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H&r block free online 32. H&r block free online   Child and Dependent Care Credit Table of Contents Reminders Introduction Useful Items - You may want to see: Tests To Claim the CreditQualifying Person Test Earned Income Test Work-Related Expense Test Joint Return Test Provider Identification Test How To Figure the CreditFiguring Total Work-Related Expenses Earned Income Limit Dollar Limit Amount of Credit How To Claim the CreditTax credit not refundable. H&r block free online Employment Taxes for Household Employers Reminders Taxpayer identification number needed for each qualifying person. H&r block free online  You must include on line 2 of Form 2441 the name and taxpayer identification number (generally the social security number) of each qualifying person. H&r block free online See Taxpayer identification number under Qualifying Person Test, later. H&r block free online You may have to pay employment taxes. H&r block free online  If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer who has to pay employment taxes. H&r block free online Usually, you are not a household employer if the person who cares for your dependent or spouse does so at his or her home or place of business. H&r block free online See Employment Taxes for Household Employers , later. H&r block free online Introduction This chapter discusses the credit for child and dependent care expenses and covers the following topics. H&r block free online Tests you must meet to claim the credit. H&r block free online How to figure the credit. H&r block free online How to claim the credit. H&r block free online Employment taxes you may have to pay as a household employer. H&r block free online You may be able to claim the credit if you pay someone to care for your dependent who is under age 13 or for your spouse or dependent who is not able to care for himself or herself. H&r block free online The credit can be up to 35% of your expenses. H&r block free online To qualify, you must pay these expenses so you can work or look for work. H&r block free online This credit should not be confused with the child tax credit discussed in chapter 34. H&r block free online Dependent care benefits. H&r block free online   If you received any dependent care benefits from your employer during the year, you may be able to exclude from your income all or part of them. H&r block free online You must complete Form 2441, Part III, before you can figure the amount of your credit. H&r block free online See Dependent Care Benefits under How To Figure the Credit, later. H&r block free online Useful Items - You may want to see: Publication 501 Exemptions, Standard Deduction, and Filing Information 503 Child and Dependent Care Expenses 926 Household Employer's Tax Guide Form (and Instructions) 2441 Child and Dependent Care Expenses Schedule H (Form 1040) Household Employment Taxes W-7 Application for IRS Individual Taxpayer Identification Number W-10 Dependent Care Provider's Identification and Certification Tests To Claim the Credit To be able to claim the credit for child and dependent care expenses, you must file Form 1040 or Form 1040A, not Form 1040EZ, and meet all the following tests. H&r block free online The care must be for one or more qualifying persons who are identified on Form 2441. H&r block free online (See Qualifying Person Test . H&r block free online ) You (and your spouse if filing jointly) must have earned income during the year. H&r block free online (However, see Rule for student-spouse or spouse not able to care for self under Earned Income Test, later. H&r block free online ) You must pay child and dependent care expenses so you (and your spouse if filing jointly) can work or look for work. H&r block free online (See Work-Related Expense Test , later. H&r block free online ) You must make payments for child and dependent care to someone you (and your spouse) cannot claim as a dependent. H&r block free online If you make payments to your child, he or she cannot be your dependent and must be age 19 or older by the end of the year. H&r block free online You cannot make payments to: Your spouse, or The parent of your qualifying person if your qualifying person is your child and under age 13. H&r block free online (See Payments to Relatives or Dependents under Work-Related Expense Test, later. H&r block free online ) Your filing status may be single, head of household, or qualifying widow(er) with dependent child. H&r block free online If you are married, you must file a joint return, unless an exception applies to you. H&r block free online (See Joint Return Test , later. H&r block free online ) You must identify the care provider on your tax return. H&r block free online (See Provider Identification Test , later. H&r block free online ) If you exclude or deduct dependent care benefits provided by a dependent care benefits plan, the total amount you exclude or deduct must be less than the dollar limit for qualifying expenses (generally, $3,000 if one qualifying person was cared for or $6,000 if two or more qualifying persons were cared for). H&r block free online (If two or more qualifying persons were cared for, the amount you exclude or deduct will always be less than the dollar limit, since the total amount you can exclude or deduct is limited to $5,000. H&r block free online See Reduced Dollar Limit under How To Figure the Credit, later. H&r block free online ) These tests are presented in Figure 32-A and are also explained in detail in this chapter. H&r block free online Figure 32-A. H&r block free online Can You Claim the Credit? Please click here for the text description of the image. H&r block free online Figure 32-A Can You Claim the Credit? Qualifying Person Test Your child and dependent care expenses must be for the care of one or more qualifying persons. H&r block free online A qualifying person is: Your qualifying child