her $4,200 QTP distribution to her $3,000 of QHEE, and finds she has an excess QTP distribution of $1,200 ($4,200 QTP − $3,000 QHEE). Filing 2010 taxes online She cannot use the extra $200 of high school expenses (from (1) above) against the QTP distribution because those expenses do not qualify a QTP for tax-free treatment. Filing 2010 taxes online Finally, Beatrice figures the taxable and tax-free portions of her QTP distribution based on her $3,000 of QHEE. Filing 2010 taxes online (See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program for more information. Filing 2010 taxes online ) Example 2. Filing 2010 taxes online Assume the same facts as in Example 1 , except that Beatrice withdrew $1,800 from her Coverdell ESA and $3,200 from her QTP. Filing 2010 taxes online In this case, she allocates her qualified education expenses as follows. Filing 2010 taxes online Using the same reasoning as in Example 1, Beatrice matches $1,000 of her Coverdell ESA distribution to her $1,000 of QESEE—she has $800 of her distribution remaining. Filing 2010 taxes online Because higher education expenses can also qualify a Coverdell ESA distribution for tax-free treatment, Beatrice allocates her $3,000 of QHEE between the remaining $800 Coverdell ESA and the $3,200 QTP distributions ($4,000 total). Filing 2010 taxes online   $3,000 QHEE × $800 ESA distribution  $4,000 total distribution = $600 QHEE (ESA)     $3,000 QHEE × $3,200 QTP distribution  $4,000 total distribution = $2,400 QHEE (QTP)   Beatrice then figures the taxable part of her: Coverdell ESA distribution based on qualified education expenses of $1,600 ($1,000 QESEE + $600 QHEE). Filing 2010 taxes online See Figuring the Taxable Portion of a Distribution , earlier, in this chapter. Filing 2010 taxes online   QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program). Filing 2010 taxes online The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. Filing 2010 taxes online However, you do not have to allocate your expenses in the same way. Filing 2010 taxes online You can use any reasonable method. Filing 2010 taxes online Losses on Coverdell ESA Investments If you have a loss on your investment in a Coverdell ESA, you may be able to deduct the loss on your income tax return. Filing 2010 taxes online You can deduct the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Filing 2010 taxes online Your basis is the total amount of contributions to that Coverdell ESA. Filing 2010 taxes online You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. Filing 2010 taxes online If you have distributions from more than one Coverdell ESA account during a year, you must combine the information (amount of distribution, basis, etc. Filing 2010 taxes online ) from all such accounts in order to determine your taxable earnings for the year. Filing 2010 taxes online By doing this, the loss from one ESA account reduces the distributed earnings (if any) from any other ESA account. Filing 2010 taxes online For examples of the calculation, see Losses on QTP Investments in chapter 8, Qualified Tuition Program. Filing 2010 taxes online Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. Filing 2010 taxes online Exceptions. Filing 2010 taxes online   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. Filing 2010 taxes online Made because the designated beneficiary is disabled. Filing 2010 taxes online A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. Filing 2010 taxes online A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. Filing 2010 taxes online Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Filing 2010 taxes online Made on account of the attendance of the designated beneficiary at a U. Filing 2010 taxes online S. Filing 2010 taxes online military academy (such as the USMA at West Point). Filing 2010 taxes online This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. Filing 2010 taxes online S. Filing 2010 taxes online Code) attributable to such attendance. Filing 2010 taxes online Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier). Filing 2010 taxes online Made before June 1, 2014, of an excess 2013 contribution (and any earnings on it). Filing 2010 taxes online The distributed earnings must be included in gross income for the year in which the excess contribution was made. Filing 2010 taxes online Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. Filing 2010 taxes online Figuring the additional tax. Filing 2010 taxes online    Use Part II of Form 5329, to figure any additional tax. Filing 2010 taxes online Report the amount on Form 1040, line 58, or Form 1040NR, line 56. Filing 2010 taxes online When Assets Must Be Distributed Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs. Filing 2010 taxes online The designated beneficiary reaches age 30. Filing 2010 taxes online In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. Filing 2010 taxes online However, this rule does not apply if the beneficiary is a special needs beneficiary. Filing 2010 taxes online The designated beneficiary dies before reaching age 30. Filing 2010 taxes online In this case, the remaining assets must generally be distributed within 30 days after the date of death. Filing 2010 taxes online Exception for Transfer to Surviving Spouse or Family Member If a Coverdell ESA is transferred to a surviving spouse or other family member as the result of the death of the designated beneficiary, the Coverdell ESA retains its status. Filing 2010 taxes online (“Family member” was defined earlier under Rollovers . Filing 2010 taxes online ) This means the spouse or other family member can treat the Coverdell ESA as his or her own and does not need to withdraw the assets until he or she reaches age 30. Filing 2010 taxes online This age limitation does not apply if the new beneficiary is a special needs beneficiary. Filing 2010 taxes online There are no tax consequences as a result of the transfer. Filing 2010 taxes online How To Figure the Taxable Earnings When a total distribution is made because the designated beneficiary either reached age 30 or died, the earnings that accumulated tax free in the account must be included in taxable income. Filing 2010 taxes online You determine these earnings as shown in the following two steps. Filing 2010 taxes online Multiply the amount distributed by a fraction. Filing 2010 taxes online The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the balance in the account at the end of 2013 plus the amount distributed during 2013. Filing 2010 taxes online Subtract the amount figured in (1) from the total amount distributed during 2013. Filing 2010 taxes online The result is the amount of earnings included in the distribution. Filing 2010 taxes online For an example, see steps (1) and (2) of the Example under Figuring the Taxable Portion of a Distribution, earlier. Filing 2010 taxes online The beneficiary or other person receiving the distribution must report this amount on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line. Filing 2010 taxes online Worksheet 7-3 Instructions. Filing 2010 taxes online Coverdell ESA—Taxable Distributions and Basis Line G. Filing 2010 taxes online Enter the total distributions received from all Coverdell ESAs during 2013. Filing 2010 taxes online Do not include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). Filing 2010 taxes online Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year for which the contributions were made. Filing 2010 taxes online Line 2. Filing 2010 taxes online Your basis (amount already taxed) in this Coverdell ESA as of December 31, 2012, is the total of:   •All contributions to this Coverdell ESA before 2013 •Minus the tax-free portion of any distributions from this Coverdell ESA before 2013. Filing 2010 taxes online   If your last distribution from this Coverdell ESA was before 2013, you must start with the basis in your account as of the end of the last year in which you took a distribution. Filing 2010 taxes online For years before 2002, you can find that amount on the last line of the worksheet in the Instructions for Form 8606, Nondeductible IRAs, that you completed for that year. Filing 2010 taxes online For years after 2001, you can find that amount by using the ending basis from the worksheet in Publication 970 for that year. Filing 2010 taxes online You can determine your basis in this Coverdell ESA as of December 31, 2012, by adding to the basis as of the end of that year any contributions made to that account after the year of the distribution and before 2013. Filing 2010 taxes online Line 4. Filing 2010 taxes online Enter the total distributions received from this Coverdell ESA in 2013. Filing 2010 taxes online Do not include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). Filing 2010 taxes online   Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year of the contributions. Filing 2010 taxes online Line 7. Filing 2010 taxes online Enter the total value of this Coverdell ESA as of December 31, 2013, plus any outstanding rollovers contributed to the account after 2012, but before the end of the 60-day rollover period. Filing 2010 taxes online A statement should be sent to you by January 31, 2014, for this Coverdell ESA showing the value on December 31, 2013. Filing 2010 taxes online   A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. Filing 2010 taxes online An outstanding rollover is any amount withdrawn within 60 days before the end of 2013 (November 2 through December 31) that was rolled over after December 31, 2013, but within the 60-day rollover period. Filing 2010 taxes online Worksheet 7-3. Filing 2010 taxes online Coverdell ESA—Taxable Distributions and Basis How to complete this worksheet. Filing 2010 taxes online • • • Complete Part I, lines A through H, on only one worksheet. Filing 2010 taxes online  Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs. Filing 2010 taxes online  Complete Part III, the Summary (line 16), on only one worksheet. Filing 2010 taxes online Part I. Filing 2010 taxes online Qualified Education Expenses (Complete for total expenses)       A. Filing 2010 taxes online Enter your total qualified education expenses for 2013   A. Filing 2010 taxes online   B. Filing 2010 taxes online Enter those qualified education expenses paid for with tax-free educational assistance (for example, tax-free scholarships, veterans' educational benefits, Pell grants, employer-provided educational assistance)   