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Free State Tax Return E-file

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Free State Tax Return E-file

Free state tax return e-file 2. Free state tax return e-file   Roth IRAs Table of Contents What's New for 2013 What's New for 2014 Reminders Introduction What Is a Roth IRA? When Can a Roth IRA Be Opened? Can You Contribute to a Roth IRA?How Much Can Be Contributed? When Can You Make Contributions? What if You Contribute Too Much? Can You Move Amounts Into a Roth IRA?Conversions Rollover From Employer's Plan Into a Roth IRA Military Death Gratuities and Servicemembers' Group Life Insurance (SGLI) Payments Rollover From a Roth IRA Rollover of Exxon Valdez Settlement Income Rollover of Airline Payments Are Distributions Taxable?What Are Qualified Distributions? Additional Tax on Early Distributions Ordering Rules for Distributions How Do You Figure the Taxable Part? Must You Withdraw or Use Assets?Minimum distributions. Free state tax return e-file Recognizing Losses on Investments Distributions After Owner's Death What's New for 2013 Roth IRA contribution limit. Free state tax return e-file  If contributions on your behalf are made only to Roth IRAs, your contribution limit for 2013 will generally be the lesser of: $5,500, or Your taxable compensation for the year. Free state tax return e-file If you were age 50 or older before 2014 and contributions on your behalf were made only to Roth IRAs, your contribution limit for 2013 will generally be the lesser of: $6,500, or Your taxable compensation for the year. Free state tax return e-file However, if your modified adjusted gross income (AGI) is above a certain amount, your contribution limit may be reduced. Free state tax return e-file For more information, see How Much Can Be Contributed? under Can You Contribute to a Roth IRA? in this chapter. Free state tax return e-file Modified AGI limit for Roth IRA contributions increased. Free state tax return e-file  For 2013, your Roth IRA contribution limit is reduced (phased out) in the following situations. Free state tax return e-file Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $178,000. Free state tax return e-file You cannot make a Roth IRA contribution if your modified AGI is $188,000 or more. Free state tax return e-file Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2013 and your modified AGI is at least $112,000. Free state tax return e-file You cannot make a Roth IRA contribution if your modified AGI is $127,000 or more. Free state tax return e-file Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. Free state tax return e-file You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more. Free state tax return e-file See Can You Contribute to a Roth IRA? in this chapter. Free state tax return e-file Net Investment Income Tax. Free state tax return e-file  For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), 457(b) plans, and IRAs). Free state tax return e-file However, these distributions are taken into account when determining the modified adjusted gross income threshold. Free state tax return e-file Distributions from a nonqualified retirement plan are included in net investment income. Free state tax return e-file See Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts, and its instructions for more information. Free state tax return e-file What's New for 2014 Modified AGI limit for Roth IRA contributions increased. Free state tax return e-file  For 2014, your Roth IRA contribution limit is reduced (phased out) in the following situations. Free state tax return e-file Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $181,000. Free state tax return e-file You cannot make a Roth IRA contribution if your modified AGI is $191,000 or more. Free state tax return e-file Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2014 and your modified AGI is at least $114,000. Free state tax return e-file You cannot make a Roth IRA contribution if your modified AGI is $129,000 or more. Free state tax return e-file Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. Free state tax return e-file You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more. Free state tax return e-file Reminders Deemed IRAs. Free state tax return e-file  For plan years beginning after 2002, a qualified employer plan (retirement plan) can maintain a separate account or annuity under the plan (a deemed IRA) to receive voluntary employee contributions. Free state tax return e-file If the separate account or annuity otherwise meets the requirements of an IRA, it will be subject only to IRA rules. Free state tax return e-file An employee's account can be treated as a traditional IRA or a Roth IRA. Free state tax return e-file For this purpose, a “qualified employer plan” includes: A qualified pension, profit-sharing, or stock bonus plan (section 401(a) plan), A qualified employee annuity plan (section 403(a) plan), A tax-sheltered annuity plan (section 403(b) plan), and A deferred compensation plan (section 457 plan) maintained by a state, a political subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state. Free state tax return e-file Designated Roth accounts. Free state tax return e-file  Designated Roth accounts are separate accounts under 401(k), 403(b), or 457(b) plans that accept elective deferrals that are referred to as Roth contributions. Free state tax return e-file These elective deferrals are included in your income, but qualified distributions from these accounts are not included in your income. Free state tax return e-file Designated Roth accounts are not IRAs and should not be confused with Roth IRAs. Free state tax return e-file Contributions, up to their respective limits, can be made to Roth IRAs and designated Roth accounts according to your eligibility to participate. Free state tax return e-file A contribution to one does not impact your eligibility to contribute to the other. Free state tax return e-file See Publication 575, for more information on designated Roth accounts. Free state tax return e-file Introduction Regardless of your age, you may be able to establish and make nondeductible contributions to an individual retirement plan called a Roth IRA. Free state tax return e-file Contributions not reported. Free state tax return e-file   You do not report Roth IRA contributions on your return. Free state tax return e-file What Is a Roth IRA? A Roth IRA is an individual retirement plan that, except as explained in this chapter, is subject to the rules that apply to a traditional IRA (defined next). Free state tax return e-file It can be either an account or an annuity. Free state tax return e-file Individual retirement accounts and annuities are described in chapter 1 under How Can a Traditional IRA Be Opened. Free state tax return e-file To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is opened. Free state tax return e-file A deemed IRA can be a Roth IRA, but neither a SEP IRA nor a SIMPLE IRA can be designated as a Roth IRA. Free state tax return e-file Unlike a traditional IRA, you cannot deduct contributions to a Roth IRA. Free state tax return e-file But, if you satisfy the requirements, qualified distributions (discussed later) are tax free. Free state tax return e-file Contributions can be made to your Roth IRA after you reach age 70½ and you can leave amounts in your Roth IRA as long as you live. Free state tax return e-file Traditional IRA. Free state tax return e-file   A traditional IRA is any IRA that is not a Roth IRA or SIMPLE IRA. Free state tax return e-file Traditional IRAs are discussed in chapter 1. Free state tax return e-file When Can a Roth IRA Be Opened? You can open a Roth IRA at any time. Free state tax return e-file However, the time for making contributions for any year is limited. Free state tax return e-file See When Can You Make Contributions , later under Can You Contribute to a Roth IRA. Free state tax return e-file Can You Contribute to a Roth IRA? Generally, you can contribute to a Roth IRA if you have taxable compensation (defined later) and your modified AGI (defined later) is less than: $188,000 for married filing jointly or qualifying widow(er), $127,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and $10,000 for married filing separately and you lived with your spouse at any time during the year. Free state tax return e-file You may be able to claim a credit for contributions to your Roth IRA. Free state tax return e-file For more information, see chapter 4. Free state tax return e-file Is there an age limit for contributions?   Contributions can be made to your Roth IRA regardless of your age. Free state tax return e-file Can you contribute to a Roth IRA for your spouse?   You can contribute to a Roth IRA for your spouse provided the contributions satisfy the Kay Bailey Hutchison Spousal IRA limit discussed in chapter 1 under How Much Can Be Contributed, you file jointly, and your modified AGI is less than $188,000. Free state tax return e-file Compensation. Free state tax return e-file   Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts received for providing personal services. Free state tax return e-file It also includes commissions, self-employment income, nontaxable combat pay, military differential pay, and taxable alimony and separate maintenance payments. Free state tax return e-file For more information, see What Is Compensation? under Who Can Open a Traditional IRA? in chapter 1. Free state tax return e-file Modified AGI. Free state tax return e-file   Your modified AGI for Roth IRA purposes is your adjusted gross income (AGI) as shown on your return with some adjustments. Free state tax return e-file Use Worksheet 2-1 , later, to determine your modified AGI. Free state tax return e-file    Do not subtract conversion income when figuring your other AGI-based phaseouts and taxable income, such as your deduction for medical and dental expenses. Free state tax return e-file Subtract them from AGI only for the purpose of figuring your modified AGI for Roth IRA purposes. Free state tax return e-file How Much Can Be Contributed? The contribution limit for Roth IRAs generally depends on whether contributions are made only to Roth IRAs or to both traditional IRAs and Roth IRAs. Free state tax return e-file Worksheet 2-1. Free state tax return e-file Modified Adjusted Gross Income for Roth IRA Purposes Use this worksheet to figure your modified adjusted gross income for Roth IRA purposes. Free state tax return e-file 1. Free state tax return e-file Enter your adjusted gross income from Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37 1. Free state tax return e-file   2. Free state tax return e-file Enter any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA (included on Form 1040, line 15b, Form 1040A, line 11b, or Form 1040NR, line 16b) and a rollover from a qualified retirement plan to a Roth IRA (included on Form 1040, line 16b, Form 1040A, line 12b, or Form 1040NR, line 17b) 2. Free state tax return e-file   3. Free state tax return e-file Subtract line 2 from line 1 3. Free state tax return e-file   4. Free state tax return e-file Enter any traditional IRA deduction from Form 1040, line 32; Form 1040A, line 17; or Form 1040NR, line 32 4. Free state tax return e-file   5. Free state tax return e-file Enter any student loan interest deduction from Form 1040, line 33; Form 1040A, line 18; or Form 1040NR, line 33 5. Free state tax return e-file   6. Free state tax return e-file Enter any tuition and fees deduction from Form 1040, line 34, or Form 1040A, line 19 6. Free state tax return e-file   7. Free state tax return e-file Enter any domestic production activities deduction from Form 1040, line 35, or Form 1040NR, line 34 7. Free state tax return e-file   8. Free state tax return e-file Enter any foreign earned income exclusion and/or housing exclusion from Form 2555, line 45, or Form 2555-EZ, line 18 8. Free state tax return e-file   9. Free state tax return e-file Enter any foreign housing deduction from Form 2555, line 50 9. Free state tax return e-file   10. Free state tax return e-file Enter any excludable qualified savings bond interest from Form 8815, line 14 10. Free state tax return e-file   11. Free state tax return e-file Enter any excluded employer-provided adoption benefits from Form 8839, line 28 11. Free state tax return e-file   12. Free state tax return e-file Add the amounts on lines 3 through 11 12. Free state tax return e-file   13. Free state tax return e-file Enter: $188,000 if married filing jointly or qualifying widow(er), $10,000 if married filing separately and you lived with your spouse at any time during the year, or $127,000 for all others 13. Free state tax return e-file   Is the amount on line 12 more than the amount on line 13? If yes, see the note below. Free state tax return e-file  If no, the amount on line 12 is your modified adjusted gross income for Roth IRA purposes. Free state tax return e-file       Note. Free state tax return e-file If the amount on line 12 is more than the amount on line 13 and you have other income or loss items, such as social security income or passive activity losses, that are subject to AGI-based phaseouts, you can refigure your AGI solely for the purpose of figuring your modified AGI for Roth IRA purposes. Free state tax return e-file (If you receive social security benefits, use Worksheet 1 in Appendix B to refigure your AGI. Free state tax return e-file ) Then go to line 3 above in this Worksheet 2-1 to refigure your modified AGI. Free state tax return e-file If you do not have other income or loss items subject to AGI-based phaseouts, your modified adjusted gross income for Roth IRA purposes is the amount on line 12 above. Free state tax return e-file Roth IRAs only. Free state tax return e-file   If contributions are made only to Roth IRAs, your contribution limit generally is the lesser of: $5,500 ($6,500 if you are age 50 or older), or Your taxable compensation. Free state tax return e-file   However, if your modified AGI is above a certain amount, your contribution limit may be reduced, as explained later under Contribution limit reduced . Free state tax return e-file Roth IRAs and traditional IRAs. Free state tax return e-file   If contributions are made to both Roth IRAs and traditional IRAs established for your benefit, your contribution limit for Roth IRAs generally is the same as your limit would be if contributions were made only to Roth IRAs, but then reduced by all contributions for the year to all IRAs other than Roth IRAs. Free state tax return e-file Employer contributions under a SEP or SIMPLE IRA plan do not affect this limit. Free state tax return e-file   This means that your contribution limit is the lesser of: $5,500 ($6,500 if you are age 50 or older) minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs, or Your taxable compensation minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs. Free state tax return e-file   However, if your modified AGI is above a certain amount, your contribution limit may be reduced, as explained below under Contribution limit reduced . Free state tax return e-file   Simplified employee pensions (SEPs) are discussed in Publication 560. Free state tax return e-file Savings incentive match plans for employees (SIMPLEs) are discussed in chapter 3. Free state tax return e-file Repayment of reservist distributions. Free state tax return e-file   You can repay qualified