who is your dependent and who was under age 13 when the care was provided (but see Child of divorced or separated parents or parents living apart, later), Your spouse who was not physically or mentally able to care for himself or herself and lived with you for more than half the year, or A person who was not physically or mentally able to care for himself or herself, lived with you for more than half the year, and either: Was your dependent, or Would have been your dependent except that: He or she received gross income of $3,900 or more, He or she filed a joint return, or You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2013 return. H&r block free online Dependent defined. H&r block free online   A dependent is a person, other than you or your spouse, for whom you can claim an exemption. H&r block free online To be your dependent, a person must be your qualifying child (or your qualifying relative). H&r block free online Qualifying child. H&r block free online   To be your qualifying child, a child must live with you for more than half the year and meet other requirements. H&r block free online More information. H&r block free online   For more information about who is a dependent or a qualifying child, see chapter 3. H&r block free online Physically or mentally not able to care for oneself. H&r block free online   Persons who cannot dress, clean, or feed themselves because of physical or mental problems are considered not able to care for themselves. H&r block free online Also, persons who must have constant attention to prevent them from injuring themselves or others are considered not able to care for themselves. H&r block free online Person qualifying for part of year. H&r block free online   You determine a person's qualifying status each day. H&r block free online For example, if the person for whom you pay child and dependent care expenses no longer qualifies on September 16, count only those expenses through September 15. H&r block free online Also see Yearly limit under Dollar Limit, later. H&r block free online Birth or death of otherwise qualifying person. H&r block free online   In determining whether a person is a qualifying person, a person who was born or died in 2013 is treated as having lived with you for more than half of 2013 if your home was the person's home for more than half the time he or she was alive in 2013. H&r block free online Taxpayer identification number. H&r block free online   You must include on your return the name and taxpayer identification number (generally the social security number) of the qualifying person(s). H&r block free online If the correct information is not shown, the credit may be reduced or disallowed. H&r block free online Individual taxpayer identification number (ITIN) for aliens. H&r block free online   If your qualifying person is a nonresident or resident alien who does not have and cannot get a social security number (SSN), use that person's ITIN. H&r block free online The ITIN is entered wherever an SSN is requested on a tax return. H&r block free online To apply for an ITIN, see Form W-7. H&r block free online   An ITIN is for tax use only. H&r block free online It does not entitle the holder to social security benefits or change the holder's employment or immigration status under U. H&r block free online S. H&r block free online law. H&r block free online Adoption taxpayer identification number (ATIN). H&r block free online   If your qualifying person is a child who was placed in your home for adoption and for whom you do not have an SSN, you must get an ATIN for the child. H&r block free online File Form W-7A, Application for Taxpayer Identification Number for Pending U. H&r block free online S. H&r block free online Adoptions. H&r block free online Child of divorced or separated parents or parents living apart. H&r block free online   Even if you cannot claim your child as a dependent, he or she is treated as your qualifying person if: The child was under age 13 or was not physically or mentally able to care for himself or herself, The child received over half of his or her support during the calendar year from one or both parents who are divorced or legally separated under a decree of divorce or separate maintenance, are separated under a written separation agreement, or lived apart at all times during the last 6 months of the calendar year, The child was in the custody of one or both parents for more than half the year, and You were the child's custodial parent. H&r block free online   The custodial parent is the parent with whom the child lived for the greater number of nights in 2013. H&r block free online If the child was with each parent for an equal number of nights, the custodial parent is the parent with the higher adjusted gross income. H&r block free online For details and an exception for a parent who works at night, see Pub. H&r block free online 501. H&r block free online   The noncustodial parent cannot treat the child as a qualifying person even if that parent is entitled to claim the child as a dependent under the special rules for a child of divorced or separated parents. H&r block free online Earned Income Test To claim the credit, you (and your spouse if filing jointly) must have earned income during the year. H&r block free online Earned income. H&r block free online   Earned income includes wages, salaries, tips, other taxable employee compensation, and net earnings from self-employment. H&r block free online A net loss from self-employment reduces earned income. H&r block free online Earned income also includes strike benefits and any disability pay you report as wages. H&r block free online   Generally, only taxable compensation is included. H&r block free online However, you can elect to include nontaxable combat pay in earned income. H&r block free online If you are filing a joint return and both you and your spouse received nontaxable combat