B. Filing 2010 taxes online         C. Filing 2010 taxes online Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040). Filing 2010 taxes online Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040 or 1040NR)   C. Filing 2010 taxes online         D. Filing 2010 taxes online Enter those qualified higher education expenses on which  an American opportunity or lifetime learning credit was based   D. Filing 2010 taxes online         E. Filing 2010 taxes online Add lines B, C, and D   D. Filing 2010 taxes online   F. Filing 2010 taxes online Subtract line E from line A. Filing 2010 taxes online This is your adjusted qualified education expense for 2013   E. Filing 2010 taxes online   G. Filing 2010 taxes online Enter your total distributions from all Coverdell ESAs during 2013. Filing 2010 taxes online Do not include rollovers  or the return of excess contributions (see instructions)   F. Filing 2010 taxes online   H. Filing 2010 taxes online Divide line F by line G. Filing 2010 taxes online Enter the result as a decimal (rounded to at least 3 places). Filing 2010 taxes online If the  result is 1. Filing 2010 taxes online 000 or more, enter 1. Filing 2010 taxes online 000   G. Filing 2010 taxes online . Filing 2010 taxes online Part II. Filing 2010 taxes online Taxable Distributions and Basis (Complete separately for each account) 1. Filing 2010 taxes online Enter the amount contributed to this Coverdell ESA for 2013, including contributions made for 2013 from January 1, 2014, through April 15, 2014. Filing 2010 taxes online Do not include rollovers or the return of excess contributions   1. Filing 2010 taxes online   2. Filing 2010 taxes online Enter your basis in this Coverdell ESA as of December 31, 2012 (see instructions)   2. Filing 2010 taxes online   3. Filing 2010 taxes online Add lines 1 and 2   3. Filing 2010 taxes online   4. Filing 2010 taxes online Enter the total distributions from this Coverdell ESA during 2013. Filing 2010 taxes online Do not include rollovers  or the return of excess contributions (see instructions)   4. Filing 2010 taxes online   5. Filing 2010 taxes online Multiply line 4 by line H. Filing 2010 taxes online This is the amount of adjusted qualified  education expense attributable to this Coverdell ESA   5. Filing 2010 taxes online         6. Filing 2010 taxes online Subtract line 5 from line 4   6. Filing 2010 taxes online         7. Filing 2010 taxes online Enter the total value of this Coverdell ESA as of December 31, 2013,  plus any outstanding rollovers (see instructions)   7. Filing 2010 taxes online         8. Filing 2010 taxes online Add lines 4 and 7   8. Filing 2010 taxes online         9. Filing 2010 taxes online Divide line 3 by line 8. Filing 2010 taxes online Enter the result as a decimal (rounded to  at least 3 places). Filing 2010 taxes online If the result is 1. Filing 2010 taxes online 000 or more, enter 1. Filing 2010 taxes online 000   9. Filing 2010 taxes online . Filing 2010 taxes online       10. Filing 2010 taxes online Multiply line 4 by line 9. Filing 2010 taxes online This is the amount of basis allocated to your  distributions, and is tax free   10. Filing 2010 taxes online     Note. Filing 2010 taxes online If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15. Filing 2010 taxes online       11. Filing 2010 taxes online Subtract line 10 from line 4   11. Filing 2010 taxes online   12. Filing 2010 taxes online Divide line 5 by line 4. Filing 2010 taxes online Enter the result as a decimal (rounded to  at least 3 places). Filing 2010 taxes online If the result is 1. Filing 2010 taxes online 000 or more, enter 1. Filing 2010 taxes online 000   12. Filing 2010 taxes online . Filing 2010 taxes online       13. Filing 2010 taxes online Multiply line 11 by line 12. Filing 2010 taxes online This is the amount of qualified education  expenses allocated to your distributions, and is tax free   13. Filing 2010 taxes online   14. Filing 2010 taxes online Subtract line 13 from line 11. Filing 2010 taxes online This is the portion of the distributions from this  Coverdell ESA in 2013 that you must include in income   14. Filing 2010 taxes online   15. Filing 2010 taxes online Subtract line 10 from line 3. Filing 2010 taxes online This is your basis in this Coverdell ESA as of December 31, 2013   15. Filing 2010 taxes online   Part III. Filing 2010 taxes online Summary (Complete only once)       16. Filing 2010 taxes online Taxable amount. Filing 2010 taxes online Add together all amounts on line 14 for all your Coverdell ESAs. Filing 2010 taxes online Enter here  and include on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line   16. 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IRS Live is for the tax pro in the know. A live webinar, IRS Live is a panel discussion among IRS experts and industry professionals aimed at educating tax professionals on the most current and complex tax issues affecting them and their clients. Tax professionals are encouraged to watch the free webinar and submit questions by e-mail during the webinar. Continuing education (CE) credit is often offered for Enrolled Agents who view the live broadcast.

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The Filing 2010 Taxes Online

Filing 2010 taxes online Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. Filing 2010 taxes online General RulesFiguring Installment Sale Income Reporting Installment Sale Income Other RulesElecting Out of the Installment Method Payments Received or Considered Received Escrow Account Depreciation Recapture Income Sale to a Related Person Like-Kind Exchange Contingent Payment Sale Single Sale of Several Assets Sale of a Business Unstated Interest and Original Issue Discount (OID) Disposition of an Installment Obligation Repossession Interest on Deferred Tax Reporting an Installment SaleRelated person. Filing 2010 taxes online Several assets. Filing 2010 taxes online Special situations. Filing 2010 taxes online Schedule D (Form 1040). Filing 2010 taxes online Form 4797. Filing 2010 taxes online How To Get Tax Help What Is an Installment Sale? An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Filing 2010 taxes online The rules for installment sales do not apply if you elect not to use the installment method (see Electing Out of the Installment Method under Other Rules, later) or the transaction is one for which the installment method may not apply. Filing 2010 taxes online The installment sales method cannot be used for the following. Filing 2010 taxes online Sale of inventory. Filing 2010 taxes online   The regular sale of inventory of personal property does not qualify as an installment sale even if you receive a payment after the year of sale. Filing 2010 taxes online See Sale of a Business under Other Rules, later. Filing 2010 taxes online Dealer sales. Filing 2010 taxes online   Sales of personal property by a person who regularly sells or otherwise disposes of the same type of personal property on the installment plan are not installment sales. Filing 2010 taxes online This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. Filing 2010 taxes online However, the rule does not apply to an installment sale of property used or produced in farming. Filing 2010 taxes online Special rule. Filing 2010 taxes online   Dealers of time-shares and residential lots can treat certain sales as installment sales and report them under the installment method if they elect to pay a special interest charge. Filing 2010 taxes online For more information, see section 453(l). Filing 2010 taxes online Stock or securities. Filing 2010 taxes online   You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. Filing 2010 taxes online You must report the entire gain on the sale in the year in which the trade date falls. Filing 2010 taxes online Installment obligation. Filing 2010 taxes online   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. Filing 2010 taxes online General Rules If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. Filing 2010 taxes online See Electing Out of the Installment Method under Other Rules, later, for information on recognizing the entire gain in the year of sale. Filing 2010 taxes online Sale at a loss. Filing 2010 taxes online   If your sale results in a loss, you cannot use the installment method. Filing 2010 taxes online If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. Filing 2010 taxes online Unstated interest. Filing 2010 taxes online   If your sale calls for payments in a later year and the sales contract provides for little or no interest, you may have to figure unstated interest, even if you have a loss. Filing 2010 taxes online See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Filing 2010 taxes online Figuring Installment Sale Income You can use the following discussions or Form 6252 to help you determine gross profit, contract price, gross profit percentage, and installment sale income. Filing 2010 taxes online Each payment on an installment sale usually consists of the following three parts. Filing 2010 taxes online Interest income. Filing 2010 taxes online Return of your adjusted basis in the property. Filing 2010 taxes online Gain on the sale. Filing 2010 taxes online In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. Filing 2010 taxes online You do not include in income the part that is the return of your basis in the property. Filing 2010 taxes online Basis is the amount of your investment in the property for installment sale purposes. Filing 2010 taxes online Interest Income You must report interest as ordinary income. Filing 2010 taxes online Interest is generally not included in a down payment. Filing 2010 taxes online However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. Filing 2010 taxes online Interest provided in the agreement is called stated interest. Filing 2010 taxes online If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. Filing 2010 taxes online See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Filing 2010 taxes online Adjusted Basis and Installment Sale Income (Gain on Sale) After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. Filing 2010 taxes online A tax-free return of your adjusted basis in the property, and Your gain (referred to as installment sale income on Form 6252). Filing 2010 taxes online Figuring adjusted basis for installment sale purposes. Filing 2010 taxes online   You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. Filing 