reservist distributions even if the repayments would cause your total contributions to the Roth IRA to be more than the general limit on contributions. Free state tax return e-file However, the total repayments cannot be more than the amount of your distribution. Free state tax return e-file Note. Free state tax return e-file If you make repayments of qualified reservist distributions to a Roth IRA, increase your basis in the Roth IRA by the amount of the repayment. Free state tax return e-file For more information, see Qualified reservist repayments under How Much Can Be Contributed? in chapter 1. Free state tax return e-file Contribution limit reduced. Free state tax return e-file   If your modified AGI is above a certain amount, your contribution limit is gradually reduced. Free state tax return e-file Use Table 2-1, later, to determine if this reduction applies to you. Free state tax return e-file Table 2-1. Free state tax return e-file Effect of Modified AGI on Roth IRA Contribution This table shows whether your contribution to a Roth IRA is affected by the amount of your modified adjusted gross income (modified AGI). Free state tax return e-file IF you have taxable compensation and your filing status is . Free state tax return e-file . Free state tax return e-file . Free state tax return e-file AND your modified AGI is . Free state tax return e-file . Free state tax return e-file . Free state tax return e-file THEN . Free state tax return e-file . Free state tax return e-file . Free state tax return e-file married filing jointly or  qualifying widow(er) less than $178,000 you can contribute up to $5,500 ($6,500 if you are age 50 or older) as explained under How Much Can Be Contributed . Free state tax return e-file at least $178,000 but less than $188,000 the amount you can contribute is reduced as explained under Contribution limit reduced . Free state tax return e-file $188,000 or more you cannot contribute to a Roth IRA. Free state tax return e-file married filing separately and you lived with your spouse at any time during the year zero (-0-) you can contribute up to $5,500 ($6,500 if you are age 50 or older) as explained under How Much Can Be Contributed . Free state tax return e-file more than zero (-0-) but less than $10,000 the amount you can contribute is reduced as explained under Contribution limit reduced . Free state tax return e-file $10,000 or more you cannot contribute to a Roth IRA. Free state tax return e-file single, head of household,  or married filing separately and you did not live with your spouse at any time during the year less than $112,000 you can contribute up to $5,500 ($6,500 if you are age 50 or older) as explained under How Much Can Be Contributed . Free state tax return e-file at least $112,000 but less than $127,000 the amount you can contribute is reduced as explained under Contribution limit reduced . Free state tax return e-file $127,000 or more you cannot contribute to a Roth IRA. Free state tax return e-file Figuring the reduction. Free state tax return e-file   If the amount you can contribute must be reduced, use Worksheet 2-2, later, to figure your reduced contribution limit. Free state tax return e-file Worksheet 2-2. Free state tax return e-file Determining Your Reduced Roth IRA Contribution Limit Before using this worksheet, check Table 2-1, earlier, to determine whether or not your Roth IRA contribution limit is reduced. Free state tax return e-file If it is, use this worksheet to determine how much it is reduced. Free state tax return e-file 1. Free state tax return e-file Enter your modified AGI for Roth IRA purposes (Worksheet 2-1, line 12) 1. Free state tax return e-file   2. Free state tax return e-file Enter: $178,000 if filing a joint return or qualifying widow(er), $-0- if married filing a separate return and you lived with your spouse at any time in 2013, or $112,000 for all others 2. Free state tax return e-file   3. Free state tax return e-file Subtract line 2 from line 1 3. Free state tax return e-file   4. Free state tax return e-file Enter: $10,000 if filing a joint return or qualifying widow(er) or married filing a separate return and you lived with your spouse at any time during the year, or $15,000 for all others 4. Free state tax return e-file   5. Free state tax return e-file Divide line 3 by line 4 and enter the result as a decimal (rounded to at least three places). Free state tax return e-file If the result is 1. Free state tax return e-file 000 or more, enter 1. Free state tax return e-file 000 5. Free state tax return e-file   6. Free state tax return e-file Enter the lesser of: $5,500 ($6,500 if you are age 50 or older), or Your taxable compensation 6. Free state tax return e-file   7. Free state tax return e-file Multiply line 5 by line 6 7. Free state tax return e-file   8. Free state tax return e-file Subtract line 7 from line 6. Free state tax return e-file Round the result up to the nearest $10. Free state tax return e-file If the result is less than $200, enter $200 8. Free state tax return e-file   9. Free state tax return e-file Enter contributions for the year to other IRAs 9. Free state tax return e-file   10. Free state tax return e-file Subtract line 9 from line 6 10. Free state tax return e-file   11. Free state tax return e-file Enter the lesser of line 8 or line 10. Free state tax return e-file This is your reduced Roth IRA contribution limit 11. Free state tax return e-file      Round your reduced contribution limit up to the nearest $10. Free state tax return e-file If your reduced contribution limit is more than $0, but less than $200, increase the limit to $200. Free state tax return e-file Example. Free state tax return e-file You are a 45-year-old, single individual with taxable compensation of $113,000. Free state tax return e-file You want to make the maximum allowable contribution to your Roth IRA for 2013. Free state tax return e-file Your modified AGI for 2013 is $113,000. Free state tax return e-file You have not contributed to any traditional IRA, so the maximum contribution limit before the modified AGI reduction is $5,500. Free state tax return e-file You figure your reduced Roth IRA contribution of $5,140 as shown on Worksheet 2-2. Free state tax return e-file Example—Illustrated, later. Free state tax return e-file   Worksheet 2-2. Free state tax return e-file Example—Illustrated Before using this worksheet, check Table 2-1, earlier, to determine whether or not your Roth IRA contribution limit is reduced. Free state tax return e-file If it is, use this worksheet to determine how much it is reduced. Free state tax return e-file 1. Free state tax return e-file Enter your modified AGI for Roth IRA purposes (Worksheet 2-1, line 12) 1. Free state tax return e-file 113,000 2. Free state tax return e-file Enter: $178,000 if filing a joint return or qualifying widow(er), $-0- if married filing a separate return and you lived with your spouse at any time in 2013, or $112,000 for all others 2. Free state tax return e-file 112,000 3. Free state tax return e-file Subtract line 2 from line 1 3. Free state tax return e-file 1,000 4. Free state tax return e-file Enter: $10,000 if filing a joint return or qualifying widow(er) or married filing a separate return and you lived with your spouse at any time during the year, or $15,000 for all others 4. Free state tax return e-file 15,000 5. Free state tax return e-file Divide line 3 by line 4 and enter the result as a decimal (rounded to at least three places). Free state tax return e-file If the result is 1. Free state tax return e-file 000 or more, enter 1. Free state tax return e-file 000 5. Free state tax return e-file . Free state tax return e-file 067 6. Free state tax return e-file Enter the lesser of: $5,500 ($6,500 if you are age 50 or older), or Your taxable compensation 6. Free state tax return e-file 5,500 7. Free state tax return e-file Multiply line 5 by line 6 7. Free state tax return e-file 369 8. Free state tax return e-file Subtract line 7 from line 6. Free state tax return e-file Round the result up to the nearest $10. Free state tax return e-file If the result is less than $200, enter $200 8. Free state tax return e-file 5,140 9. Free state tax return e-file Enter contributions for the year to other IRAs 9. Free state tax return e-file 0 10. Free state tax return e-file Subtract line 9 from line 6 10. Free state tax return e-file 5,500 11. Free state tax return e-file Enter the lesser of line 8 or line 10. Free state tax return e-file This is your reduced Roth IRA contribution limit 11. Free state tax return e-file 5,140 When Can You Make Contributions? You can make contributions to a Roth IRA for a year at any time during the year or by the due date of your return for that year (not including extensions). Free state tax return e-file You can make contributions for 2013 by the due date (not including extensions) for filing your 2013 tax return. Free state tax return e-file This means that most people can make contributions for 2013 by April 15, 2014. Free state tax return e-file What if You Contribute Too Much? A 6% excise tax applies to any excess contribution to a Roth IRA. Free state tax return e-file Excess contributions. Free state tax return e-file   These are the contributions to your Roth IRAs for a year that equal the total of: Amounts contributed for the tax year to your Roth IRAs (other than amounts properly and timely rolled over from a Roth IRA or properly converted from a traditional IRA or rolled over from a qualified retirement plan, as described later) that are more than your contribution limit for the year (explained earlier under How Much Can Be Contributed? ), plus Any excess contributions for the preceding year, reduced by the total of: Any distributions out of your Roth IRAs for the year, plus Your contribution limit for the year minus your contributions to all your IRAs for the year. Free state tax return e-file Withdrawal of excess contributions. Free state tax return e-file   For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. Free state tax return e-file This treatment only applies if any earnings on the contributions are also withdrawn. Free state tax return e-file The earnings are considered earned and received in the year the excess contribution was made. Free state tax return e-file   If you timely filed your 2013 tax return without withdrawing a contribution that you made in 2013, you can still have the contribution returned to you within 6 months of the due date of your 2013 tax return, excluding extensions. Free state tax return e-file If you do, file an amended return with “Filed pursuant to section 301. Free state tax return e-file 9100-2” written at the top. Free state tax return e-file Report any related earnings on the amended return and include an explanation of the withdrawal. Free state tax return e-file Make any other necessary changes on the amended return. Free state tax return e-file Applying excess contributions. Free state tax return e-file    If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year. Free state tax return e-file Can You Move Amounts Into a Roth IRA? You may be able to convert amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA. Free state tax return e-file You may be able to roll over amounts from a qualified retirement plan to a Roth IRA. Free state tax return e-file You may be able to recharacterize contributions made to one IRA as having been made directly to a different IRA. Free state tax return e-file You can roll amounts over from a designated Roth account or from one Roth IRA to another Roth IRA. Free state tax return e-file Conversions You can convert a traditional IRA to a Roth IRA. Free state tax return e-file The conversion is treated as a rollover, regardless of the conversion method used. Free state tax return e-file Most of the rules for rollovers, described in chapter 1 under Rollover From One IRA Into Another , apply to these rollovers. Free state tax return e-file However, the 1-year waiting period does not apply. Free state tax return e-file Conversion methods. Free state tax return e-file   You can convert amounts from a traditional IRA to a Roth IRA in any of the following three ways. Free state tax return e-file Rollover. Free state tax return e-file You can receive a distribution from a traditional IRA and roll it over (contribute it) to a Roth IRA within 60 days after the distribution. Free state tax return e-file Trustee-to-trustee transfer. Free state tax return e-file You can direct the trustee of the traditional IRA to transfer an amount from the traditional IRA to the trustee of the Roth IRA. Free state tax return e-file Same trustee transfer. Free state tax return e-file If the trustee of the traditional IRA also maintains the Roth IRA, you can direct the trustee to transfer an amount from the traditional IRA to the Roth IRA. Free state tax return e-file Same trustee. Free state tax return e-file   Conversions made with the same trustee can be made by redesignating the traditional IRA as a Roth IRA, rather than opening a new account or issuing a new contract. Free state tax return e-file Income. Free state tax return e-file   You must include in your gross income distributions from a traditional IRA that you would have had to include in income if you had not converted them into a Roth IRA. Free state tax return e-file These amounts are normally included in income on your return for the year that you converted them from a traditional IRA to a Roth IRA. Free state tax return e-file If you must include any amount in your gross income, you may have to increase your withholding or make estimated tax payments. Free state tax return e-file See Publication 505, Tax Withholding and Estimated Tax. Free state tax return e-file More information. Free state tax return e-file   For more information on conversions, see Converting From Any Traditional IRA Into a Roth IRA in chapter 1. Free state tax return e-file Rollover From Employer's Plan Into a Roth IRA You can roll over into a Roth IRA all or part of an eligible rollover distribution you receive from your (or your deceased spouse's): Employer's qualified pension, profit-sharing, or stock bonus plan (including a 401(k) plan); Annuity plan; Tax-sheltered annuity plan (section 403(b) plan); or Governmental deferred compensation plan (section 457 plan). Free state tax return e-file Any amount rolled over is subject to the same rules for converting a traditional IRA into a Roth IRA. Free state tax return e-file See Converting From Any Traditional IRA Into a Roth IRA in chapter 1. Free state tax return e-file Also, the rollover contribution must meet the rollover requirements that apply to the specific type of retirement plan. Free state tax return e-file Rollover methods. Free state tax return e-file   You can roll over amounts from a qualified retirement plan to a Roth IRA in one of the following ways. Free state tax return e-file Rollover. Free state tax return e-file You can receive a distribution from a qualified retirement plan and roll it over (contribute) to a Roth IRA within 60 days after the distribution. Free state tax return e-file Since the distribution is paid directly to you, the payer generally must withhold 20% of it. Free state tax return e-file Direct rollover option. Free state tax return e-file Your employer's qualified plan must give you the option to have any part of an eligible rollover distribution paid directly to a Roth