pay, you can each make your own election. H&r block free online (In other words, if one of you makes the election, the other one can also make it but does not have to. H&r block free online ) You should figure your credit both ways and make the election if it gives you a greater tax benefit. H&r block free online Members of certain religious faiths opposed to social security. H&r block free online   Certain income earned by persons who are members of certain religious faiths that are opposed to participation in Social Security Act programs and have an IRS-approved form that exempts certain income from social security and Medicare taxes may not be considered earned income for this purpose. H&r block free online See Earned Income Test in Publication 503. H&r block free online Not earned income. H&r block free online   Earned income does not include: Pensions and annuities, Social security and railroad retirement benefits, Workers' compensation, Interest and dividends, Unemployment compensation, Scholarship or fellowship grants, except for those reported on a Form W-2 and paid to you for teaching or other services, Nontaxable workfare payments, Child support payments received by you, Income of nonresident aliens that is not effectively connected with a U. H&r block free online S. H&r block free online trade or business, or Any amount received for work while an inmate in a penal institution. H&r block free online Rule for student-spouse or spouse not able to care for self. H&r block free online   Your spouse is treated as having earned income for any month that he or she is: A full-time student, or Physically or mentally not able to care for himself or herself. H&r block free online (Your spouse also must live with you for more than half the year. H&r block free online )   If you are filing a joint return, this rule also applies to you. H&r block free online You can be treated as having earned income for any month you are a full-time student or not able to care for yourself. H&r block free online   Figure the earned income of the nonworking spouse described under (1) or (2) above as explained under Earned Income Limit , later. H&r block free online   This rule applies to only one spouse for any one month. H&r block free online If, in the same month, both you and your spouse do not work and are either full-time students or not physically or mentally able to care for yourselves, only one of you can be treated as having earned income in that month. H&r block free online Full-time student. H&r block free online   You are a full-time student if you are enrolled at a school for the number of hours or classes that the school considers full time. H&r block free online You must have been a full-time student for some part of each of 5 calendar months during the year. H&r block free online (The months need not be consecutive. H&r block free online ) School. H&r block free online   The term “school” includes high schools, colleges, universities, and technical, trade, and mechanical schools. H&r block free online A school does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet. H&r block free online Work-Related Expense Test Child and dependent care expenses must be work-related to qualify for the credit. H&r block free online Expenses are considered work-related only if both of the following are true. H&r block free online They allow you (and your spouse if filing jointly) to work or look for work. H&r block free online They are for a qualifying person's care. H&r block free online Working or Looking for Work To be work-related, your expenses must allow you to work or look for work. H&r block free online If you are married, generally both you and your spouse must work or look for work. H&r block free online One spouse is treated as working during any month he or she is a full-time student or is not physically or mentally able to care for himself or herself. H&r block free online Your work can be for others or in your own business or partnership. H&r block free online It can be either full time or part time. H&r block free online Work also includes actively looking for work. H&r block free online However, if you do not find a job and have no earned income for the year, you cannot take this credit. H&r block free online See Earned Income Test , earlier. H&r block free online An expense is not considered work-related merely because you had it while you were working. H&r block free online The purpose of the expense must be to allow you to work. H&r block free online Whether your expenses allow you to work or look for work depends on the facts. H&r block free online Example 1. H&r block free online The cost of a babysitter while you and your spouse go out to eat is not normally a work-related expense. H&r block free online Example 2. H&r block free online You work during the day. H&r block free online Your spouse works at night and sleeps during the day. H&r block free online You pay for care of your 5-year-old child during the hours when you are working and your spouse is sleeping. H&r block free online Your expenses are considered work-related. H&r block free online Volunteer work. H&r block free online    For this purpose, you are not considered to be working if you do unpaid volunteer work or volunteer work for a nominal salary. H&r block free online Work for part of year. H&r block free online   If you work or actively look for work during only part of the period covered by the expenses, then you must figure your expenses for each day. H&r block free online For example, if you work all year and pay care expenses of $250 a month ($3,000 for the year), all the expenses are work-related. H&r block free online However, if you work or look for work for only 2 months and 15 days during the year and pay expenses of $250 a month, your work-related expenses are limited to $625 (2½ months × $250). H&r block free online Temporary absence from work. H&r block free