2010 taxes online When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. Filing 2010 taxes online Worksheet A. Filing 2010 taxes online Figuring Adjusted Basis and Gross Profit Percentage 1. Filing 2010 taxes online Enter the selling price for the property   2. Filing 2010 taxes online Enter your adjusted basis for the property     3. Filing 2010 taxes online Enter your selling expenses     4. Filing 2010 taxes online Enter any depreciation recapture     5. Filing 2010 taxes online Add lines 2, 3, and 4. Filing 2010 taxes online  This is your adjusted basis for installment sale purposes   6. Filing 2010 taxes online Subtract line 5 from line 1. Filing 2010 taxes online If zero or less, enter -0-. Filing 2010 taxes online  This is your gross profit     If the amount entered on line 6 is zero, stop here. Filing 2010 taxes online You cannot use the installment method. Filing 2010 taxes online   7. Filing 2010 taxes online Enter the contract price for the property   8. Filing 2010 taxes online Divide line 6 by line 7. Filing 2010 taxes online This is your gross profit percentage   Selling price. Filing 2010 taxes online   The selling price is the total cost of the property to the buyer and includes any of the following. Filing 2010 taxes online Any money you are to receive. Filing 2010 taxes online The fair market value (FMV) of any property you are to receive (FMV is discussed in Property Used As a Payment under Other Rules, later). Filing 2010 taxes online Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). Filing 2010 taxes online Any of your selling expenses the buyer pays. Filing 2010 taxes online   Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. Filing 2010 taxes online Adjusted basis for installment sale purposes. Filing 2010 taxes online   Your adjusted basis is the total of the following three items. Filing 2010 taxes online Adjusted basis. Filing 2010 taxes online Selling expenses. Filing 2010 taxes online Depreciation recapture. Filing 2010 taxes online Adjusted basis. Filing 2010 taxes online   Basis is your investment in the property for installment sale purposes. Filing 2010 taxes online The way you figure basis depends on how you acquire the property. Filing 2010 taxes online The basis of property you buy is generally its cost. Filing 2010 taxes online The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. Filing 2010 taxes online   While you own property, various events may change your original basis. Filing 2010 taxes online Some events, such as adding rooms or making permanent improvements, increase basis. Filing 2010 taxes online Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. Filing 2010 taxes online The result is adjusted basis. Filing 2010 taxes online   For more information on how to figure basis and adjusted basis, see Publication 551. Filing 2010 taxes online For more information regarding your basis in property you inherited from someone who died in 2010 and whose executor filed Form 8939, Allocation of Increase In Basis for Property Acquired From a Decedent, see Publication 4895. Filing 2010 taxes online Selling expenses. Filing 2010 taxes online   Selling expenses relate to the sale of the property. Filing 2010 taxes online They include commissions, attorney fees, and any other expenses paid on the sale. Filing 2010 taxes online Selling expenses are added to the basis of the sold property. Filing 2010 taxes online Depreciation recapture. Filing 2010 taxes online   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. Filing 2010 taxes online See Depreciation Recapture Income under Other Rules, later. Filing 2010 taxes online Gross profit. Filing 2010 taxes online   Gross profit is the total gain you report on the installment method. Filing 2010 taxes online   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. Filing 2010 taxes online If the property you sold was your home, subtract from the gross profit any gain you can exclude. Filing 2010 taxes online See Sale of Your Home , later, under Reporting Installment Sale Income. Filing 2010 taxes online Contract price. Filing 2010 taxes online   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. Filing 2010 taxes online Gross profit percentage. Filing 2010 taxes online   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. Filing 2010 taxes online This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. Filing 2010 taxes online   The gross profit percentage generally remains the same for each payment you receive. Filing 2010 taxes online However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. Filing 2010 taxes online Example. Filing 2010 taxes online You sell property at a contract price of $6,000 and your gross profit is $1,500. Filing 2010 taxes online Your gross profit percentage is 25% ($1,500 ÷ $6,000). Filing 2010 taxes online After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. Filing 2010 taxes online The remainder (balance) of each payment is the tax-free return of your adjusted basis. Filing 2010 taxes online Amount to report as installment sale income. Filing 2010 taxes online   Multiply the payments you receive each year (less interest) by the gross profit percentage. Filing 2010 taxes online The result is your installment sale income for the tax year. Filing 2010 taxes online In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. Filing 2010 taxes online A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. Filing 2010 taxes online For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. Filing 2010 taxes online Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. Filing 2010 taxes online You then must refigure the gross profit percentage for the remaining payments. Filing 2010 taxes online Refigure your gross profit using Worksheet B. Filing 2010 taxes online You will spread any remaining gain over future installments. Filing 2010 taxes online Worksheet B. Filing 2010 taxes online New Gross Profit Percentage — Selling Price Reduced 1. Filing 2010 taxes online Enter the reduced selling  price for the property   2. Filing 2010 taxes online Enter your adjusted  basis for the  property     3. Filing 2010 taxes online Enter your selling  expenses     4. Filing 2010 taxes online Enter any depreciation  recapture     5. Filing 2010 taxes online Add lines 2, 3, and 4. Filing 2010 taxes online   6. Filing 2010 taxes online Subtract line 5 from line 1. Filing 2010 taxes online  This is your adjusted  gross profit   7. Filing 2010 taxes online Enter any installment sale  income reported in  prior year(s)   8. Filing 2010 taxes online Subtract line 7 from line 6   9. Filing 2010 taxes online Future installments   10. Filing 2010 taxes online Divide line 8 by line 9. Filing 2010 taxes online  This is your new gross profit percentage*   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Filing 2010 taxes online Example. Filing 2010 taxes online In 2011, you sold land with a basis of $40,000 for $100,000. Filing 2010 taxes online Your gross profit was $60,000. Filing 2010 taxes online You received a $20,000 down payment and the buyer's note for $80,000. Filing 2010 taxes online The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. Filing 2010 taxes online Your gross profit percentage is 60%. Filing 2010 taxes online You reported a gain of $12,000 on each payment received in 2011 and 2012. Filing 2010 taxes online In 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $15,000 for each year. Filing 2010 taxes online The new gross profit percentage, 46. Filing 2010 taxes online 67%, is figured on Example—Worksheet B. Filing 2010 taxes online You will report a gain of $7,000 (46. Filing 2010 taxes online 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. Filing 2010 taxes online Example — Worksheet B. Filing 2010 taxes online New Gross Profit Percentage — Selling Price Reduced 1. Filing 2010 taxes online Enter the reduced selling  price for the property 85,000 2. Filing 2010 taxes online Enter your adjusted  basis for the  property 40,000   3. Filing 2010 taxes online Enter your selling  expenses -0-   4. Filing 2010 taxes online Enter any depreciation  recapture -0-   5. Filing 2010 taxes online Add lines 2, 3, and 4. Filing 2010 taxes online 40,000 6. Filing 2010 taxes online Subtract line 5 from line 1. Filing 2010 taxes online  This is your adjusted  gross profit 45,000 7. Filing 2010 taxes online Enter any installment sale  income reported in  prior year(s) 24,000 8. Filing 2010 taxes online Subtract line 7 from line 6 21,000 9. Filing 2010 taxes online Future installments 45,000 10. Filing 2010 taxes online Divide line 8 by line 9. Filing 2010 taxes online  This is your new gross profit percentage* 46. Filing 2010 taxes online 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Filing 2010 taxes online Reporting Installment Sale Income Generally, you will use Form 6252 to report installment sale income from casual sales of real or personal property during the tax year. Filing 2010 taxes online You also will have to report the installment sale income on Schedule D (Form 1040), Capital Gains and Losses, or Form 4797, or both. Filing 2010 taxes online See Schedule D (Form 1040) and Form 4797 , later. Filing 2010 taxes online If the property was your main home, you may be able to exclude part or all of the gain. Filing 2010 taxes online See Sale of Your Home , later. Filing 2010 taxes online Form 6252 Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. Filing 2010 taxes online Attach it to your tax return for each year. Filing 2010 taxes online Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. Filing 2010 taxes online Which parts to complete. Filing 2010 taxes online   Which part to complete depends on whether you are filing the form for the year of sale or a later year. Filing 2010 taxes online Year of sale. Filing 2010 taxes online   Complete lines 1 through 4, Part I, and Part II. Filing 2010 taxes online If you sold property to a related party during the year, also complete Part III. Filing 2010 taxes online Later years. Filing 2010 taxes online   Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. Filing 2010 taxes online   If you sold a marketable security to a related party after May 14, 1980, and before January 1, 1987, complete Form 6252 for each year of the installment agreement, even if you did not receive a payment. Filing 2010 taxes online (After December 31, 1986, the installment method is not available for the