IRA. Free state tax return e-file Generally, no tax is withheld from any part of the designated distribution that is directly paid to the trustee of the Roth IRA. Free state tax return e-file Rollover by nonspouse beneficiary. Free state tax return e-file   If you are a designated beneficiary (other than a surviving spouse) of a deceased employee, you can roll over all or part of an eligible rollover distribution from one of the types of plans listed above into a Roth IRA. Free state tax return e-file You must make the rollover by a direct trustee-to-trustee transfer into an inherited Roth IRA. Free state tax return e-file   You will determine your required minimum distributions in years after you make the rollover based on whether the employee died before his or her required beginning date for taking distributions from the plan. Free state tax return e-file For more information, see Distributions after the employee’s death under Tax on Excess Accumulation in Publication 575. Free state tax return e-file Income. Free state tax return e-file   You must include in your gross income distributions from a qualified retirement plan that you would have had to include in income if you had not rolled them over into a Roth IRA. Free state tax return e-file You do not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions (after-tax contributions) to the plan that were taxable to you when paid. Free state tax return e-file These amounts are normally included in income on your return for the year of the rollover from the qualified employer plan to a Roth IRA. Free state tax return e-file If you must include any amount in your gross income, you may have to increase your withholding or make estimated tax payments. Free state tax return e-file See Publication 505, Tax Withholding and Estimated Tax. Free state tax return e-file For more information on eligible rollover distributions from qualified retirement plans and withholding, see Rollover From Employer's Plan Into an IRA in chapter 1. Free state tax return e-file Military Death Gratuities and Servicemembers' Group Life Insurance (SGLI) Payments If you received a military death gratuity or SGLI payment with respect to a death from injury that occurred after October 6, 2001, you can contribute (roll over) all or part of the amount received to your Roth IRA. Free state tax return e-file The contribution is treated as a qualified rollover contribution. Free state tax return e-file The amount you can roll over to your Roth IRA cannot exceed the total amount that you received reduced by any part of that amount that was contributed to a Coverdell ESA or another Roth IRA. Free state tax return e-file Any military death gratuity or SGLI payment contributed to a Roth IRA is disregarded for purposes of the 1-year waiting period between rollovers. Free state tax return e-file The rollover must be completed before the end of the 1-year period beginning on the date you received the payment. Free state tax return e-file The amount contributed to your Roth IRA is treated as part of your cost basis (investment in the contract) in the Roth IRA that is not taxable when distributed. Free state tax return e-file Rollover From a Roth IRA You can withdraw, tax free, all or part of the assets from one Roth IRA if you contribute them within 60 days to another Roth IRA. Free state tax return e-file Most of the rules for rollovers, described in chapter 1 under Rollover From One IRA Into Another , apply to these rollovers. Free state tax return e-file However, rollovers from retirement plans other than Roth IRAs are disregarded for purposes of the 1-year waiting period between rollovers. Free state tax return e-file A rollover from a Roth IRA to an employer retirement plan is not allowed. Free state tax return e-file A rollover from a designated Roth account can only be made to another designated Roth account or to a Roth IRA. Free state tax return e-file If you roll over an amount from one Roth IRA to another Roth IRA, the 5-year period used to determine qualified distributions does not change. Free state tax return e-file The 5-year period begins with the first taxable year for which the contribution was made to the initial Roth IRA. Free state tax return e-file See What are Qualified Distributions , later. Free state tax return e-file Rollover of Exxon Valdez Settlement Income If you are a qualified taxpayer (defined in chapter 1, earlier) and you received qualified settlement income (defined in chapter 1, earlier), you can contribute all or part of the amount received to an eligible retirement plan which includes a Roth IRA. Free state tax return e-file The rules for contributing qualified settlement income to a Roth IRA are the same as the rules for contributing qualified settlement income to a traditional IRA with the following exception. Free state tax return e-file Qualified settlement income that is contributed to a Roth IRA, or to a designated Roth account, will be: Included in your taxable income for the year the qualified settlement income was received, and Treated as part of your cost basis (investment in the contract) in the Roth IRA that is not taxable when distributed. Free state tax return e-file For more information, see Rollover of Exxon Valdez Settlement Income in chapter 1. Free state tax return e-file Rollover of Airline Payments If you are a qualified airline employee (defined next), you may contribute any portion of an airline payment (defined below) you receive to a Roth IRA. Free state tax return e-file The contribution must be made within 180 days from the date you received the payment. Free state tax return e-file The contribution will be treated as a qualified rollover contribution. Free state tax return e-file The rollover contribution is included in income to the extent it would be included in income if it were not part of the rollover contribution. Free state tax return e-file Also, any reduction in the airline payment amount on account of employment taxes shall be disregarded when figuring the amount you can contribute to your Roth IRA. Free state tax return e-file Qualified airline employee. Free state tax return e-file    A current or former employee of a commercial airline carrier who was a participant in a qualified defined benefit plan maintained by the carrier which was terminated or became subject to restrictions under Section 402(b) of the Pension Protection Act of 2006. Free state tax return e-file These provisions also apply to surviving spouses of qualified airline employees. Free state tax return e-file Airline payment. Free state tax return e-file    An airline payment is any payment of money or other property that is paid to a qualified airline employee from a commercial airline carrier. Free state tax return e-file The payment also must be made both: Under the approval of an order of federal bankruptcy court in a case filed after September 11, 2001, and before January 1, 2007, and In respect of the qualified airline employee’s interest in a bankruptcy claim against the airline carrier, any note of the carrier (or amount paid in lieu of a note being issued), or any other fixed obligation of the carrier to pay a lump sum amount. Free state tax return e-file Any reduction in the airline payment amount on account of employment taxes shall be disregarded when figuring the amount you can roll over to your traditional IRA. Free state tax return e-file Also, an airline payment shall not include any amount payable on the basis of the airline carrier’s future earnings or profits. Free state tax return e-file Are Distributions Taxable? You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). Free state tax return e-file You also do not include distributions from your Roth IRA that you roll over tax free into another Roth IRA. Free state tax return e-file You may have to include part of other distributions in your income. Free state tax return e-file See Ordering Rules for Distributions , later. Free state tax return e-file Basis of distributed property. Free state tax return e-file   The basis of property distributed from a Roth IRA is its fair market value (FMV) on the date of distribution, whether or not the distribution is a qualified distribution. Free state tax return e-file Withdrawals of contributions by due date. Free state tax return e-file   If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. Free state tax return e-file If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. Free state tax return e-file The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions. Free state tax return e-file What Are Qualified Distributions? A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements. Free state tax return e-file It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and The payment or distribution is: Made on or after the date you reach age 59½, Made because you are disabled (defined earlier), Made to a beneficiary or to your estate after your death, or One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit). Free state tax return e-file Additional Tax on Early Distributions If you receive a distribution that is not a qualified distribution, you may have to pay the 10% additional tax on early distributions as explained in the following paragraphs. Free state tax return e-file Distributions of conversion and certain rollover contributions within 5-year period. Free state tax return e-file   If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. Free state tax return e-file You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). Free state tax return e-file A separate 5-year period applies to each conversion and rollover. Free state tax return e-file See Ordering Rules for Distributions , later, to determine the recapture amount, if any. Free state tax return e-file   The 5-year period used for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion and rollover, and is not necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution. Free state tax return e-file See What Are Qualified Distributions , earlier. Free state tax return e-file   For example, if a calendar-year taxpayer makes a conversion contribution on February 25, 2013, and makes a regular contribution for 2012 on the same date, the 5-year period for the conversion begins January 1, 2013, while the 5-year period for the regular contribution begins on January 1, 2012. Free state tax return e-file   Unless one of the exceptions listed later applies, you must pay the additional tax on the portion of the distribution attributable to the part of the conversion or rollover contribution that you had to include in income because of the conversion or rollover. Free state tax return e-file   You must pay the 10% additional tax in the year of the distribution, even if you had included the conversion or rollover contribution in an earlier year. Free state tax return e-file You also must pay the additional tax on any portion of the distribution attributable to earnings on contributions. Free state tax return e-file Other early distributions. Free state tax return e-file   Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that are not qualified distributions. Free state tax return e-file Exceptions. Free state tax return e-file   You may not have to pay the 10% additional tax in the following situations. Free state tax return e-file You have reached age 59½. Free state tax return e-file You are totally and permanently disabled. Free state tax return e-file You are the beneficiary of a deceased IRA owner. Free state tax return e-file You use the distribution to buy, build, or rebuild a first home. Free state tax return e-file The distributions are part of a series of substantially equal payments. Free state tax return e-file You have unreimbursed medical expenses that are more than 10% (or 7. Free state tax return e-file 5% if you or your spouse was born before January 2, 1949) of your adjusted gross income (defined earlier) for the year. Free state tax return e-file You are paying medical insurance premiums during a period of unemployment. Free state tax return e-file The distributions are not more than your qualified higher education expenses. Free state tax return e-file The distribution is due to an IRS levy of the qualified plan. Free state tax return e-file The distribution is a qualified reservist distribution. Free state tax return e-file Most of these exceptions are discussed earlier in chapter 1 under Early Distributions . Free state tax return e-file Please click here for the text description of the image. Free state tax return e-file Is Roth Distributions a Qualified Distribution? Ordering Rules for Distributions If you receive a distribution from your Roth IRA that is not a qualified distribution, part of it may be taxable. Free state tax return e-file There is a set order in which contributions (including conversion contributions and rollover contributions from qualified retirement plans) and earnings are considered to be distributed from your Roth IRA. Free state tax return e-file For these purposes, disregard the withdrawal of excess contributions and the earnings on them (discussed earlier under What if You Contribute Too Much ). Free state tax return e-file Order the distributions as follows. Free state tax return e-file Regular contributions. Free state tax return e-file Conversion and rollover contributions, on a first-in, first-out basis (generally, total conversions and rollovers from the earliest year first). Free state tax return e-file See Aggregation (grouping and adding) rules, later. Free state tax return e-file Take these conversion and rollover contributions into account as follows: Taxable portion (the amount required to be included in gross income because of the conversion or rollover) first, and then the Nontaxable portion. Free state tax return e-file Earnings on contributions. Free state tax return e-file Disregard rollover contributions from other Roth IRAs for this purpose. Free state tax return e-file Aggregation (grouping and adding) rules. Free state tax return e-file   Determine the taxable amounts distributed (withdrawn), distributions, and contributions by grouping and adding them together as follows. Free state tax return e-file Add all distributions from all your Roth IRAs during the year together. Free state tax return e-file Add all regular contributions made for the year (including contributions made after the close of the year, but before the due date of your return) together. Free state tax return e-file Add this total to the total undistributed regular contributions made in prior years. Free state tax return e-file Add all conversion and rollover contributions made during the year together. Free state tax return e-file For purposes of the ordering rules, in the case of any conversion or rollover in which the conversion or rollover distribution is made in 2013 and the conversion or rollover contribution is made in 2014, treat the conversion or rollover contribution as contributed before any other conversion or rollover contributions made in 2014. Free state tax return e-file Add any recharacterized contributions that end up in a Roth IRA to the appropriate contribution group for the year that the original contribution would have been taken into account if it had been made directly to the Roth IRA. Free state tax return e-file   Disregard any recharacterized contribution that ends up in an IRA other than a Roth IRA for the purpose of grouping (aggregating) both