online   You do not have to figure your expenses for each day during a short, temporary absence from work, such as for vacation or a minor illness, if you have to pay for care anyway. H&r block free online Instead, you can figure your credit including the expenses you paid for the period of absence. H&r block free online   An absence of 2 weeks or less is a short, temporary absence. H&r block free online An absence of more than 2 weeks may be considered a short, temporary absence, depending on the circumstances. H&r block free online Example. H&r block free online You pay a nanny to care for your 2-year-old son and 4-year-old daughter so you can work. H&r block free online You become ill and miss 4 months of work but receive sick pay. H&r block free online You continue to pay the nanny to care for the children while you are ill. H&r block free online Your absence is not a short, temporary absence, and your expenses are not considered work-related. H&r block free online Part-time work. H&r block free online   If you work part-time, you generally must figure your expenses for each day. H&r block free online However, if you have to pay for care weekly, monthly, or in another way that includes both days worked and days not worked, you can figure your credit including the expenses you paid for days you did not work. H&r block free online Any day when you work at least 1 hour is a day of work. H&r block free online Example 1. H&r block free online You work 3 days a week. H&r block free online While you work, your 6-year-old child attends a dependent care center, which complies with all state and local regulations. H&r block free online You can pay the center $150 for any 3 days a week or $250 for 5 days a week. H&r block free online Your child attends the center 5 days a week. H&r block free online Your work-related expenses are limited to $150 a week. H&r block free online Example 2. H&r block free online The facts are the same as in Example 1 except the center does not offer a 3-day option. H&r block free online The entire $250 weekly fee may be a work-related expense. H&r block free online Care of a Qualifying Person To be work-related, your expenses must be to provide care for a qualifying person. H&r block free online You do not have to choose the least expensive way of providing care. H&r block free online The cost of a paid care provider may be an expense for the care of a qualifying person even if another care provider is available at no cost. H&r block free online Expenses are for the care of a qualifying person only if their main purpose is the person's well-being and protection. H&r block free online Expenses for household services qualify if part of the services is for the care of qualifying persons. H&r block free online See Household services , later. H&r block free online Expenses not for care. H&r block free online   Expenses for care do not include amounts you pay for food, lodging, clothing, education, and entertainment. H&r block free online However, you can include small amounts paid for these items if they are incidental to and cannot be separated from the cost of caring for the qualifying person. H&r block free online   Child support payments are not for care and do not qualify for the credit. H&r block free online Education. H&r block free online   Expenses for a child in nursery school, preschool, or similar programs for children below the level of kindergarten are expenses for care. H&r block free online Expenses to attend kindergarten or a higher grade are not expenses for care. H&r block free online Do not use these expenses to figure your credit. H&r block free online   However, expenses for before- or after-school care of a child in kindergarten or a higher grade may be expenses for care. H&r block free online   Summer school and tutoring programs are not for care. H&r block free online Example 1. H&r block free online You take your 3-year-old child to a nursery school that provides lunch and educational activities as a part of its preschool childcare service. H&r block free online The lunch and educational activities are incidental to the childcare, and their cost cannot be separated from the cost of care. H&r block free online You can count the total cost when you figure the credit. H&r block free online Example 2. H&r block free online You place your 10-year-old child in a boarding school so you can work full time. H&r block free online Only the part of the boarding school expense that is for the care of your child is a work-related expense. H&r block free online You can count that part of the expense in figuring your credit if it can be separated from the cost of education. H&r block free online You cannot count any part of the amount you pay the school for your child's education. H&r block free online Care outside your home. H&r block free online   You can count the cost of care provided outside your home if the care is for your dependent under age 13 or any other qualifying person who regularly spends at least 8 hours each day in your home. H&r block free online Dependent care center. H&r block free online   You can count care provided outside your home by a dependent care center only if the center complies with all state and local regulations that apply to these centers. H&r block free online   A dependent care center is a place that provides care for more than six persons (other than persons who live there) and receives a fee, payment, or grant for providing services for any of those persons, even if the center is not run for profit. H&r block free online Camp. H&r block free online   The cost of sending your child to an overnight camp is not considered a work-related expense. H&r block free online The cost of sending your child to a day camp may be a work-related expense, even if the camp specializes in a particular activity, such as computers or soccer. H&r block free online Transportation. H&r block free