sale of marketable securities. Filing 2010 taxes online ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. Filing 2010 taxes online Complete Part III unless you received the final payment during the tax year. Filing 2010 taxes online   If you sold property other than a marketable security to a related party after May 14, 1980, complete Form 6252 for the year of sale and for 2 years after the year of sale, even if you did not receive a payment. Filing 2010 taxes online Complete lines 1 through 4 and Part II for any year during this 2-year period in which you receive a payment from the sale. Filing 2010 taxes online Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. Filing 2010 taxes online Schedule D (Form 1040) Enter the gain figured on Form 6252 (line 26) for personal-use property (capital assets) on Schedule D (Form 1040), as a short-term gain (line 4) or long-term gain (line 11). Filing 2010 taxes online If your gain from the installment sale qualifies for long-term capital gain treatment in the year of sale, it will continue to qualify in later tax years. Filing 2010 taxes online Your gain is long-term if you owned the property for more than 1 year when you sold it. Filing 2010 taxes online Form 4797 An installment sale of property used in your business or that earns rent or royalty income may result in a capital gain, an ordinary gain, or both. Filing 2010 taxes online All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. Filing 2010 taxes online For trade or business property held for more than 1 year, enter the amount from line 26 of Form 6252 on Form 4797, line 4. Filing 2010 taxes online If the property was held 1 year or less or you have an ordinary gain from the sale of a noncapital asset (even if the holding period is more than 1 year), enter this amount on Form 4797, line 10, and write “From Form 6252. Filing 2010 taxes online ” Sale of Your Home If you sell your home, you may be able to exclude all or part of the gain on the sale. Filing 2010 taxes online See Publication 523 for information about excluding the gain. Filing 2010 taxes online If the sale is an installment sale, any gain you exclude is not included in gross profit when figuring your gross profit percentage. Filing 2010 taxes online Seller-financed mortgage. Filing 2010 taxes online   If you finance the sale of your home to an individual, both you and the buyer may have to follow special reporting procedures. Filing 2010 taxes online   When you report interest income received from a buyer who uses the property as a personal residence, write the buyer's name, address, and social security number (SSN) on line 1 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. Filing 2010 taxes online   When deducting the mortgage interest, the buyer must write your name, address, and SSN on line 11 of Schedule A (Form 1040), Itemized Deductions. Filing 2010 taxes online   If either person fails to include the other person's SSN, a $50 penalty will be assessed. Filing 2010 taxes online Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. Filing 2010 taxes online The following topics are discussed. Filing 2010 taxes online Electing out of the installment method. Filing 2010 taxes online Payments received or considered received. Filing 2010 taxes online Escrow account. Filing 2010 taxes online Depreciation recapture income. Filing 2010 taxes online Sale to a related person. Filing 2010 taxes online Like-kind exchange. Filing 2010 taxes online Contingent payment sale. Filing 2010 taxes online Single sale of several assets. Filing 2010 taxes online Sale of a business. Filing 2010 taxes online Unstated interest and original issue discount. Filing 2010 taxes online Disposition of an installment obligation. Filing 2010 taxes online Repossession. Filing 2010 taxes online Interest on deferred tax. Filing 2010 taxes online Electing Out of the Installment Method If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. Filing 2010 taxes online To figure the amount of gain to report, use the fair market value (FMV) of the buyer's installment obligation that represents the buyer's debt to you. Filing 2010 taxes online Notes, mortgages, and land contracts are examples of obligations that are included at FMV. Filing 2010 taxes online You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. Filing 2010 taxes online If you use the cash method of accounting, the FMV of the obligation will never be considered to be less than the FMV of the property sold (minus any other consideration received). Filing 2010 taxes online Example. Filing 2010 taxes online You sold a parcel of land for $50,000. Filing 2010 taxes online You received a $10,000 down payment and will receive the balance over the next 10 years at $4,000 a year, plus 8% interest. Filing 2010 taxes online The buyer gave you a note for $40,000. Filing 2010 taxes online The note had an FMV of $40,000. Filing 2010 taxes online You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. Filing 2010 taxes online The land cost $25,000, and you owned it for more than one year. Filing 2010 taxes online You decide to elect out of the installment method and report the entire gain in the year of sale. Filing 2010 taxes online Gain realized:     Selling price $50,000 Minus: Property's adj. Filing 2010 taxes online basis $25,000     Commission 3,000 28,000 Gain realized $22,000 Gain recognized in year of sale:   Cash $10,000 Market value of note 40,000 Total realized in year of sale $50,000 Minus: Property's adj. Filing 2010 taxes online basis $25,000     Commission 3,000 28,000 Gain recognized $22,000 The recognized gain of $22,000 is long-term capital gain. Filing 2010 taxes online You include the entire gain in income in the year of sale, so you do not include in income any principal payments you receive in later tax years. Filing 2010 taxes online The interest on the note is ordinary income and is reported as interest income each year. Filing 2010 taxes online How to elect out. Filing 2010 taxes online   To make this election, do not report your sale on Form 6252. Filing 2010 taxes online Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. Filing 2010 taxes online When to elect out. Filing 2010 taxes online   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Filing 2010 taxes online Automatic six-month extension. Filing 2010 taxes online   If you timely file your tax return without making the election, you still can make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). Filing 2010 taxes online Write “Filed pursuant to section 301. Filing 2010 taxes online 9100-2” at the top of the amended return and file it where the original return was filed. Filing 2010 taxes online Revoking the election. Filing 2010 taxes online   Once made, the election can be revoked only with IRS approval. Filing 2010 taxes online A revocation is retroactive. Filing 2010 taxes online You will not be allowed to revoke the election if either of the following applies. Filing 2010 taxes online One of the purposes is to avoid federal income tax. Filing 2010 taxes online The tax year in which any payment was received has closed. Filing 2010 taxes online Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. Filing 2010 taxes online In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. Filing 2010 taxes online These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. Filing 2010 taxes online However, as discussed later, the buyer's assumption of your debt is treated as a recovery of your basis rather than as a payment in many cases. Filing 2010 taxes online Buyer Pays Seller's Expenses If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. Filing 2010 taxes online Include these expenses in the selling and contract prices when figuring the gross profit percentage. Filing 2010 taxes online Buyer Assumes Mortgage If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. Filing 2010 taxes online Mortgage not more than basis. Filing 2010 taxes online   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. Filing 2010 taxes online It is considered a recovery of your basis. Filing 2010 taxes online The contract price is the selling price minus the mortgage. Filing 2010 taxes online Example. Filing 2010 taxes online You sell property with an adjusted basis of $19,000. Filing 2010 taxes online You have selling expenses of $1,000. Filing 2010 taxes online The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 12% interest) in each of the next 4 years). Filing 2010 taxes online The selling price is $25,000 ($15,000 + $10,000). Filing 2010 taxes online Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). Filing 2010 taxes online The contract price is $10,000 ($25,000 − $15,000 mortgage). Filing 2010 taxes online Your gross profit percentage is 50% ($5,000 ÷ $10,000). Filing 2010 taxes online You report half of each $2,000 payment received as gain from the sale. Filing 2010 taxes online You also report all interest you receive as ordinary income. Filing 2010 taxes online Mortgage more than basis. Filing 2010 taxes online   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. Filing 2010 taxes online The part of the mortgage greater than your basis is treated as a payment received in the year of sale. Filing 2010 taxes online   To figure the contract price, subtract the mortgage from the selling price. Filing 2010 taxes online This is the total amount (other than interest) you will receive directly from the buyer. Filing 2010 taxes online Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). Filing 2010 taxes online The contract price is then the same as your gross profit from the sale. Filing 2010 taxes online    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. Filing 2010 taxes online Example. Filing 2010 taxes online The selling price for your property is $9,000. Filing 2010 taxes online The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. Filing 2010 taxes online Your adjusted basis in the property is $4,400. Filing 2010 taxes online You have selling expenses of $600, for a total installment sale basis of $5,000. Filing 2010 taxes online The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). Filing 2010 taxes online This amount is included in the contract price and treated as a payment received in the year of sale. Filing 2010 taxes online The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000       Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000 Your gross profit percentage is 