contributions and distributions. Free state tax return e-file Also disregard any amount withdrawn to correct an excess contribution (including the earnings withdrawn) for this purpose. Free state tax return e-file Example. Free state tax return e-file On October 15, 2009, Justin converted all $80,000 in his traditional IRA to his Roth IRA. Free state tax return e-file His Forms 8606 from prior years show that $20,000 of the amount converted is his basis. Free state tax return e-file Justin included $60,000 ($80,000 − $20,000) in his gross income. Free state tax return e-file On February 23, 2013, Justin made a regular contribution of $5,000 to a Roth IRA. Free state tax return e-file On November 8, 2013, at age 60, Justin took a $7,000 distribution from his Roth IRA. Free state tax return e-file The first $5,000 of the distribution is a return of Justin's regular contribution and is not includible in his income. Free state tax return e-file The next $2,000 of the distribution is not includible in income because it was included previously. Free state tax return e-file Figuring your recapture amount. Free state tax return e-file   If you had an early distribution from your Roth IRAs in 2013, you must allocate the early distribution by using the Recapture Amount—Allocation Chart, later. Free state tax return e-file Recapture Amount—Allocation Chart Enter the amount from your 2013 Form 8606, line 19   Before you begin: You will need your prior year Form(s) 8606 and income tax return(s) if you entered an amount on any line(s) as indicated below. Free state tax return e-file   You will now allocate the amount you entered above (2013 Form 8606, line 19) in the order shown, to the amounts on the lines listed below (to the extent a prior year distribution was not allocable to the amount). Free state tax return e-file The maximum amount you can enter on each line below is the amount entered on the referenced lines of the form for that year. Free state tax return e-file Note. Free state tax return e-file Once you have allocated the full amount from your 2013 Form 8606, line 19, STOP. Free state tax return e-file See the Example , earlier. Free state tax return e-file Tax Year Your Form 2013 Form 8606, line 20   Form 8606, line 22   1998 Form 8606, line 16   Form 8606, line 15   1999 Form 8606, line 16   Form 8606, line 15   2000 Form 8606, line 16   Form 8606, line 15   2001 Form 8606, line 18   Form 8606, line 17   2002 Form 8606, line 18   Form 8606, line 17   2003 Form 8606, line 18   Form 8606, line 17   2004 Form 8606, line 18   Form 8606, line 17   2005 Form 8606, line 18   Form 8606, line 17   2006 Form 8606, line 18   Form 8606, line 17   2007 Form 8606, line 18   Form 8606, line 17   2008 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2009 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2010 Form 8606, lines 18 and 23   Form 8606, lines 17 and 22   2011 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2012 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2013 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2013 Form 8606, line 25       *Only include those amounts rolled over to a Roth IRA. Free state tax return e-file  **Only include any contributions (usually Form 1099-R, box 5) that were taxable to you when made and rolled over to a Roth IRA. Free state tax return e-file Amount to include on Form 5329, line 1. Free state tax return e-file   Include on line 1 of your 2013 Form 5329 the following four amounts from the Recapture Amount—Allocation Chart that you filled out. Free state tax return e-file The amount you allocated to line 20 of your 2013 Form 8606. Free state tax return e-file The amount(s) allocated to your 2009 through 2013 Forms 8606, line 18, and your 2010 Form 8606, line 23. Free state tax return e-file The amount(s) allocated to your 2009, 2011, 2012, and 2013 Forms 1040, line 16b; Forms 1040A, line 12b; and Forms 1040NR, line 17b. Free state tax return e-file The amount from your 2013 Form 8606, line 25. Free state tax return e-file   Also, include any amount you allocated to line 20 of your 2013 Form 8606 on your 2013 Form 5329, line 2, and enter exception number 09. Free state tax return e-file Example. Free state tax return e-file Ishmael, age 32, opened a Roth IRA in 2000. Free state tax return e-file He made the maximum contributions to it every year. Free state tax return e-file In addition, he made the following transactions into his Roth IRA. Free state tax return e-file In 2005, he converted $10,000 from his traditional IRA into his Roth IRA. Free state tax return e-file He filled out a 2005 Form 8606 and attached it with his 2005 Form 1040. Free state tax return e-file He entered $0 on line 17 of Form 8606 because he took a deduction for all the contributions to the traditional IRA, therefore he has no basis. Free state tax return e-file He entered $10,000 on line 18 of Form 8606. Free state tax return e-file In 2011, he rolled over the entire balance of his qualified retirement plan, $20,000, into a Roth IRA when he changed jobs. Free state tax return e-file He used a 2011 Form 1040 to file his taxes. Free state tax return e-file He entered $20,000 on line 16a of Form 1040 because that was the amount reported in box 1 of his 2011 Form 1099-R. Free state tax return e-file Box 5 of his 2011 Form 1099-R reported $0 since he did not make any after-tax contributions to the qualified retirement plan. Free state tax return e-file He entered $20,000 on line 16b of Form 1040 since that is the taxable amount that was rolled over in 2011. Free state tax return e-file The total balance in his Roth IRA as of January 1, 2013 was $105,000 ($50,000 in contributions from 2000 through 2012 + $10,000 from the 2005 conversion + $20,000 from the 2011 rollover + $25,000 from earnings). Free state tax return e-file He has not taken any early distribution from his Roth IRA before 2013. Free state tax return e-file In 2013, he made the maximum contribution of $5,500 to his Roth IRA. Free state tax return e-file In August of 2013, he took a $85,500 early distribution from his Roth IRA to use as a down payment on the purchase of his first home. Free state tax return e-file See his filled out Illustrated Recapture Amount—Allocation Chart, later, to see how he allocated the amounts from the above transactions. Free state tax return e-file Based on his allocation, he would enter $20,000 on his 2013 Form 5329, line 1 (see Amount to include on Form 5329, line 1 , above). Free state tax return e-file He should also report $10,000 on his 2013 Form 5329, line 2, and enter exception 09 since that amount is not subject to the 10% additional tax on early distributions. Free state tax return e-file Illustrated Recapture Amount—Allocation Chart Enter the amount from your 2013 Form 8606, line 19 $85,500 Before you begin: You will need your prior year Form(s) 8606 and income tax return(s) if you entered an amount on any line(s) as indicated below. Free state tax return e-file   You will now allocate the amount you entered above (2013 Form 8606, line 19) in the order shown, to the amounts on the lines listed below (to the extent a prior year distribution was not allocable to the amount). Free state tax return e-file The maximum amount you can enter on each line below is the amount entered on the referenced lines of the form for that year. Free state tax return e-file Note. Free state tax return e-file Once you have allocated the full amount from your 2013 Form 8606, line 19, STOP. Free state tax return e-file See the Example , earlier. Free state tax return e-file Tax Year Your Form 2013 Form 8606, line 20 $10,000 Form 8606, line 22 $55,500 1998 Form 8606, line 16   Form 8606, line 15   1999 Form 8606, line 16   Form 8606, line 15   2000 Form 8606, line 16   Form 8606, line 15   2001 Form 8606, line 18   Form 8606, line 17   2002 Form 8606, line 18   Form 8606, line 17   2003 Form 8606, line 18   Form 8606, line 17   2004 Form 8606, line 18   Form 8606, line 17   2005 Form 8606, line 18 $10,000 Form 8606, line 17 $-0- 2006 Form 8606, line 18   Form 8606, line 17   2007 Form 8606, line 18   Form 8606, line 17   2008 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2009 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2010 Form 8606, lines 18 and 23   Form 8606, lines 17 and 22   2011 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b* $10,000 Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2012 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2013 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2013 Form 8606, line 25       *Only include those amounts rolled over to a Roth IRA. Free state tax return e-file  **Only include any contributions (usually Form 1099-R, box 5) that were taxable to you when made and rolled over to a Roth IRA. Free state tax return e-file How Do You Figure the Taxable Part? To figure the taxable part of a distribution that is not a qualified distribution, complete Form 8606, Part III. Free state tax return e-file Must You Withdraw or Use Assets? You are not required to take distributions from your Roth IRA at any age. Free state tax return e-file The minimum distribution rules that apply to traditional IRAs do not apply to Roth IRAs while the owner is alive. Free state tax return e-file However, after the death of a Roth IRA owner, certain of the minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs as explained later under Distributions After Owner's Death . Free state tax return e-file Minimum distributions. Free state tax return e-file   You cannot use your Roth IRA to satisfy minimum distribution requirements for your traditional IRA. Free state tax return e-file Nor can you use distributions from traditional IRAs for required distributions from Roth IRAs. Free state tax return e-file See Distributions to beneficiaries , later. Free state tax return e-file Recognizing Losses on Investments If you have a loss on your Roth IRA investment, you can recognize the loss on your income tax return, but only when all the amounts in all of your Roth IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis. Free state tax return e-file Your basis is the total amount of contributions in your Roth IRAs. Free state tax return e-file You claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A (Form 1040). Free state tax return e-file Any such losses are added back to taxable income for purposes of calculating the alternative minimum tax. Free state tax return e-file Distributions After Owner's Death If a Roth IRA owner dies, the minimum distribution rules that apply to traditional IRAs apply to Roth IRAs as though the Roth IRA owner died before his or her required beginning date. Free state tax return e-file See When Can You Withdraw or Use Assets? in chapter 1. Free state tax return e-file Distributions to beneficiaries. Free state tax return e-file   Generally, the entire interest in the Roth IRA must be distributed by the end of the fifth calendar year after the year of the owner's death unless the interest is payable to a designated beneficiary over the life or life expectancy of the designated beneficiary. Free state tax return e-file (See When Must You Withdraw Assets? (Required Minimum Distributions) in chapter 1. Free state tax return e-file )   If paid as an annuity, the entire interest must be payable over a period not greater than the designated beneficiary's life expectancy and distributions must begin before the end of the calendar year following the year of death. Free state tax return e-file Distributions from another Roth IRA cannot be substituted for these distributions unless the other Roth IRA was inherited from the same decedent. Free state tax return e-file   If the sole beneficiary is the spouse, he or she can either delay distributions until the decedent would have reached age 70½ or treat the Roth IRA as his or her own. Free state tax return e-file Combining with other Roth IRAs. Free state tax return e-file   A beneficiary can combine an inherited Roth IRA with another Roth IRA maintained by the beneficiary only if the beneficiary either: Inherited the other Roth IRA from the same decedent, or Was the spouse of the decedent and the sole beneficiary of the Roth IRA and elects to treat it as his or her own IRA. Free state tax return e-file Distributions that are not qualified distributions. Free state tax return e-file   If a distribution to a beneficiary is not a qualified distribution, it is generally includible in the beneficiary's gross income in the same manner as it would have been included in the owner's income had it been distributed to the IRA owner when he or she was alive. Free state tax return e-file   If the owner of a Roth IRA dies before the end of: The 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for the owner's benefit, or The 5-year period starting with the year of a conversion contribution from a traditional IRA or a rollover from a qualified retirement plan to a Roth IRA, each type of contribution is divided among multiple beneficiaries according to the pro-rata share of each. Free state tax return e-file See Ordering Rules for Distributions , earlier in this chapter under Are Distributions Taxable. Free state tax return e-file Example. Free state tax return e-file When Ms. Free state tax return e-file Hibbard died in 2013, her Roth IRA contained regular contributions of $4,000, a conversion contribution of $10,000 that was made in 2009, and earnings of $2,000. Free state tax return e-file No distributions had been made from her IRA. Free state tax return e-file She had no basis in the conversion contribution in 2009. Free state tax return e-file When she established this Roth IRA (her first) in 2009, she named each of her four children as equal beneficiaries. Free state tax return e-file Each child will receive one-fourth of each type of contribution and one-fourth of the earnings. Free state tax return e-file An immediate distribution of $4,000 to each child will be treated as $1,000 from regular contributions, $2,500 from conversion contributions, and $500 from earnings. Free state tax return e-file In this case, because the distributions are made before the end of the applicable 5-year period for a qualified distribution, each beneficiary includes $500 in income for 2013. Free state tax return e-file The 10% additional tax on early distributions does not apply because the distribution was made to the beneficiaries as a result of the death of the IRA owner. Free state tax return e-file If distributions from an inherited Roth IRA are less than the required minimum distribution for the year, discussed in chapter 1 under When Must You Withdraw Assets? (Required Minimum Distributions), you may have to pay a 50% excise tax for that year on the amount not distributed as required. Free state tax return e-file For the tax on excess accumulations (insufficient distributions), see Excess Accumulations (Insufficient Distributions) under What Acts Result in Penalties or Additional Taxes? in chapter 1. Free state tax return e-file If this applies to you, substitute “Roth IRA” for “traditional IRA” in that discussion. Free state tax return e-file Prev  Up  Next   Home   More Online Publications
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The Department of Defense Inspector General combats waste, fraud, and abuse by conducting audits and investigations. The Office of the Inspector General reports its findings to the secretary of defense and to Congress.