online   If a care provider takes a qualifying person to or from a place where care is provided, that transportation is for the care of the qualifying person. H&r block free online This includes transportation by bus, subway, taxi, or private car. H&r block free online However, transportation not provided by a care provider is not for the care of a qualifying person. H&r block free online Also, if you pay the transportation cost for the care provider to come to your home, that expense is not for care of a qualifying person. H&r block free online Fees and deposits. H&r block free online   Fees you paid to an agency to get the services of a care provider, deposits you paid to an agency or preschool, application fees, and other indirect expenses are work-related expenses if you have to pay them to get care, even though they are not directly for care. H&r block free online However, a forfeited deposit is not for the care of a qualifying person if care is not provided. H&r block free online Example 1. H&r block free online You paid a fee to an agency to get the services of the nanny who cares for your 2-year-old daughter while you work. H&r block free online The fee you paid is a work-related expense. H&r block free online Example 2. H&r block free online You placed a deposit with a preschool to reserve a place for your 3-year-old child. H&r block free online You later sent your child to a different preschool and forfeited the deposit. H&r block free online The forfeited deposit is not for care and so is not a work-related expense. H&r block free online Household services. H&r block free online   Expenses you pay for household services meet the work-related expense test if they are at least partly for the well-being and protection of a qualifying person. H&r block free online   Household services are ordinary and usual services done in and around your home that are necessary to run your home. H&r block free online They include the services of a housekeeper, maid, or cook. H&r block free online However, they do not include the services of a chauffeur, bartender, or gardener. H&r block free online See Household Services in Publication 503 for more information. H&r block free online   In this chapter, the term housekeeper refers to any household employee whose services include the care of a qualifying person. H&r block free online Taxes paid on wages. H&r block free online   The taxes you pay on wages for qualifying child and dependent care services are work-related expenses. H&r block free online See Employment Taxes for Household Employers , later. H&r block free online Payments to Relatives or Dependents You can count work-related payments you make to relatives who are not your dependents, even if they live in your home. H&r block free online However, do not count any amounts you pay to: A dependent for whom you (or your spouse if filing jointly) can claim an exemption, Your child who was under age 19 at the end of the year, even if he or she is not your dependent, A person who was your spouse any time during the year, or The parent of your qualifying person if your qualifying person is your child and under age 13. H&r block free online Joint Return Test Generally, married couples must file a joint return to take the credit. H&r block free online However, if you are legally separated or living apart from your spouse, you may be able to file a separate return and still take the credit. H&r block free online Legally separated. H&r block free online   You are not considered married if you are legally separated from your spouse under a decree of divorce or separate maintenance. H&r block free online You may be eligible to take the credit on your return using head of household filing status. H&r block free online Married and living apart. H&r block free online   You are not considered married and are eligible to take the credit if all the following apply. H&r block free online You file a return apart from your spouse. H&r block free online Your home is the home of a qualifying person for more than half the year. H&r block free online You pay more than half the cost of keeping up your home for the year. H&r block free online Your spouse does not live in your home for the last 6 months of the year. H&r block free online Costs of keeping up a home. H&r block free online   The costs of keeping up a home normally include property taxes, mortgage interest, rent, utility charges, home repairs, insurance on the home, and food eaten at home. H&r block free online   The costs of keeping up a home do not include payments for clothing, education, medical treatment, vacations, life insurance, transportation, or mortgage principal. H&r block free online   They also do not include the purchase, permanent improvement, or replacement of property. H&r block free online For example, you cannot include the cost of replacing a water heater. H&r block free online However, you can include the cost of repairing a water heater. H&r block free online Death of spouse. H&r block free online   If your spouse died during the year and you do not remarry before the end of the year, you generally must file a joint return to take the credit. H&r block free online If you do remarry before the end of the year, the credit can be claimed on your deceased spouse's return. H&r block free online Provider Identification Test You must identify all persons or organizations that provide care for your child or dependent. H&r block free online Use Form 2441, Part I, to show the information. H&r block free online If you do not have any care providers and you are filing Form 2441 only to report taxable income in Part III, enter “none” in line 1, column (a). H&r block free online Information needed. H&r block free online   To identify the care provider, you must give the provider's: Name, Address, and Taxpayer identification number. H&r block free online   If the care provider is an individual, the taxpayer