100%. Filing 2010 taxes online Report 100% of each payment (less interest) as gain from the sale. Filing 2010 taxes online Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. Filing 2010 taxes online Mortgage Canceled If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. Filing 2010 taxes online You are considered to receive a payment equal to the outstanding canceled debt. Filing 2010 taxes online Example. Filing 2010 taxes online Mary Jones loaned you $45,000 in 2009 in exchange for a note and a mortgage in a tract of land you owned. Filing 2010 taxes online On April 4, 2013, she bought the land for $70,000. Filing 2010 taxes online At that time, $30,000 of her loan to you was outstanding. Filing 2010 taxes online She agreed to forgive this $30,000 debt and to pay you $20,000 (plus interest) on August 1, 2013, and $20,000 on August 1, 2014. Filing 2010 taxes online She did not assume an existing mortgage. Filing 2010 taxes online She canceled the $30,000 debt you owed her. Filing 2010 taxes online You are considered to have received a $30,000 payment at the time of the sale. Filing 2010 taxes online Buyer Assumes Other Debts If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. Filing 2010 taxes online If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. Filing 2010 taxes online Compare the debt to your installment sale basis in the property being sold. Filing 2010 taxes online If the debt is less than your installment sale basis, none of it is treated as a payment. Filing 2010 taxes online If it is more, only the difference is treated as a payment. Filing 2010 taxes online If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. Filing 2010 taxes online These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . Filing 2010 taxes online However, they apply only to the following types of debt the buyer assumes. Filing 2010 taxes online Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. Filing 2010 taxes online Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. Filing 2010 taxes online If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. Filing 2010 taxes online The value of the assumed debt is then considered a payment to you in the year of sale. Filing 2010 taxes online Property Used As a Payment If you receive property other than money from the buyer, it is still considered a payment in the year received. Filing 2010 taxes online However, see Like-Kind Exchange , later. Filing 2010 taxes online Generally, the amount of the payment is the property's FMV on the date you receive it. Filing 2010 taxes online Exception. Filing 2010 taxes online   If the property the buyer gives you is payable on demand or readily tradable, the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use the accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. Filing 2010 taxes online See Unstated Interest and Original Issue Discount (OID) , later. Filing 2010 taxes online Debt not payable on demand. Filing 2010 taxes online   Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. Filing 2010 taxes online This is true even if the debt is guaranteed by a third party, including a government agency. Filing 2010 taxes online Fair market value (FMV). Filing 2010 taxes online   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. Filing 2010 taxes online Third-party note. Filing 2010 taxes online   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. Filing 2010 taxes online Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. Filing 2010 taxes online The excess of the note's face value over its FMV is interest. Filing 2010 taxes online Exclude this interest in determining the selling price of the property. Filing 2010 taxes online However, see Exception under Property Used As a Payment, earlier. Filing 2010 taxes online Example. Filing 2010 taxes online You sold real estate in an installment sale. Filing 2010 taxes online As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. Filing 2010 taxes online The FMV of the third-party note at the time of the sale was $30,000. Filing 2010 taxes online This amount, not $50,000, is a payment to you in the year of sale. Filing 2010 taxes online The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. Filing 2010 taxes online The remaining 40% is interest taxed as ordinary income. Filing 2010 taxes online Bond. Filing 2010 taxes online   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. Filing 2010 taxes online For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. Filing 2010 taxes online    If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. Filing 2010 taxes online However, see Exception under Property Used As a Payment, earlier. Filing 2010 taxes online Buyer's note. Filing 2010 taxes online   The buyer's note (unless payable on demand) is not considered payment on the sale. Filing 2010 taxes online However, its full face value is included when figuring the selling price and the contract price. Filing 2010 taxes online Payments you receive on the note are used to figure your gain in the year received. Filing 2010 taxes online Installment Obligation Used as Security (Pledge Rule) If you use an installment obligation to secure any debt, the net proceeds from the debt may be treated as a payment on the installment obligation. Filing 2010 taxes online This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. Filing 2010 taxes online It does not apply to the following dispositions. Filing 2010 taxes online Sales of property used or produced in farming. Filing 2010 taxes online Sales of personal-use property. Filing 2010 taxes online Qualifying sales of time-shares and residential lots. Filing 2010 taxes online The net debt proceeds are the gross debt minus the direct expenses of getting the debt. Filing 2010 taxes online The amount treated as a payment is considered received on the later of the following dates. Filing 2010 taxes online The date the debt becomes secured. Filing 2010 taxes online The date you receive the debt proceeds. Filing 2010 taxes online A debt is secured by an installment obligation to the extent that payment of principal or interest on the debt is directly secured (under the terms of the loan or any underlying arrangement) by any interest in the installment obligation. Filing 2010 taxes online For sales after December 16, 1999, payment on a debt is treated as directly secured by an interest in an installment obligation to the extent an arrangement allows you to satisfy all or part of the debt with the installment obligation. Filing 2010 taxes online Limit. Filing 2010 taxes online   The net debt proceeds treated as a payment on the pledged installment obligation cannot be more than the excess of item (1) over item (2), below. Filing 2010 taxes online The total contract price on the installment sale. Filing 2010 taxes online Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. Filing 2010 taxes online Installment payments. Filing 2010 taxes online   The pledge rule accelerates the reporting of the installment obligation payments. Filing 2010 taxes online Do not report payments received on the obligation after it has been pledged until the payments received exceed the amount reported under the pledge rule. Filing 2010 taxes online Exception. Filing 2010 taxes online   The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. Filing 2010 taxes online The debt was outstanding on December 17, 1987. Filing 2010 taxes online The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. Filing 2010 taxes online   A refinancing as a result of the creditor's calling of the debt is treated as a continuation of the original debt so long as a person other than the creditor or a person related to the creditor provides the refinancing. Filing 2010 taxes online   This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. Filing 2010 taxes online Any excess is treated as a payment on the installment obligation. Filing 2010 taxes online Escrow Account In some cases, the sales agreement or a later agreement may call for the buyer to establish an irrevocable escrow account from which the remaining installment payments (including interest) are to be made. Filing 2010 taxes online These sales cannot be reported on the installment method. Filing 2010 taxes online The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. Filing 2010 taxes online When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement. Filing 2010 taxes online Example. Filing 2010 taxes online You sell property for $100,000. Filing 2010 taxes online The sales agreement calls for a down payment of $10,000 and payment of $15,000 in each of the next 6 years to be made from an irrevocable escrow account containing the balance of the purchase price plus interest. Filing 2010 taxes online You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. Filing 2010 taxes online You report the entire gain in the year of sale. Filing 2010 taxes online Escrow established in a later year. Filing 2010 taxes online   If you make an installment sale and in a later year an irrevocable escrow account is established to pay the remaining installments plus interest, the amount placed in the escrow account represents payment of the balance of the installment obligation. Filing 2010 taxes online Substantial restriction. Filing 2010 taxes online   If an escrow arrangement imposes a substantial restriction on your right to receive the sale proceeds, the sale can be reported on the installment method, provided it otherwise qualifies. Filing 2010 taxes online For an escrow arrangement to impose a substantial restriction, it must serve a bona fide purpose of the buyer, that is, a real and definite restriction placed on the seller or a specific economic benefit conferred on the buyer. Filing 2010 taxes online Depreciation Recapture Income If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year. Filing 2010 taxes online Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Filing 2010 taxes online Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. Filing 2010 taxes online The recapture income is also included in Part I of Form 6252. Filing 2010 taxes online However, the gain equal to the recapture income is reported in full in the year of the sale. Filing 2010 taxes online Only the gain greater than the recapture income is reported on the installment method. Filing 2010 taxes online For more information on depreciation recapture, see chapter 3 in Publication 544. Filing 2010 taxes online The recapture