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The Free State Tax Return E-file

Free state tax return e-file 7. Free state tax return e-file   Depreciation, Depletion, and Amortization Table of Contents What's New for 2013 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Overview of DepreciationWhat Property Can Be Depreciated? What Property Cannot Be Depreciated? When Does Depreciation Begin and End? Can You Use MACRS To Depreciate Your Property? What Is the Basis of Your Depreciable Property? How Do You Treat Repairs and Improvements? Do You Have To File Form 4562? How Do You Correct Depreciation Deductions? Section 179 Expense DeductionWhat Property Qualifies? What Property Does Not Qualify? How Much Can You Deduct? How Do You Elect the Deduction? When Must You Recapture the Deduction? Claiming the Special Depreciation AllowanceWhat is Qualified Property? How Can You Elect Not To Claim the Allowance? When Must You Recapture an Allowance Figuring Depreciation Under MACRSWhich Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS? What Is the Placed-in-Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies? Which Convention Applies? Which Depreciation Method Applies? How Is the Depreciation Deduction Figured? How Do You Use General Asset Accounts? When Do You Recapture MACRS Depreciation? Additional Rules for Listed PropertyWhat Is Listed Property? What Is the Business-Use Requirement? Do the Passenger Automobile Limits Apply? Depletion Who Can Claim Depletion? Figuring Depletion AmortizationBusiness Start-Up Costs Reforestation Costs Section 197 Intangibles What's New for 2013 Increased section 179 expense deduction dollar limits. Free state tax return e-file  The maximum amount you can elect to deduct for most section 179 property you placed in service in 2013 is $500,000. Free state tax return e-file This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. Free state tax return e-file See Dollar Limits under Section 179 Expense Deduction , later. Free state tax return e-file Extension of special depreciation allowance for certain qualified property acquired after December 31, 2007. Free state tax return e-file . Free state tax return e-file  You may be able to take a 50% special depreciation allowance for certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Free state tax return e-file See Claiming the Special Depreciation Allowance , later. Free state tax return e-file Expiration of the 3- year recovery period for certain race horses. Free state tax return e-file  The 3-year recovery period for race horses two years old or younger will expire for such horses placed in service after December 31, 2013. Free state tax return e-file Introduction If you buy or make improvements to farm property such as machinery, equipment, livestock, or a structure with a useful life of more than a year, you generally cannot deduct its entire cost in one year. Free state tax return e-file Instead, you must spread the cost over the time you use the property and deduct part of it each year. Free state tax return e-file For most types of property, this is called depreciation. Free state tax return e-file This chapter gives information on depreciation methods that generally apply to property placed in service after 1986. Free state tax return e-file For information on depreciating pre-1987 property, see Publication 534, Depreciating Property Placed in Service Before 1987. Free state tax return e-file Topics - This chapter discusses: Overview of depreciation Section 179 expense deduction Special depreciation allowance Modified Accelerated Cost Recovery System (MACRS) Listed property Basic information on cost depletion (including timber depletion) and percentage depletion Amortization of the costs of going into business, reforestation costs, the costs of pollution control facilities, and the costs of section 197 intangibles Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) T (Timber), Forest Activities Schedule 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. Free state tax return e-file It is important to keep good records for property you depreciate. Free state tax return e-file Do not file these records with your return. Free state tax return e-file Instead, you should keep them as part of the permanent records of the depreciated property. Free state tax return e-file They will help you verify the accuracy of the depreciation of assets placed in service in the current and previous tax years. Free state tax return e-file For general information on recordkeeping, see Publication 583, Starting a Business and Keeping Records. Free state tax return e-file For specific information on keeping records for section 179 property and listed property, see Publication 946, How To Depreciate Property. Free state tax return e-file Overview of Depreciation This overview discusses basic information on the following. Free state tax return e-file What property can be depreciated. Free state tax return e-file What property cannot be depreciated. Free state tax return e-file When depreciation begins and ends. Free state tax return e-file Whether MACRS can be used to figure depreciation. Free state tax return e-file What is the basis of your depreciable property. Free state tax return e-file How to treat repairs and improvements. Free state tax return e-file When you must file Form 4562. Free state tax return e-file How you can correct depreciation claimed incorrectly. Free state tax return e-file What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, equipment, vehicles, certain livestock, and furniture. Free state tax return e-file You can also depreciate certain intangible property, such as copyrights, patents, and computer software. Free state tax return e-file To be depreciable, the property must meet all the following requirements. Free state tax return e-file It must be property you own. Free state tax return e-file It must be used in your business or income-producing activity. Free state tax return e-file It must have a determinable useful life. Free state tax return e-file It must have a useful life that extends substantially beyond the year you place it in service. Free state tax return e-file Property You Own To claim depreciation, you usually must be the owner of the property. Free state tax return e-file You are considered as owning property even if it is subject to a debt. Free state tax return e-file Leased property. Free state tax return e-file   You can depreciate leased property only if you retain the incidents of ownership in the property. Free state tax return e-file This means you bear the burden of exhaustion of the capital investment in the property. Free state tax return e-file Therefore, if you lease property from someone to use in your trade or business or for the production of income, you generally cannot depreciate its cost because you do not retain the incidents of ownership. Free state tax return e-file You can, however, depreciate any capital improvements you make to the leased property. Free state tax return e-file See Additions and Improvements under Which Recovery Period Applies in chapter 4 of Publication 946. Free state tax return e-file   If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. Free state tax return e-file However, you cannot depreciate the cost of the property if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased. Free state tax return e-file Life tenant. Free state tax return e-file   Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. Free state tax return e-file See Certain term interests in property , later, for an exception. Free state tax return e-file Property Used in Your Business or Income-Producing Activity To claim depreciation on property, you must use it in your business or income-producing activity. Free state tax return e-file If you use property to produce income (investment use), the income must be taxable. Free state tax return e-file You cannot depreciate property that you use solely for personal activities. Free state tax return e-file However, if you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the percentage of business or investment use. Free state tax return e-file Example 1. Free state tax return e-file   If you use your car for farm business, you can deduct depreciation based on its percentage of use in farming. Free state tax return e-file If you also use it for investment purposes, you can depreciate it based on its percentage of investment use. Free state tax return e-file Example 2. Free state tax return e-file   If you use part of your home for business, you may be able to deduct depreciation on that part based on its business use. Free state tax return e-file For more information, see Business Use of Your Home in chapter 4. Free state tax return e-file Inventory. Free state tax return e-file   You can never depreciate inventory because it is not held for use in your business. Free state tax return e-file Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. Free state tax return e-file Livestock. Free state tax return e-file   Livestock purchased for draft, breeding, or dairy purposes can be depreciated only if they are not kept in an inventory account. Free state tax return e-file Livestock you raise usually has no depreciable basis because the costs of raising them are deducted and not added to their basis. Free state tax return e-file However, see Immature livestock under When Does Depreciation Begin and End , later, for a special rule. Free state tax return e-file Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. Free state tax return e-file This means it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Free state tax return e-file Irrigation systems and water wells. Free state tax return e-file   Irrigation systems and wells used in a trade or business can be depreciated if their useful life can be determined. Free state tax return e-file You can depreciate irrigation systems and wells composed of masonry, concrete, tile, metal, or wood. Free state tax return e-file In addition, you can depreciate costs for moving dirt to construct irrigation systems and water wells composed of these materials. Free state tax return e-file However, land preparation costs for center pivot irrigation systems are not depreciable. Free state tax return e-file Dams, ponds, and terraces. Free state tax return e-file   In general, you cannot depreciate earthen dams, ponds, and terraces unless the structures have a determinable useful life. Free state tax return e-file What Property Cannot Be Depreciated? Certain property cannot be depreciated, even if the requirements explained earlier are met. Free state tax return e-file This includes the following. Free state tax return e-file Land. Free state tax return e-file You can never depreciate the cost of land because land does not wear out, become obsolete, or get used up. Free state tax return e-file The cost of land generally includes the cost of clearing, grading, planting, and landscaping. Free state tax return e-file Although you cannot depreciate land, you can depreciate certain costs incurred in preparing land for business use. Free state tax return e-file See chapter 1 of Publication 946. Free state tax return e-file Property placed in service and disposed of in the same year. Free state tax return e-file Determining when property is placed in service is explained later. Free state tax return e-file Equipment used to build capital improvements. Free state tax return e-file You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Free state tax return e-file Intangible property such as section 197 intangibles. Free state tax return e-file This property does not have a determinable useful life and generally cannot be depreciated. Free state tax return e-file However, see Amortization , later. Free state tax return e-file Special rules apply to computer software (discussed below). Free state tax return e-file Certain term interests (discussed below). Free state tax return e-file Computer software. Free state tax return e-file   Computer software is generally not a section 197 intangible even if acquired in connection with the acquisition of a business, if it meets all of the following tests. Free state tax return e-file It is readily available for purchase by the general public. Free state tax return e-file It is subject to a nonexclusive license. Free state tax return e-file It has not been substantially modified. Free state tax return e-file   If the software meets the tests above, it can be depreciated and may qualify for the section 179 expense deduction and the special depreciation allowance (if applicable), discussed later. Free state tax return e-file Certain term interests in property. Free state tax return e-file   You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is held, directly or indirectly, by a person related to you. Free state tax return e-file This rule does not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. Free state tax return e-file For more information, see chapter 1 of Publication 946. Free state tax return e-file When Does Depreciation Begin and End? You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. Free state tax return e-file You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first. Free state tax return e-file Placed in Service Property is placed in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. Free state tax return e-file Even if you are not using the property, it is in service when it is ready and available for its specific use. Free state tax return e-file Example. Free state tax return e-file You bought a planter for use in your farm business. Free state tax return e-file The planter was delivered in December 2012 after harvest was over. Free state tax return e-file You begin to depreciate the planter for 2012 because it was ready and available for its specific use in 2012, even though it will not be used until the spring of 2013. Free state tax return e-file If your planter comes unassembled in December 2012 and is put together in February 2013, it is not placed in service until 2013. Free state tax return e-file You begin to depreciate it in 2013. Free state tax return e-file If your planter was delivered and assembled in February 2013 but not used until April 2013, it is placed in service in February 2013, because this is when the planter was ready for its specified use. Free state tax return e-file You begin to depreciate it in 2013. Free state tax return e-file Fruit or nut trees and vines. Free state tax return e-file   If you acquire an orchard, grove, or vineyard before the trees or vines have reached the income-producing stage, and they have a preproductive period of more than 2 years, you must capitalize the preproductive-period costs under the uniform capitalization rules (unless you elect not to use these rules). Free state tax return e-file See chapter 6 for information about the uniform capitalization rules. Free state tax return e-file Your depreciation begins when the trees and vines reach the income-producing stage (that is, when they bear fruit, nuts, or grapes in quantities sufficient to commercially warrant harvesting). Free state tax return e-file Immature livestock. Free state tax return e-file   Depreciation for livestock begins when the livestock reaches the age of maturity. Free state tax return e-file If you bought immature livestock for drafting purposes, depreciation begins when they can be worked. Free state tax return e-file If you bought immature livestock for dairy purposes, depreciation begins when they can be milked. Free state tax return e-file If you bought immature livestock for breeding purposes, depreciation begins when they can be bred. Free state tax return e-file Your basis for depreciation is your initial cost for the immature livestock. Free state tax return e-file Idle Property Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle. Free state tax return e-file For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine. Free state tax return e-file Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. Free state tax return e-file This happens when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. Free state tax return e-file Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. Free state tax return e-file You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. Free state tax return e-file You sell or exchange the property. Free state tax return e-file You convert the property to personal use. Free state tax return e-file You abandon the property. Free state tax return e-file You transfer the property to a supplies or scrap account. Free state tax return e-file The property is destroyed. Free state tax return e-file For information on abandonment of property, see chapter 8. Free state tax return e-file For information on destroyed property, see chapter 11 and Publication 547, Casualties, Disasters, and Thefts. Free state tax return e-file Can You Use MACRS To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most business and investment property placed in service after 1986. Free state tax return e-file MACRS is explained later under Figuring Depreciation Under MACRS . Free state tax return e-file You cannot use MACRS to depreciate the following property. Free state tax return e-file Property you placed in service before 1987. Free state tax return e-file Use the methods discussed in Publication 534. Free state tax return e-file Certain property owned or used in 1986. Free state tax return e-file See chapter 1 of Publication 946. Free state tax return e-file Intangible property. Free state tax return e-file Films, video tapes, and recordings. Free state tax return e-file Certain corporate or partnership property acquired in a nontaxable transfer. Free state tax return e-file Property you elected to exclude from MACRS. Free state tax return e-file For more information, see chapter 1 of Publication 946. Free state tax return e-file What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. Free state tax return e-file To determine basis, you need to know the cost or other basis of your property. Free state tax return e-file Cost or other basis. Free state tax return e-file   The basis of property you buy is usually its cost plus amounts you paid for items such as sales tax, freight charges, and installation and testing fees. Free state tax return e-file The cost includes the amount you pay in cash, debt obligations, other property, or services. Free state tax return e-file   There are times when you cannot use cost as basis. Free state tax return e-file In these situations, the fair market value (FMV) or the adjusted basis of the property may be used. Free state tax return e-file Adjusted basis. Free state tax return e-file   To find your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service. Free state tax return e-file Basis adjustment for depreciation allowed or allowable. Free state tax return e-file   After you place your property in service, you must reduce the basis of the property by the depreciation allowed or allowable, whichever is greater. Free state tax return e-file Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Free state tax return e-file Depreciation allowable is depreciation you are entitled to