income reported in the year of sale is included in your installment sale basis in determining your gross profit on the installment sale. Filing 2010 taxes online Determining gross profit is discussed under General Rules , earlier. Filing 2010 taxes online Sale to a Related Person If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. Filing 2010 taxes online If you sell property to a related person and the related person disposes of the property before you receive all payments with respect to the sale, you may have to treat the amount realized by the related person as received by you when the related person disposes of the property. Filing 2010 taxes online These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. Filing 2010 taxes online Sale of Depreciable Property If you sell depreciable property to certain related persons, you generally cannot report the sale using the installment method. Filing 2010 taxes online Instead, all payments to be received are considered received in the year of sale. Filing 2010 taxes online However, see Exception , below. Filing 2010 taxes online Depreciable property for this rule is any property the purchaser can depreciate. Filing 2010 taxes online Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. Filing 2010 taxes online In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. Filing 2010 taxes online The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. Filing 2010 taxes online Exception. Filing 2010 taxes online   You can use the installment method to report a sale of depreciable property to a related person if no significant tax deferral benefit will be derived from the sale. Filing 2010 taxes online You must show to the satisfaction of the IRS that avoidance of federal income tax was not one of the principal purposes of the sale. Filing 2010 taxes online Related person. Filing 2010 taxes online   Related persons include the following. Filing 2010 taxes online A person and all controlled entities with respect to that person. Filing 2010 taxes online A taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless that beneficiary's interest in the trust is a remote contingent interest. Filing 2010 taxes online Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of that estate. Filing 2010 taxes online Two or more partnerships in which the same person owns, directly or indirectly, more than 50% of the capital interests or the profits interests. Filing 2010 taxes online   For information about which entities are controlled entities, see section 1239(c). Filing 2010 taxes online Sale and Later Disposition Generally, a special rule applies if you sell or exchange property to a related person on the installment method (first disposition) who then sells, exchanges, or gives away the property (second disposition) under the following circumstances. Filing 2010 taxes online The related person makes the second disposition before making all payments on the first disposition. Filing 2010 taxes online The related person disposes of the property within 2 years of the first disposition. Filing 2010 taxes online This rule does not apply if the property involved is marketable securities. Filing 2010 taxes online Under this rule, you treat part or all of the amount the related person realizes (or the FMV if the disposed property is not sold or exchanged) from the second disposition as if you received it at the time of the second disposition. Filing 2010 taxes online See Exception , later. Filing 2010 taxes online Related person. Filing 2010 taxes online   Related persons include the following. Filing 2010 taxes online Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. Filing 2010 taxes online A partnership or estate and a partner or beneficiary. Filing 2010 taxes online A trust (other than a section 401(a) employees trust) and a beneficiary. Filing 2010 taxes online A trust and an owner of the trust. Filing 2010 taxes online Two corporations that are members of the same controlled group as defined in section 267(f). Filing 2010 taxes online The fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. Filing 2010 taxes online A tax-exempt educational or charitable organization and a person (if an individual, including members of the individual's family) who directly or indirectly controls such an organization. Filing 2010 taxes online An individual and a corporation when the individual owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. Filing 2010 taxes online A fiduciary of a trust and a corporation when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. Filing 2010 taxes online The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Filing 2010 taxes online Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Filing 2010 taxes online An S corporation and a corporation that is not an S corporation if the same persons own more than 50% in value of the outstanding stock of each corporation. Filing 2010 taxes online 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 or profits interest in the partnership. Filing 2010 taxes online An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. Filing 2010 taxes online Example 1. Filing 2010 taxes online In 2012, Harvey Green sold farm land to his son Bob for $500,000, which was to be paid in five equal payments over 5 years, plus adequate stated interest on the balance due. Filing 2010 taxes online His installment sale basis for the farm land was $250,000 and the property was not subject to any outstanding liens or mortgages. Filing 2010 taxes online His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). Filing 2010 taxes online He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. Filing 2010 taxes online 50). Filing 2010 taxes online Bob made no improvements to the property and sold it to Alfalfa Inc. Filing 2010 taxes online , in 2013 for $600,000 after making the payment for that year. Filing 2010 taxes online The amount realized from the second disposition is $600,000. Filing 2010 taxes online Harvey figures his installment sale income for 2013 as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $500,000 Subtract: Sum of payments from Bob in 2012 and 2013 - 200,000 Amount treated as received because of second disposition $300,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $400,000 Multiply by gross profit % × . Filing 2010 taxes online 50 Installment sale income for 2013 $200,000 Harvey will not include in his installment sale income any principal payments he receives on the installment obligation for 2014, 2015, and 2016 because he has already reported the total payments of $500,000 from the first disposition ($100,000 in 2012 and $400,000 in 2013). Filing 2010 taxes online Example 2. Filing 2010 taxes online Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. Filing 2010 taxes online The gain for 2013 is figured as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $400,000 Subtract: Sum of payments from Bob in 2012 and 2013 − 200,000 Amount treated as received because of second disposition $200,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $300,000 Multiply by gross profit % × . Filing 2010 taxes online 50 Installment sale income for 2013 $150,000     Harvey receives a $100,000 payment in 2014 and another in 2015. Filing 2010 taxes online They are not taxed because he treated the $200,000 from the disposition in 2013 as a payment received and paid tax on the installment sale income. Filing 2010 taxes online In 2016, he receives the final $100,000 payment. Filing 2010 taxes online He figures the installment sale income he must recognize in 2016 as follows: Total payments from the first disposition received by the end of 2016 $500,000 Minus the sum of:     Payment from 2012 $100,000   Payment from 2013 100,000   Amount treated as received in 2013 200,000   Total on which gain was previously recognized  − 400,000 Payment on which gain is recognized for 2016  $100,000 Multiply by gross profit % × . Filing 2010 taxes online 50 Installment sale income for 2016 $ 50,000 Exception. Filing 2010 taxes online   This rule does not apply to a second disposition, and any later transfer, if you can show to the satisfaction of the IRS that neither the first disposition (to the related person) nor the second disposition had as one of its principal purposes the avoidance of federal income tax. Filing 2010 taxes online Generally, an involuntary second disposition will qualify under the nontax avoidance exception, such as when a creditor of the related person forecloses on the property or the related person declares bankruptcy. Filing 2010 taxes online   The nontax avoidance exception also applies to a second disposition that is also an installment sale if the terms of payment under the installment resale are substantially equal to or longer than those for the first installment sale. Filing 2010 taxes online However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. Filing 2010 taxes online   In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. Filing 2010 taxes online An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. Filing 2010 taxes online A transfer after the death of the person making the first disposition or the related person's death, whichever is earlier, is not treated as a second disposition. Filing 2010 taxes online Like-Kind Exchange If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. Filing 2010 taxes online These trades are known as like-kind exchanges. Filing 2010 taxes online The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. Filing 2010 taxes online You do not have to report any part of your gain if you receive only like-kind property. Filing 2010 taxes online However, if you also receive money or other property (boot) in the exchange, you must report your gain to the extent of the money and the FMV of the other property received. Filing 2010 taxes online For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. Filing 2010 taxes online Installment payments. Filing 2010 taxes online   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine the installment sale income each year. Filing 2010 taxes online The contract price is reduced by the FMV of the like-kind property received in the trade. Filing 2010 taxes online The gross profit is reduced by any gain on the trade that can be postponed. Filing 2010 taxes online Like-kind property received in the trade is not considered payment on the installment obligation. Filing 2010 taxes online Example. Filing 