deduct. Free state tax return e-file   If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable. Free state tax return e-file   If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed). Free state tax return e-file   For more information, see chapter 6. Free state tax return e-file How Do You Treat Repairs and Improvements? You generally deduct the cost of repairing business property in the same way as any other business expense. Free state tax return e-file However, if a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it. Free state tax return e-file Treat improvements as separate depreciable property. Free state tax return e-file See chapter 1 of Publication 946 for more information. Free state tax return e-file Example. Free state tax return e-file You repair a small section on a corner of the roof of a barn that you rent to others. Free state tax return e-file You deduct the cost of the repair as a business expense. Free state tax return e-file However, if you replace the entire roof, the new roof is considered to be an improvement because it increases the value and lengthens the life for the property. Free state tax return e-file You depreciate the cost of the new roof. Free state tax return e-file Improvements to rented property. Free state tax return e-file   You can depreciate permanent improvements you make to business property you rent from someone else. Free state tax return e-file Do You Have To File Form 4562? Use Form 4562 to claim your deduction for depreciation and amortization. Free state tax return e-file You must complete and attach Form 4562 to your tax return if you are claiming any of the following. Free state tax return e-file A section 179 expense deduction for the current year or a section 179 carryover from a prior year. Free state tax return e-file Depreciation for property placed in service during the current year. Free state tax return e-file Depreciation on any vehicle or other listed property, regardless of when it was placed in service. Free state tax return e-file Amortization of costs that began in the current year. Free state tax return e-file For more information, see the Instructions for Form 4562. Free state tax return e-file How Do You Correct Depreciation Deductions? If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. Free state tax return e-file You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Free state tax return e-file You claimed the incorrect amount because of a mathematical error made in any year. Free state tax return e-file You claimed the incorrect amount because of a posting error made in any year, for example, omitting an asset from the depreciation schedule. Free state tax return e-file You have not adopted a method of accounting for the property placed in service by you in tax years ending after December 29, 2003. Free state tax return e-file You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Free state tax return e-file Note. Free state tax return e-file You have adopted a method of accounting if you used the same incorrect method of depreciation for two or more consecutively filed returns. Free state tax return e-file If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. Free state tax return e-file See the Instructions for Form 3115. Free state tax return e-file Section 179 Expense Deduction You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. Free state tax return e-file This is the section 179 expense deduction. Free state tax return e-file You can elect the section 179 expense deduction instead of recovering the cost by taking depreciation deductions. Free state tax return e-file This part of the chapter explains the rules for the section 179 expense deduction. Free state tax return e-file It explains what property qualifies for the deduction, what property does not qualify for the deduction, the limits that may apply, how to elect the deduction, and when you may have to recapture the deduction. Free state tax return e-file For more information, see chapter 2 of Publication 946. Free state tax return e-file What Property Qualifies? To qualify for the section 179 expense deduction, your property must meet all the following requirements. Free state tax return e-file It must be eligible property. Free state tax return e-file It must be acquired for business use. Free state tax return e-file It must have been acquired by purchase. Free state tax return e-file Eligible Property To qualify for the section 179 expense deduction, your property must be one of the following types of depreciable property. Free state tax return e-file Tangible personal property. Free state tax return e-file Qualified real property. Free state tax return e-file (Special rules apply to qualified real property that you elect to treat as qualified section 179 real property. Free state tax return e-file For more information, see chapter 2 of Publication 946 and section 179(f) of the Internal Revenue Code. Free state tax return e-file ) Other tangible property (except buildings and their structural components) used as: An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services; A research facility used in connection with any of the activities in (a) above; or A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities. Free state tax return e-file Single purpose agricultural (livestock) or horticultural structures. Free state tax return e-file Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. Free state tax return e-file Off-the-shelf computer software that is readily available for purchase by the general public, is subject to a nonexclusive lease, and has not been substantially modified. Free state tax return e-file Tangible personal property. Free state tax return e-file   Tangible personal property is any tangible property that is not real property. Free state tax return e-file It includes the following property. Free state tax return e-file Machinery and equipment. Free state tax return e-file Property contained in or attached to a building (other than structural components), such as milk tanks, automatic feeders, barn cleaners, and office equipment. Free state tax return e-file Gasoline storage tanks and pumps at retail service stations. Free state tax return e-file Livestock, including horses, cattle, hogs, sheep, goats, and mink and other fur-bearing animals. Free state tax return e-file Facility used for the bulk storage of fungible commodities. Free state tax return e-file   A facility used for the bulk storage of fungible commodities is qualifying property for purposes of the section 179 expense deduction if it is used in connection with any of the activities listed earlier in item (3)(a). Free state tax return e-file Bulk storage means the storage of a commodity in a large mass before it is used. Free state tax return e-file Grain bins. Free state tax return e-file   A grain bin is an example of a storage facility that is qualifying section 179 property. Free state tax return e-file It is a facility used in connection with the production of grain or livestock for the bulk storage of fungible commodities. Free state tax return e-file Single purpose agricultural or horticultural structures. Free state tax return e-file   A single purpose agricultural (livestock) or horticultural structure is qualifying property for purposes of the section 179 expense deduction. Free state tax return e-file Agricultural structure. Free state tax return e-file   A single purpose agricultural (livestock) structure is any building or enclosure specifically designed, constructed, and used for both the following reasons. Free state tax return e-file To house, raise, and feed a particular type of livestock and its produce. Free state tax return e-file To house the equipment, including any replacements, needed to house, raise, or feed the livestock. Free state tax return e-file For this purpose, livestock includes poultry. Free state tax return e-file   Single purpose structures are qualifying property if used, for example, to breed chickens or hogs, produce milk from dairy cattle, or produce feeder cattle or pigs, broiler chickens, or eggs. Free state tax return e-file The facility must include, as an integral part of the structure or enclosure, equipment necessary to house, raise, and feed the livestock. Free state tax return e-file Horticultural structure. Free state tax return e-file   A single purpose horticultural structure is either of the following. Free state tax return e-file A greenhouse specifically designed, constructed, and used for the commercial production of plants. Free state tax return e-file A structure specifically designed, constructed, and used for the commercial production of mushrooms. Free state tax return e-file Use of structure. Free state tax return e-file   A structure must be used only for the purpose that qualified it. Free state tax return e-file For example, a hog barn will not be qualifying property if you use it to house poultry. Free state tax return e-file Similarly, using part of your greenhouse to sell plants will make the greenhouse nonqualifying property. Free state tax return e-file   If a structure includes work space, the work space can be used only for the following activities. Free state tax return e-file Stocking, caring for, or collecting livestock or plants or their produce. Free state tax return e-file Maintaining the enclosure or structure. Free state tax return e-file Maintaining or replacing the equipment or stock enclosed or housed in the structure. Free state tax return e-file Property Acquired by Purchase To qualify for the section 179 expense deduction, your property must have been acquired by purchase. Free state tax return e-file For example, property acquired by gift or inheritance does not qualify. Free state tax return e-file Property acquired from a related person (that is, your spouse, ancestors, or lineal descendants) is not considered acquired by purchase. Free state tax return e-file Example. Free state tax return e-file Ken is a farmer. Free state tax return e-file He purchased two tractors, one from his brother and one from his father. Free state tax return e-file He placed both tractors in service in the same year he bought them. Free state tax return e-file The tractor purchased from his father does not qualify for the section 179 expense deduction because he is a related person (as defined above). Free state tax return e-file The tractor purchased from his brother does qualify for the deduction because Ken is not a related person (as defined above). Free state tax return e-file What Property Does Not Qualify? Land and improvements. Free state tax return e-file   Land and land improvements, do not qualify as section 179 property. Free state tax return e-file Land improvements include nonagricultural fences, swimming pools, paved parking areas, wharves, docks, bridges, and fences. Free state tax return e-file However, agricultural fences do qualify as section 179 property. Free state tax return e-file Similarly, field drainage tile also qualifies as section 179 property. Free state tax return e-file Excepted property. Free state tax return e-file   Even if the requirements explained in the preceding discussions are met, farmers cannot elect the section 179 expense deduction for the following property. Free state tax return e-file Certain property you lease to others (if you are a noncorporate lessor). Free state tax return e-file Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. Free state tax return e-file Property used by a tax-exempt organization (other than a tax-exempt farmers' cooperative) unless the property is used mainly in a taxable unrelated trade or business. Free state tax return e-file Property used by governmental units or foreign persons or entities (except property used under a lease with a term of less than 6 months). Free state tax return e-file How Much Can You Deduct? Your section 179 expense deduction is generally the cost of the qualifying property. Free state tax return e-file However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. Free state tax return e-file These limits apply to each taxpayer, not to each business. Free state tax return e-file However, see Married individuals under Dollar Limits , later. Free state tax return e-file See also the special rules for applying the limits for partnerships and S corporations under Partnerships and S Corporations , later. Free state tax return e-file If you deduct only part of the cost of qualifying property as a section 179 expense deduction, you can generally depreciate the cost you do not deduct. Free state tax return e-file Use Part I of Form 4562 to figure your section 179 expense deduction. Free state tax return e-file Partial business use. Free state tax return e-file   When you use property for business and nonbusiness purposes, you can elect the section 179 expense deduction only if you use it more than 50% for business in the year you place it in service. Free state tax return e-file If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. Free state tax return e-file Use the resulting business cost to figure your section 179 expense deduction. Free state tax return e-file Trade-in of other property. Free state tax return e-file   If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 expense deduction includes only the cash you paid. Free state tax return e-file For example, if you buy (for cash and a trade-in) a new tractor for use in your business, your cost for the section 179 expense deduction is the cash you paid. Free state tax return e-file It does not include the adjusted basis of the old tractor you trade for the new tractor. Free state tax return e-file Example. Free state tax return e-file J-Bar Farms traded two cultivators having a total adjusted basis of $6,800 for a new cultivator costing $13,200. Free state tax return e-file They received an $8,000 trade-in allowance for the old cultivators and paid $5,200 cash for the new cultivator. Free state tax return e-file J-Bar also traded a used pickup truck with an adjusted basis of $8,000 for a new pickup truck costing $35,000. Free state tax return e-file They received a $5,000 trade-in allowance and paid $30,000 cash for the new pickup truck. Free state tax return e-file Only the cash paid by J-Bar qualifies for the section 179 expense deduction. Free state tax return e-file J-Bar's business costs that qualify for a section 179 expense deduction are $35,200 ($5,200 + $30,000). Free state tax return e-file Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 is $500,000. Free state tax return e-file If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 expense deduction among the items in any way, as long as the total deduction is not more than $500,000. Free state tax return e-file Qualified real property that you elect to treat as section 179 property is limited to $250,000 of the maximum section 179 deduction of $500,000 for 2013. Free state tax return e-file You do not have to claim the full $500,000. Free state tax return e-file For specific information on the section 179 dollar limits, see chapter 2 of Publication 946. Free state tax return e-file Reduced dollar limit for cost exceeding $2 million. Free state tax return e-file   If the cost of your qualifying section 179 property placed in service in 2013 is over $2 million, you must reduce the dollar limit (but not below zero) by the amount of cost over $2 million. Free state tax return e-file If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 expense deduction and you cannot carry over the cost that is more than $2,500,000. Free state tax return e-file Example. Free state tax return e-file This year, James Smith placed in service machinery costing $2,050,000. Free state tax return e-file Because this cost is $50,000 more than $2 million, he must reduce his dollar limit to $450,000 ($500,000 − $50,000). Free state tax return e-file Limits for sport utility vehicles. Free state tax return e-file   The total amount you can elect to deduct for certain sport utility vehicles and certain other vehicles placed in service in 2013 is $25,000. Free state tax return e-file This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, and highways that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. Free state tax return e-file   For more information, see chapter 2 of Publication 946. Free state tax return e-file Limits for passenger automobiles. Free state tax return e-file   For a passenger automobile that is placed in service in 2013, the total section 179 and depreciation deduction is limited. Free state tax return e-file See Do the Passenger Automobile Limits Apply , later. Free state tax return e-file Married individuals. Free state tax return e-file   If you are married, how you figure your section 179 expense deduction depends on whether you file jointly or separately. Free state tax return e-file If you file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. Free state tax return e-file If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over $2 million. Free state tax return e-file You must allocate the dollar limit (after any reduction) equally between you, unless you both elect a different allocation. Free state tax return e-file If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. Free state tax return e-file Joint return after separate returns. Free state tax return e-file   If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return, the dollar limit on the joint return is the lesser of the following amounts. Free state tax return e-file The dollar limit (after reduction for any cost of section 179 property over $2 million). Free state tax return e-file The total cost of section 179 property you and your spouse elected to expense on your separate returns. Free state tax return e-file Business Income Limit The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. Free state tax return e-file Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business. Free state tax return e-file Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. Free state tax return e-file See Carryover of disallowed deduction , later. Free state tax return e-file Taxable income. Free state tax return e-file   In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. Free state tax return e-file In addition to net income or loss from a sole proprietorship, partnership, or S corporation, net income or loss derived from a trade or business also includes the following items. Free state tax return e-file Section 1231 gains (or losses) as discussed in chapter 9. Free state tax return e-file Interest from working capital of your trade or business. Free state tax return e-file Wages, salaries, tips, or other pay earned by you (or your spouse if you file a joint return) as an employee of any employer. Free state tax return e-file   In addition, figure taxable income without regard to any of the following. Free state tax return e-file The section 179 expense deduction. Free state tax return e-file The self-employment tax deduction. Free state tax return e-file Any net operating loss carryback or carryforward. Free state tax return e-file Any unreimbursed employee business expenses. Free state tax return e-file Two different taxable income limits. Free state tax return e-file   In addition to the business income limit for your section 179 expense deduction, you may have a taxable income limit for some other deduction (for example, charitable contributions). Free state tax return e-file You may have to figure the limit for this other deduction taking into account the section 179 expense deduction. Free state tax return e-file If so, complete the following steps. Free state tax return e-file Step Action 1 Figure taxable income without the section 179 expense deduction or the other deduction. Free state tax return e-file 2 Figure a hypothetical section 179 expense deduction using the taxable income figured in Step 1. Free state tax return e-file 3 Subtract the hypothetical section 179 expense deduction figured in Step 2 from the taxable income figured in Step 1. Free state tax return e-file 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. Free state tax return e-file 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in  Step 1. Free state tax return e-file 6 Figure your actual section 179 expense deduction using the taxable income figured in Step 5. Free state tax return e-file 7 Subtract your actual section 179 expense deduction figured in Step 6 from the taxable income figured in Step 1. Free state tax return e-file 8 Figure your actual other deduction using the taxable income figured in Step 7. Free state tax return e-file Example. Free state tax return e-file On February 1, 2013, the XYZ farm corporation purchased and placed in service qualifying section 179 property that cost $500,000. Free state tax return e-file It elects to expense the entire $500,000 cost under section 179. Free state tax return e-file In June, the corporation gave a charitable contribution of $10,000. Free state tax return e-file A corporation's limit on charitable contributions is figured after subtracting any section 179 expense deduction. Free state tax return e-file The business income limit for the section 179 expense deduction is figured after subtracting any allowable charitable contributions. Free state tax return e-file XYZ's taxable income figured without the section 179 expense deduction or the deduction for charitable contributions is $520,000. Free state tax return e-file XYZ figures its section 179 expense deduction and its deduction for charitable contributions as follows. Free state tax return e-file Step 1. Free state tax return e-file Taxable income figured without either deduction is $520,000. Free state tax return e-file Step 2. Free state tax return e-file Using $520,000 as taxable income, XYZ's hypothetical section 179 expense deduction is $500,000. Free state tax return e-file Step 3. Free state tax return e-file $20,000 ($520,000 − $500,000). Free state tax return e-file Step 4. Free state tax return e-file Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. Free state tax return e-file Step 5. Free state tax return e-file $518,000 ($520,000 − $2,000). Free state tax return e-file Step 6. Free state tax return e-file Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 expense deduction. Free state tax return e-file Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 expense deduction. Free state tax return e-file Step 7. Free state tax return e-file $20,000 ($520,000 − $500,000). Free state tax return e-file Step 8. Free state tax return e-file Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. Free state tax return e-file Carryover of disallowed deduction. Free state tax return e-file   You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense but were unable to because of the business income limit. Free state tax return e-file   The amount you carry over is used in determining your section 179 expense deduction in the next year. Free state tax return e-file However, it is subject to the limits in that year. Free state tax return e-file If you place more than one property in service in a year, you can select the properties for which all or a part of the cost will be carried forward. Free state tax return e-file Your selections must be shown in your books and records. Free state tax return e-file Example. Free state tax return e-file Last year, Joyce Jones placed in service a machine that cost $8,000 and elected to deduct all $8,000 under section 179. Free state tax return e-file The taxable income from her business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) was $6,000. Free state tax return e-file Her section 179 expense deduction was limited to $6,000. Free state tax return e-file The $2,000 cost that was not allowed as a section 179 expense deduction (because of the business income limit) is carried to this year. Free state tax return e-file This year, Joyce placed another machine in service that cost $9,000. Free state tax return e-file Her taxable income from business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) is $10,000. Free state tax return e-file Joyce can deduct the full cost of the machine ($9,000) but only $1,000 of the carryover from last year because of the business income limit. Free state tax return e-file She can carry over the balance of $1,000 to next year. Free state tax return e-file Partnerships and S Corporations The section 179 expense deduction limits apply both to the partnership or S corporation and to each partner or shareholder. Free state tax return e-file The partnership or S corporation determines its section 179 expense deduction subject to the limits. Free state tax return e-file It then allocates the deduction among its partners or shareholders. Free state tax return e-file If you are a partner in a partnership or shareholder of an S corporation, you add the amount allocated from the partnership or S corporation to any section 179 costs not related to the partnership or S corporation and then apply the dollar limit to this total. Free state tax return e-file To determine any reduction in the dollar limit for costs over $560,000, you do not include any of the cost of section 179 property placed in service by the partnership or S corporation. Free state tax return e-file After you apply the dollar limit, you apply the business income limit to any remaining section 179 costs. Free state tax return e-file For more information, see chapter 2 of Publication 946. Free state tax return e-file Example. Free state tax return e-file In 2013, Partnership P placed in service section 179 property with a total cost of $2,160,000. Free state tax return e-file P must reduce its dollar limit by $160,000 ($2,160,000 − $2,000,000). Free state tax return e-file Its maximum section 179 expense deduction is $340,000 ($500,000 − $160,000), and it elects to expense that amount. Free state tax return e-file Because P's taxable income from the active conduct of all its trades or businesses for the year was $400,000, it can deduct the full $340,000. Free state tax return e-file P allocates $100,000 of its section 179 expense deduction and $110,000 of its taxable income to John, one of its partners. Free state tax return e-file John also conducts a business as a sole proprietor and in 2013, placed in service in that business, section 179 property costing $28,000. Free state tax return e-file John's taxable income from that business was $10,000. Free state tax return e-file In addition to the $100,000 allocated from P, he elects to expense the $28,000 of his sole proprietorship's section 179 costs. Free state tax return e-file However, John's deduction is limited to his business taxable income of $120,000 ($110,000 from P plus $10,000 from his sole proprietorship). Free state tax return e-file He carries over $8,000 ($128,000 − $120,000) of the elected section 179 costs to 2014. Free state tax return e-file How Do You Elect the Deduction? You elect to take the section 179 expense deduction by completing Part I of Form 4562. Free state tax return e-file If you elect the deduction for listed property, complete Part V of  Form 4562 before completing Part I. Free state tax return e-file   File Form 4562 with either of the following: Your original tax return (whether or not you filed it timely), or An amended return filed within the time prescribed by law. Free state tax return e-file An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. Free state tax return e-file The amended return must also include any resulting adjustments to taxable income. Free state tax return e-file Revoking an election. Free state tax return e-file   An election (or any specification made in the election) to take a section 179 expense deduction for 2013 can be revoked without IRS approval by filing an amended return. Free state tax return e-file The amended return must be filed within the time prescribed by law. Free state tax return e-file The amended return must also include any resulting adjustments to taxable income (for example, allowable depreciation in that tax year for the item of section 179 property for which the election pertains. Free state tax return e-file ) Once made, the revocation is irrevocable. Free state tax return e-file When Must You Recapture the Deduction? You may have to recapture the section 179 expense deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. Free state tax return e-file In the year the business use drops to 50% or less, you include the recapture amount as ordinary income. Free state tax return e-file You also increase the basis of the property by the recapture amount. Free state tax return e-file Recovery periods for property are discussed later. Free state tax return e-file If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. Free state tax return e-file Instead, use the rules for recapturing depreciation explained in  chapter 9 under Section 1245 Property. Free state tax return e-file   If the property is listed property, do not figure the recapture amount under the rules explained in this discussion when the percentage of business use drops to 50% or less. Free state tax return e-file Instead, use the rules for recapturing depreciation explained in chapter 5 of Publication 946 under Recapture of Excess Depreciation. Free state tax return e-file Figuring the recapture amount. Free state tax return e-file   To figure the amount to recapture, take the following steps. Free state tax return e-file Figure the allowable depreciation for the section 179 expense deduction you claimed. Free state tax return e-file Begin with the year you placed the property in service and include the year of recapture. Free state tax return e-file Subtract the depreciation figured in (1) from the section 179 expense deduction you actually claimed. Free state tax return e-file The result is the amount you must recapture. Free state tax return e-file Example. Free state tax return e-file In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. Free state tax return e-file The property is not listed property. Free state tax return e-file He elected a $5,000 section 179 expense deduction for the property and also elected not to claim a special depreciation allowance. Free state tax return e-file He used the property only for business in 2011 and 2012. Free state tax return e-file During 2013, he used the property 40% for business and 60% for personal use. Free state tax return e-file He figures his recapture amount as follows. Free state tax return e-file Section 179 expense deduction claimed (2011) $5,000 Minus: Allowable depreciation (instead of section 179 expense deduction):   2011 $1,250   2012 1,875   2013 ($1,250 × 40% (business)) 500 3,625 2013 — Recapture amount $1,375     Paul must include $1,375 in income for 2013. Free state tax return e-file Where to report recapture. Free state tax return e-file   Report any recapture of the section 179 expense deduction as ordinary income in Part IV of Form 4797 and include it in income on Schedule F (Form 1040). Free state tax return e-file Recapture for qualified section 179 GO Zone property. Free state tax return e-file   If any qualified section 179 GO Zone property ceases to be used in the GO Zone in a later year, you must recapture the benefit of the increased section 179 expense deduction as “other income. Free state tax return e-file ” Claiming the Special Depreciation Allowance For qualified property (defined below) placed in service in 2013, you can take an additional 50% special depreciation allowance. Free state tax return e-file The allowance is an additional deduction you can take after any section 179 expense deduction and before you figure regular depreciation under MACRS. Free state tax return e-file Figure the special depreciation allowance by multiplying the depreciable basis of the qualified property by 50%. Free state tax return e-file What is Qualified Property? For farmers, qualified property generally is certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Free state tax return e-file Certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Free state tax return e-file   Certain qualified property (defined below) acquired after December 31, 2007, and before January 1, 2014, is eligible for a 50% special depreciation allowance. Free state tax return e-file   Qualified property includes the following: Tangible property depreciated under the Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less. Free state tax return e-file Water utility property. Free state tax return e-file Off-the-shelf computer software. Free state tax return e-file Qualified leasehold improvement property. Free state tax return e-file   Qualified property must also meet all of the following tests: You must have acquired qualified property by purchase after December 31, 2007. Free state tax return e-file If a binding contract to acquire the property existed before January 1, 2008, the property does not qualify. Free state tax return e-file Qualified property must be placed in service after December 31, 2007 and placed in service before January 1, 2014 (before January 1, 2015 for certain property with a long production period and for certain aircraft). Free state tax return e-file The original use of the property must begin with you after December 31, 2007. Free state tax return e-file For more information, see chapter 3 of Publication 946. Free state tax return e-file How Can You Elect Not To Claim the Allowance? You can elect, for any class of property, not to deduct the special depreciation allowance for all property in such class placed in service during the tax year. Free state tax return e-file To make the election, attach a statement to your return indicating the class of property for which you are making the election. Free state tax return e-file Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. Free state tax return e-file However, if you timely filed your return for the year without making the election, you still can make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). Free state tax return e-file Attach the election statement to the amended return. Free state tax return e-file On the amended return, write “Filed pursuant to section 301. Free state tax return e-file 9100-2. Free state tax return e-file ” Once made, the election may not be revoked without IRS consent. Free state tax return e-file If you elect not to have the special depreciation allowance apply, the property may be subject to an alternative minimum tax adjustment for depreciation. Free state tax return e-file When Must You Recapture an Allowance When you dispose of property for which you claimed a special depreciation allowance, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the special depreciation allowance previously allowed or allowable. Free state tax return e-file For more information, see chapter 3 of Publication 946. Free state tax return e-file Figuring Depreciation Under MACRS The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. Free state tax return e-file MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Free state tax return e-file Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. Free state tax return e-file To be sure you can use MACRS to figure depreciation for your property, see Can You Use MACRS To Depreciate Your Property, earlier. Free state tax return e-file This part explains how to determine which MACRS depreciation system applies to your property. Free state tax return e-file It also discusses the following information that you need to know before you can figure depreciation under MACRS. Free state tax return e-file Property's recovery class. Free state tax return e-file Placed-in-service date. Free state tax return e-file Basis for depreciation. Free state tax return e-file Recovery period. Free state tax return e-file Convention. Free state tax return e-file Depreciation method. Free state tax return e-file Finally, this part explains how to use this information to figure your depreciation deduction. Free state tax return e-file Which Depreciation System (GDS or ADS) Applies? Your use of either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to depreciate property under MACRS determines what depreciation method and recovery period you use. Free state tax return e-file You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Free state tax return e-file Required use of ADS. Free state tax return e-file   You must use ADS for the following property. Free state tax return e-file All property used predominantly in a farming business and placed in service in any tax year during which an election not to apply the uniform capitalization rules to certain farming costs is in effect. Free state tax return e-file Listed property used 50% or less in a qualified business use. Free state tax return e-file See Additional Rules for Listed Property , later. Free state tax return e-file Any tax-exempt use property. Free state tax return e-file Any tax-exempt bond-financed property. Free state tax return e-file Any property imported from a foreign country for which an Executive Order is in effect because the country maintains trade restrictions or engages in other discriminatory acts. Free state tax return e-file Any tangible property used predominantly outside the United States during the year. Free state tax return e-file If you are required to use ADS to depreciate your property, you cannot claim the special depreciation allowance. Free state tax return e-file Electing ADS. Free state tax return e-file   Although your property may qualify for GDS, you can elect to use ADS. Free state tax return e-file The election generally must cover all property in the same property class you placed in service during the year. Free state tax return e-file However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Free state tax return e-file Once you make this election, you can never revoke it. Free state tax return e-file   You make the election by completing line 20 in Part III of Form 4562. Free state tax return e-file Which Property Class Applies Under GDS? The following is a list of the nine property classes under GDS. Free state tax return e-file 3-year property. Free state tax return e-file 5-year property. Free state tax return e-file 7-year property. Free state tax return e-file 10-year property. Free state tax return e-file 15-year property. Free state tax return e-file 20-year property. Free state tax return e-file 25-year