2010 taxes online In 2013, George Brown trades personal property with an installment sale basis of $400,000 for like-kind property having an FMV of $200,000. Filing 2010 taxes online He also receives an installment note for $800,000 in the trade. Filing 2010 taxes online Under the terms of the note, he is to receive $100,000 (plus interest) in 2014 and the balance of $700,000 (plus interest) in 2015. Filing 2010 taxes online George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). Filing 2010 taxes online His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). Filing 2010 taxes online The contract price is $800,000 ($1,000,000 − $200,000). Filing 2010 taxes online The gross profit percentage is 75% ($600,000 ÷ $800,000). Filing 2010 taxes online He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. Filing 2010 taxes online He reports $75,000 gain for 2014 (75% of $100,000 payment received) and $525,000 gain for 2015 (75% of $700,000 payment received). Filing 2010 taxes online Deferred exchanges. Filing 2010 taxes online   A deferred exchange is one in which you transfer property you use in business or hold for investment and receive like-kind property later that you will use in business or hold for investment. Filing 2010 taxes online Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. Filing 2010 taxes online If certain rules are met, these funds will not be considered a payment until you have the right to receive the funds or, if earlier, the end of the exchange period. Filing 2010 taxes online See Regulations section 1. Filing 2010 taxes online 1031(k)-1(j)(2) for these rules. Filing 2010 taxes online Contingent Payment Sale A contingent payment sale is one in which the total selling price cannot be determined by the end of the tax year of sale. Filing 2010 taxes online This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. Filing 2010 taxes online If the selling price cannot be determined by the end of the tax year, you must use different rules to figure the contract price and the gross profit percentage than those you use for an installment sale with a fixed selling price. Filing 2010 taxes online For rules on using the installment method for a contingent payment sale, see Regulations section 15a. Filing 2010 taxes online 453-1(c). Filing 2010 taxes online Single Sale of Several Assets If you sell different types of assets in a single sale, you must identify each asset to determine whether you can use the installment method to report the sale of that asset. Filing 2010 taxes online You also have to allocate part of the selling price to each asset. Filing 2010 taxes online If you sell assets that constitute a trade or business, see Sale of a Business , later. Filing 2010 taxes online Unless an allocation of the selling price has been agreed to by both parties in an arm's-length transaction, you must allocate the selling price to an asset based on its FMV. Filing 2010 taxes online If the buyer assumes a debt, or takes the property subject to a debt, you must reduce the FMV of the property by the debt. Filing 2010 taxes online This becomes the net FMV. Filing 2010 taxes online A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. Filing 2010 taxes online However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. Filing 2010 taxes online It must be reported separately. Filing 2010 taxes online The remaining assets sold at a gain are reported together. Filing 2010 taxes online Example. Filing 2010 taxes online You sold three separate and unrelated parcels of real property (A, B, and C) under a single contract calling for a total selling price of $130,000. Filing 2010 taxes online The total selling price consisted of a cash payment of $20,000, the buyer's assumption of a $30,000 mortgage on parcel B, and an installment obligation of $80,000 payable in eight annual installments, plus interest at 8% a year. Filing 2010 taxes online Your installment sale basis for each parcel was $15,000. Filing 2010 taxes online Your net gain was $85,000 ($130,000 − $45,000). Filing 2010 taxes online You report the gain on the installment method. Filing 2010 taxes online The sales contract did not allocate the selling price or the cash payment received in the year of sale among the individual parcels. Filing 2010 taxes online The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. Filing 2010 taxes online The installment sale basis for parcel C was more than its FMV, so it was sold at a loss and must be treated separately. Filing 2010 taxes online You must allocate the total selling price and the amounts received in the year of sale between parcel C and the remaining parcels. Filing 2010 taxes online Of the total $130,000 selling price, you must allocate $120,000 to parcels A and B together and $10,000 to parcel C. Filing 2010 taxes online You should allocate the cash payment of $20,000 received in the year of sale and the note receivable on the basis of their proportionate net FMV. Filing 2010 taxes online The allocation is figured as follows:   Parcels   A and B Parcel C FMV $120,000 $10,000 Minus: Mortgage assumed 30,000 -0- Net FMV $ 90,000 $10,000 Proportionate net FMV:     Percentage of total 90% 10% Payments in year of sale:     $20,000 × 90% $18,000   $20,000 × 10%   $2,000 Excess of parcel B mortgage over installment sale basis 15,000 -0- Allocation of payments  received (or considered  received) in year of sale $ 33,000 $ 2,000 You cannot report the sale of parcel C on the installment method because the sale results in a loss. Filing 2010 taxes online You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. Filing 2010 taxes online However, if parcel C was held for personal use, the loss is not deductible. Filing 2010 taxes online You allocate the installment obligation of $80,000 to the properties sold based on their proportionate net FMVs (90% to parcels A and B, 10% to parcel C). Filing 2010 taxes online Sale of a Business The installment sale of an entire business for one overall price under a single contract is not the sale of a single asset. Filing 2010 taxes online Allocation of Selling Price To determine whether any of the gain on the sale of the business can be reported on the installment method, you must allocate the total selling price and the payments received in the year of sale between each of the following classes of assets. Filing 2010 taxes online Assets sold at a loss. Filing 2010 taxes online Real and personal property eligible for the installment method. Filing 2010 taxes online Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. Filing 2010 taxes online Inventory. Filing 2010 taxes online   The sale of inventories of personal property cannot be reported on the installment method. Filing 2010 taxes online All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. Filing 2010 taxes online   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. Filing 2010 taxes online If you do not, each payment must be allocated between the inventory and the other assets sold. Filing 2010 taxes online   Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. Filing 2010 taxes online Use your basis in the inventory to figure the cost of goods sold. Filing 2010 taxes online Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. Filing 2010 taxes online Residual method. Filing 2010 taxes online   Except for assets exchanged under the like-kind exchange rules, both the buyer and seller of a business must use the residual method to allocate the sale price to each business asset sold. Filing 2010 taxes online This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. Filing 2010 taxes online   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. Filing 2010 taxes online 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). Filing 2010 taxes online   A group of assets constitutes a trade or business if goodwill or going concern value could, under any circumstances, attach to the assets or if the use of the assets would constitute an active trade or business under section 355. Filing 2010 taxes online   The residual method provides for the consideration to be reduced first by cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). Filing 2010 taxes online The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Filing 2010 taxes online   For asset acquisitions occurring after March 15, 2001, make the allocation among the following assets in proportion to (but not more than) their fair market value on the purchase date in the following order. Filing 2010 taxes online Certificates of deposit, U. Filing 2010 taxes online S. Filing 2010 taxes online Government securities, foreign currency, and actively traded personal property, including stock and securities. Filing 2010 taxes online Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Filing 2010 taxes online However, see Regulations section 1. Filing 2010 taxes online 338-6(b)(2)(iii) 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. Filing 2010 taxes online 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. Filing 2010 taxes online All other assets except section 197 intangibles. Filing 2010 taxes online Section 197 intangibles except goodwill and going concern value. Filing 2010 taxes online Goodwill and going concern value (whether or not they qualify as section 197 intangibles). Filing 2010 taxes online   If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. Filing 2010 taxes online For example, if an asset is described in both (4) and (6), include it in (4). Filing 2010 taxes online Agreement. Filing 2010 taxes online   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. Filing 2010 taxes online This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Filing 2010 taxes online Reporting requirement. Filing 2010 taxes online   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. Filing 2010 taxes online Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Filing 2010 taxes online The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Filing 2010 taxes online Sale of Partnership Interest A partner who sells a partnership interest at a gain may be able to report the sale on the installment method. Filing 2010 taxes online The sale of a partnership interest is treated as the sale of a single capital asset. Filing 2010 taxes online The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. Filing 2010 taxes online (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. Filing 2010 taxes online ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. Filing 2010 taxes online The gain allocated to the other assets can be reported under the installment method. Filing 2010 taxes online For more information on the treatment of unrealized receivables and inventory, see Publication 541. Filing 2010 taxes online Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. Filing 2010 taxes online You received a $100,000 down payment and the buyer's note for $120,000. Filing 2010 taxes online The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. Filing 2010 taxes online The total selling price is $220,000. Filing 2010 taxes online Your selling expenses are $11,000. Filing 2010 taxes online The selling expenses are divided among all the assets sold, including inventory. Filing 2010 taxes online Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price). Filing 2010 taxes online The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows:     Depre- ciation Adj. Filing 2010 taxes online Asset FMV Claimed Basis Inventory $ 10,000 -0- $ 8,000 Land 42,000 -0- 15,000 Building 48,000 $9,000 36,000 Machine A 71,000 27,200 63,800 Machine B 24,000 12,960 22,040 Truck 6,500 18,624 5,376   $201,500 $67,784 $150,216         Under the residual method, you allocate the selling price to each of the assets based on their FMV ($201,500). Filing 2010 taxes online The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. Filing 2010 taxes online The assets included in the sale, their selling prices based on their FMVs, the selling expense allocated to each asset, the adjusted basis, and the gain for each asset are shown in the following chart. Filing 2010 taxes online   Sale  Price Sale   Exp. Filing 2010 taxes online Adj. Filing 2010 taxes online   Basis Gain Inventory $ 10,000 $ 500 $ 8,000 $ 1,500 Land 42,000 2,100 15,000 24,900 Building 48,000 2,400 36,000 9,600 Mch. Filing 2010 taxes online A 71,000 3,550 63,800 3,650 Mch. Filing 2010 taxes online B 24,000 1,200 22,040 760 Truck 6,500 325 5,376 799 Goodwill 18,500 925 -0- 17,575   $220,000 $11,000 $150,216 $58,784 The building was acquired in 2005, the year the business began, and it is section 1250 property. Filing 2010 taxes online There is no depreciation recapture income because the building was depreciated using the straight line method. Filing 2010 taxes online All gain on the truck, machine A, and machine B is depreciation recapture income since it is the lesser of the depreciation claimed or the gain on the sale. Filing 2010 taxes online Figure depreciation recapture in Part III of Form 4797. Filing 2010 taxes online The total depreciation recapture income reported in Part II of Form 4797 is $5,209. Filing 2010 taxes online This consists of $3,650 on machine A, $799 on the truck, and $760 on machine B (the gain on each item because it was less than the depreciation claimed). Filing 2010 taxes online These gains are reported in full in the year of sale and are not included in the installment sale computation. Filing 2010 taxes online Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. Filing 2010 taxes online The selling prices of the truck and machines are also removed from the total selling price because gain on these items is reported in full in the year of sale. Filing 2010 taxes online The selling price equals the contract price for the installment sale ($108,500). Filing 2010 taxes online The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. Filing 2010 taxes online   Selling  Price Install- ment  Sale  Basis Gross  Profit Land $ 42,000 $17,100 $24,900 Building 48,000 38,400 9,600 Goodwill 18,500 925 17,575 Total $108,500 $56,425 $52,075         The gross profit percentage (gross profit ÷ contract price) for the installment sale is 48% ($52,075 ÷ $108,500). Filing 2010 taxes online The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. Filing 2010 taxes online 95 Building— $9,600 ÷ $108,500 8. Filing 2010 taxes online 85 Goodwill— $17,575 ÷ $108,500 16. Filing 2010 taxes online 20 Total 48. Filing 2010 taxes online 00 The sale includes assets sold on the installment method and assets for which the gain is reported in full in the year of sale, so payments must be allocated between the installment part of the sale and the part reported in the year of sale. Filing 2010 taxes online The selling price for the installment sale is $108,500. Filing 2010 taxes online This is 49. Filing 2010 taxes online 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). Filing 2010 taxes online The selling price of assets not reported on the installment method is $111,500. Filing 2010 taxes online This is 50. Filing 2010 taxes online 7% ($111,500 ÷ $220,000) of the total selling price. Filing 2010 taxes online Multiply principal payments by 49. Filing 2010 taxes online 3% to determine the part of the payment for the installment sale. Filing 2010 taxes online The balance, 50. Filing 2010 taxes online 7%, is for the part reported in the year of the sale. Filing 2010 taxes online The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. Filing 2010 taxes online When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. Filing 2010 taxes online Only the part for the installment sale (49. Filing 2010 taxes online 3%) is used in the installment sale computation. Filing 2010 taxes online The only payment received in 2013 is the down payment of $100,000. Filing 2010 taxes online The part of the payment for the installment sale is $49,300 ($100,000 × 49. Filing 2010 taxes online 3%). Filing 2010 taxes online This amount is used in the installment sale computation. Filing 2010 taxes online Installment income for 2013. Filing 2010 taxes online   Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2013. Filing 2010 taxes online Income Land—22. Filing 2010 taxes online 95% of $49,300 $11,314 Building—8. Filing 2010 taxes online 85% of $49,300 4,363 Goodwill—16. Filing 2010 taxes online 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. Filing 2010 taxes online   You figure installment income for years after 2013 by applying the same gross profit percentages to 49. Filing 2010 taxes online 3% of the total payments you receive on the buyer's note during the year. Filing 2010 taxes online Unstated Interest and Original Issue Discount (OID) An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. Filing 2010 taxes online Interest provided in the contract is called stated interest. Filing 2010 taxes online If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. Filing 2010 taxes online If section 483 applies to the contract, this interest is called unstated interest. Filing 2010 taxes online If section 1274 applies to the contract, this interest is called original issue discount (OID). Filing 2010 taxes online An installment sale contract does not provide for adequate stated interest if the stated interest rate is lower than the test rate (defined later). Filing 2010 taxes online Treatment of unstated interest and OID. Filing 2010 taxes online   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. Filing 2010 taxes online As a result, the buyer cannot deduct the unstated interest. Filing 2010 taxes online The seller must report the unstated interest as income. Filing 2010 taxes online   Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. Filing 2010 taxes online   If the debt is subject to the section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan, or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. Filing 2010 taxes online Rules for the seller. Filing 2010 taxes online   If either section 1274 or section 483 applies to the installment sale contract, you must treat part of the installment sale price as interest, even though interest is not called for in the sales agreement. Filing 2010 taxes online If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest. Filing 2010 taxes online   Include the unstated interest in income based on your regular method of accounting. Filing 2010 taxes online Include OID in income over the term of the contract. Filing 2010 taxes online   The OID includible in income each year is based on the constant yield method described in section 1272. Filing 2010 taxes online (In some cases, the OID on an installment sale contract also may include all or part of the stated interest, especially if the stated interest is not paid at least annually. Filing 2010 taxes online )   If you do not use the installment method to report the sale, report the entire gain under your method of accounting in the year of sale. Filing 2010 taxes online Reduce the selling price by any stated principal treated as interest to determine the gain. Filing 2010 taxes online   Report unstated interest or OID on your tax return, in addition to stated interest. Filing 2010 taxes online Rules for the buyer. Filing 2010 taxes online   Any part of the stated selling price of an installment sale contract treated by the buyer as interest reduces the buyer's basis in the property and increases the buyer's interest expense. Filing 2010 taxes online These rules do not apply to personal-use property (for example, property not used in a trade or business). Filing 2010 taxes online Adequate stated interest. Filing 2010 taxes online   An installment sale contract generally provides for adequate stated interest if the contract's stated principal amount is at least equal to the sum of the present values of all principal and interest payments called for under the contract. Filing 2010 taxes online The present value of a payment is determined based on the test rate of interest, defined next. Filing 2010 taxes online (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. Filing 2010 taxes online ) In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the test rate of interest. Filing 2010 taxes online Test rate of interest. Filing 2010 taxes online   The test rate of interest for a contract is the 3-month rate. Filing 2010 taxes online The 3-month rate is the lower of the following applicable federal rates (AFRs). Filing 2010 taxes online The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the first month in which there is a binding written contract that substantially provides the terms under which the sale or exchange is ultimately completed. Filing 2010 taxes online The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the month in which the sale or exchange occurs. Filing 2010 taxes online Applicable federal rate (AFR). Filing 2010 taxes online   The AFR depends on the month the binding