property. Free state tax return e-file Residential rental property. Free state tax return e-file Nonresidential real property. Free state tax return e-file See Which Property Class Applies Under GDS in chapter 4 of Publication 946 for examples of the types of property included in each class. Free state tax return e-file What Is the Placed-in-Service Date? You begin to claim depreciation when your property is placed in service for use either in a trade or business or for the production of income. Free state tax return e-file The placed-in-service date for your property is the date the property is ready and available for a specific use. Free state tax return e-file It is therefore not necessarily the date it is first used. Free state tax return e-file If you converted property held for personal use to use in a trade or business or for the production of income, treat the property as being placed in service on the conversion date. Free state tax return e-file See Placed in Service under When Does Depreciation Begin and End , earlier, for examples illustrating when property is placed in service. Free state tax return e-file What Is the Basis for Depreciation? The basis for depreciation of MACRS property is the property's cost or other basis multiplied by the percentage of business/investment use. Free state tax return e-file Reduce that amount by any credits and deductions allocable to the property. Free state tax return e-file The following are examples of some of the credits and deductions that reduce basis. Free state tax return e-file Any deduction for section 179 property. Free state tax return e-file Any deduction for removal of barriers to the disabled and the elderly. Free state tax return e-file Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. Free state tax return e-file Any special depreciation allowance. Free state tax return e-file Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. Free state tax return e-file For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property , earlier. Free state tax return e-file Also, see chapter 6. Free state tax return e-file For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. Free state tax return e-file Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. Free state tax return e-file It is determined based on the depreciation system (GDS or ADS) used. Free state tax return e-file See Table 7-1 for recovery periods under both GDS and ADS for some commonly used assets. Free state tax return e-file For a complete list of recovery periods, see the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. Free state tax return e-file House trailers for farm laborers. Free state tax return e-file   To depreciate a house trailer you supply as housing for those who work on your farm, use one of the following recovery periods if the house trailer is mobile (it has wheels and a history of movement). Free state tax return e-file A 7-year recovery period under GDS. Free state tax return e-file A 10-year recovery period under ADS. Free state tax return e-file   However, if the house trailer is not mobile (its wheels have been removed and permanent utilities and pipes attached to it), use one of the following recovery periods. Free state tax return e-file A 20-year recovery period under GDS. Free state tax return e-file A 25-year recovery period under ADS. Free state tax return e-file Water wells. Free state tax return e-file   Water wells used to provide water for raising poultry and livestock are land improvements. Free state tax return e-file If they are depreciable, use one of the following recovery periods. Free state tax return e-file A 15-year recovery period under GDS. Free state tax return e-file A 20-year recovery period under ADS. Free state tax return e-file   The types of water wells that can be depreciated were discussed earlier in Irrigation systems and water wells under Property Having a Determinable Useful Life . Free state tax return e-file Table 7-1. Free state tax return e-file Farm Property Recovery Periods   Recovery Period in Years Assets GDS ADS Agricultural structures (single purpose) 10 15 Automobiles 5 5 Calculators and copiers 5 6 Cattle (dairy or breeding) 5 7 Communication equipment1 7 10 Computer and peripheral equipment 5 5 Drainage facilities 15 20 Farm buildings2 20 25 Farm machinery and equipment 7 10 Fences (agricultural) 7 10 Goats and sheep (breeding) 5 5 Grain bin 7 10 Hogs (breeding) 3 3 Horses (age when placed in service)     Breeding and working (12 years or less) 7 10 Breeding and working (more than 12 years) 3 10 Racing horses 3 12 Horticultural structures (single purpose) 10 15 Logging machinery and equipment3 5 6 Nonresidential real property 394 40 Office furniture, fixtures, and equipment (not calculators, copiers, or typewriters) 7 10 Paved lots 15 20 Residential rental property 27. Free state tax return e-file 5 40 Tractor units (over-the-road) 3 4 Trees or vines bearing fruit or nuts 10 20 Truck (heavy duty, unloaded weight 13,000 lbs. Free state tax return e-file or more) 5 6 Truck (actual weight less than 13,000 lbs) 5 5 Water wells 15 20 1 Not including communication equipment listed in other classes. Free state tax return e-file 2 Not including single purpose agricultural or horticultural structures. Free state tax return e-file 3 Used by logging and sawmill operators for cutting of timber. Free state tax return e-file 4 For property placed in service after May 12, 1993; for property placed in service before May 13, 1993,  the recovery period is 31. Free state tax return e-file 5 years. Free state tax return e-file Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. Free state tax return e-file The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property. Free state tax return e-file Use one of the following conventions. Free state tax return e-file The half-year convention. Free state tax return e-file The mid-month convention. Free state tax return e-file The mid-quarter convention. Free state tax return e-file For a detailed explanation of each convention, see Which Convention Applies in chapter 4 of Publication 946. Free state tax return e-file Also, see the Instructions for Form 4562. Free state tax return e-file Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. Free state tax return e-file The 200% declining balance method over a GDS recovery period. Free state tax return e-file The 150% declining balance method over a GDS recovery period. Free state tax return e-file The straight line method over a GDS recovery period. Free state tax return e-file The straight line method over an ADS recovery period. Free state tax return e-file Depreciation Table. Free state tax return e-file   The following table lists the types of property you can depreciate under each method. Free state tax return e-file The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. Free state tax return e-file Depreciation Table System/Method   Type of Property GDS using  150% DB • All property used in a farming business (except real property)   • All 15- and 20-year property   • Nonfarm 3-, 5-, 7-, and 10-year property1 GDS using SL • Nonresidential real property   • Residential rental property   • Trees or vines bearing fruit or nuts   • All 3-, 5-, 7-, 10-, 15-, and 20-year property1 ADS using SL • Property used predomi- nantly outside the United States   • Farm property used when an election not to apply the uniform capitalization rules is in effect   • Tax-exempt property   • Tax-exempt bond-financed property   • Imported property2   • Any property for which you elect to use this method1 GDS using  200% DB • Nonfarm 3-, 5-, 7-, and 10-year property 1Elective method 2See section 168(g)(6) of the Internal Revenue  Code Property used in farming business. Free state tax return e-file   For personal property placed in service after 1988 in a farming business, you must use the 150% declining balance method over a GDS recovery period or you can elect one of the following methods. Free state tax return e-file The straight line method over a GDS recovery period. Free state tax return e-file The straight line method over an ADS recovery period. Free state tax return e-file For property placed in service before 1999, you could have elected to use the 150% declining balance method using the ADS recovery periods for certain property classes. Free state tax return e-file If you made this election, continue to use the same method and recovery period for that property. Free state tax return e-file Real property. Free state tax return e-file   You can depreciate real property using the straight line method under either GDS or ADS. Free state tax return e-file Switching to straight line. Free state tax return e-file   If you use a declining balance method, you switch to the straight line method in the year it provides an equal or greater deduction. Free state tax return e-file If you use the MACRS percentage tables, discussed later under How Is the Depreciation Deduction Figured , you do not need to determine in which year your deduction is greater using the straight line method. Free state tax return e-file The tables have the switch to the straight line method built into their rates. Free state tax return e-file Fruit or nut trees and vines. Free state tax return e-file   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a 10-year recovery period. Free state tax return e-file ADS required for some farmers. Free state tax return e-file   If you elect not to apply the uniform capitalization rules to any plant shown in Table 6-1 of chapter 6 and produced in your farming business, you must use ADS for all property you place in service in any year the election is in effect. Free state tax return e-file See chapter 6 for a discussion of the application of the uniform capitalization rules to farm property. Free state tax return e-file Electing a different method. Free state tax return e-file   As shown in the Depreciation Table , you can elect a different method for depreciation for certain types of property. Free state tax return e-file You must make the election by the due date of the return (including extensions) for the year you placed the property in service. Free state tax return e-file However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). Free state tax return e-file Attach the election to the amended return and write “Filed pursuant to section 301. Free state tax return e-file 9100-2” on the election statement. Free state tax return e-file File the amended return at the same address you filed the original return. Free state tax return e-file Once you make the election, you cannot change it. Free state tax return e-file    If you elect to use a different method for one item in a property class, you must apply the same method to all property in that class placed in service during the year of the election. Free state tax return e-file However, you can make the election on a property-by-property basis for residential rental and nonresidential real property. Free state tax return e-file Straight line election. Free state tax return e-file   Instead of using the declining balance method, you can elect to use the straight line method over the GDS recovery period. Free state tax return e-file Make the election by entering “S/L” under column (f) in Part III of Form 4562. Free state tax return e-file ADS election. Free state tax return e-file   As explained earlier under Which Depreciation System (GDS or ADS) Applies , you can elect to use ADS even though your property may come under GDS. Free state tax return e-file ADS uses the straight line method of depreciation over the ADS recovery periods, which are generally longer than the GDS recovery periods. Free state tax return e-file The ADS recovery periods for many assets used in the business of farming are listed in Table 7–1. Free state tax return e-file Additional ADS recovery periods for other classes of property may be found in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. Free state tax return e-file How Is the Depreciation Deduction Figured? To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed-in-service date, basis amount, recovery period, convention, and depreciation method that applies to your property. Free state tax return e-file Then you are ready to figure your depreciation deduction. Free state tax return e-file You can figure it in one of two ways. Free state tax return e-file You can use the percentage tables provided by the IRS. Free state tax return e-file You can figure your own deduction without using the tables. Free state tax return e-file Figuring your own MACRS deduction will generally result in a slightly different amount than using the tables. Free state tax return e-file Using the MACRS Percentage Tables To help you figure your deduction under MACRS, the IRS has established percentage tables that incorporate the applicable convention and depreciation method. Free state tax return e-file These percentage tables are in Appendix A of Publication 946. Free state tax return e-file Rules for using the tables. Free state tax return e-file   The following rules cover the use of the percentage tables. Free state tax return e-file You must apply the rates in the percentage tables to your property's unadjusted basis. Free state tax return e-file Unadjusted basis is the same basis amount you would use to figure gain on a sale but figured without reducing your original basis by any MACRS depreciation taken in earlier years. Free state tax return e-file You cannot use the percentage tables for a short tax year. Free state tax return e-file See chapter 4 of Publication 946 for information on how to figure the deduction for a short tax year. Free state tax return e-file You generally must continue to use them for the entire recovery period of the property. Free state tax return e-file You must stop using the tables if you adjust the basis of the property for any reason other than— Depreciation allowed or allowable, or An addition or improvement to the property, which is depreciated as a separate property. Free state tax return e-file Basis adjustment due to casualty loss. Free state tax return e-file   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. Free state tax return e-file For the year of the adjustment and the remaining recovery period, you must figure the depreciation yourself using the property's adjusted basis at the end of the year. Free state tax return e-file See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946. Free state tax return e-file Figuring depreciation using the 150% DB method and half-year convention. Free state tax return e-file    Table 7-2 has the percentages for 3-, 5-, 7-, and 20-year property. Free state tax return e-file The percentages are based on the 150% declining balance method with a change to the straight line method. Free state tax return e-file This table covers only the half-year convention and the first 8 years for 20-year property. Free state tax return e-file See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. Free state tax return e-file   The following examples show how to figure depreciation under MACRS using the percentages in Table 7-2 . Free state tax return e-file Example 1. Free state tax return e-file During the year, you bought an item of 7-year property for $10,000 and placed it in service. Free state tax return e-file You do not elect a section 179 expense deduction for this property. Free state tax return e-file In addition, the property is not qualified property for purposes of the special depreciation allowance. Free state tax return e-file The unadjusted basis of the property is $10,000. Free state tax return e-file You use the percentages in Table 7-2 to figure your deduction. Free state tax return e-file Since this is 7-year property, you multiply $10,000 by 10. Free state tax return e-file 71% to get this year's depreciation of $1,071. Free state tax return e-file For next year, your depreciation will be $1,913 ($10,000 × 19. Free state tax return e-file 13%). Free state tax return e-file Example 2. Free state tax return e-file You had a barn constructed on your farm at a cost of $20,000. Free state tax return e-file You placed the barn in service this year. Free state tax return e-file You elect not to claim the special depreciation allowance. Free state tax return e-file The barn is 20-year property and you use the table percentages to figure your deduction. Free state tax return e-file You figure this year's depreciation by multiplying $20,000 (unadjusted basis) by 3. Free state tax return e-file 75% to get $750. Free state tax return e-file For next year, your depreciation will be $1,443. Free state tax return e-file 80 ($20,000 × 7. Free state tax return e-file 219%). Free state tax return e-file Table 7-2. Free state tax return e-file 150% Declining Balance Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 25. Free state tax return e-file 0 % 15. Free state tax return e-file 00 % 10. Free state tax return e-file 71 % 3. Free state tax return e-file 750 % 2 37. Free state tax return e-file 5   25. Free state tax return e-file 50   19. Free state tax return e-file 13   7. Free state tax return e-file 219   3 25. Free state tax return e-file 0   17. Free state tax return e-file 85   15. Free state tax return e-file 03   6. Free state tax return e-file 677   4 12. Free state tax return e-file 5   16. Free state tax return e-file 66   12. Free state tax return e-file 25   6. Free state tax return e-file 177   5     16. Free state tax return e-file 66   12. Free state tax return e-file 25   5. Free state tax return e-file 713   6     8. Free state tax return e-file 33   12. Free state tax return e-file 25   5. Free state tax return e-file 285   7         12. Free state tax return e-file 25   4. Free state tax return e-file 888   8         6. Free state tax return e-file 13   4. Free state tax return e-file 522   Figuring depreciation using the straight line method and half-year convention. Free state tax return e-file   The following table has the straight line percentages for 3-, 5-, 7-, and 20-year property using the half-year convention. Free state tax return e-file The table covers only the first 8 years for 20-year property. Free state tax return e-file See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. Free state tax return e-file Table 7-3. Free state tax return e-file Straight Line Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 16. Free state tax return e-file 67 % 10 % 7. Free state tax return e-file 14 % 2. Free state tax return e-file 5 % 2 33. Free state tax return e-file 33   20   14. Free state tax return e-file 29   5. Free state tax return e-file 0   3 33. Free state tax return e-file 33   20   14. Free state tax return e-file 29   5. Free state tax return e-file 0   4 16. Free state tax return e-file 67   20   14. Free state tax return e-file 28   5. Free state tax return e-file 0   5     20   14. Free state tax return e-file 29   5. Free state tax return e-file 0   6     10   14. Free state tax return e-file 28   5. Free state tax return e-file 0   7         14. Free state tax return e-file 29   5. Free state tax return e-file 0   8         7. Free state tax return e-file 14   5. Free state tax return e-file 0