identification number is his or her social security number or individual taxpayer identification number. H&r block free online If the care provider is an organization, then it is the employer identification number (EIN). H&r block free online   You do not have to show the taxpayer identification number if the care provider is a tax-exempt organization (such as a church or school). H&r block free online In this case, enter “Tax-Exempt” in the space where Form 2441 asks for the number. H&r block free online   If you cannot provide all of the information or if the information is incorrect, you must be able to show that you used due diligence (discussed later) in trying to furnish the necessary information. H&r block free online Getting the information. H&r block free online   You can use Form W-10 to request the required information from the care provider. H&r block free online If you do not use Form W-10, you can get the information from one of the other sources listed in the instructions for Form W-10 including: A copy of the provider's social security card, A copy of the provider's completed Form W-4 if he or she is your household employee, A copy of the statement furnished by your employer if the provider is your employer's dependent care plan, or A letter or invoice from the provider if it shows the information. H&r block free online    You should keep this information with your tax records. H&r block free online Do not send Form W-10 (or other document containing this information) to the Internal Revenue Service. H&r block free online Due diligence. H&r block free online   If the care provider information you give is incorrect or incomplete, your credit may not be allowed. H&r block free online However, if you can show that you used due diligence in trying to supply the information, you can still claim the credit. H&r block free online   You can show due diligence by getting and keeping the provider's completed Form W-10 or one of the other sources of information just listed. H&r block free online Care providers can be penalized if they do not provide this information to you or if they provide incorrect information. H&r block free online Provider refusal. H&r block free online   If the provider refuses to give you their identifying information, you should report on Form 2441 whatever information you have (such as the name and address). H&r block free online Enter “See Attached Statement” in the columns calling for the information you do not have. H&r block free online Then attach a statement explaining that you requested the information from the care provider, but the provider did not give you the information. H&r block free online Be sure to write your name and social security number on this statement. H&r block free online The statement will show that you used due diligence in trying to furnish the necessary information. H&r block free online U. H&r block free online S. H&r block free online citizens and resident aliens living abroad. H&r block free online   If you are living abroad, your care provider may not have, and may not be required to get, a U. H&r block free online S. H&r block free online taxpayer identification number (for example, an SSN or EIN). H&r block free online If so, enter “LAFCP” (Living Abroad Foreign Care Provider) in the space for the care provider's taxpayer identification number. H&r block free online How To Figure the Credit Your credit is a percentage of your work-related expenses. H&r block free online Your expenses are subject to the earned income limit and the dollar limit. H&r block free online The percentage is based on your adjusted gross income. H&r block free online Figuring Total Work-Related Expenses To figure the credit for 2013 work-related expenses, count only those you paid by December 31, 2013. H&r block free online Expenses prepaid in an earlier year. H&r block free online   If you pay for services before they are provided, you can count the prepaid expenses only in the year the care is received. H&r block free online Claim the expenses for the later year as if they were actually paid in that later year. H&r block free online Expenses not paid until the following year. H&r block free online   Do not count 2012 expenses that you paid in 2013 as work-related expenses for 2013. H&r block free online You may be able to claim an additional credit for them on your 2013 return, but you must figure it separately. H&r block free online See Payments for prior year's expenses under Amount of Credit in Publication 503. H&r block free online    If you had expenses in 2013 that you did not pay until 2014, you cannot count them when figuring your 2013 credit. H&r block free online You may be able to claim a credit for them on your 2014 return. H&r block free online Expenses reimbursed. H&r block free online   If a state social services agency pays you a nontaxable amount to reimburse you for some of your child and dependent care expenses, you cannot count the expenses that are reimbursed as work-related expenses. H&r block free online Example. H&r block free online You paid work-related expenses of $3,000. H&r block free online You are reimbursed $2,000 by a state social services agency. H&r block free online You can use only $1,000 to figure your credit. H&r block free online Medical expenses. H&r block free online   Some expenses for the care of qualifying persons who are not able to care for themselves may qualify as work-related expenses and also as medical expenses. H&r block free online You can use them either way, but you cannot use the same expenses to claim both a credit and a medical expense deduction. H&r block free online   If you use these expenses to figure the credit and they are more than the earned income limit or the dollar limit, discussed later, you can add the excess to your medical expenses. H&r block free online However, if you use your total expenses to figure your medical expense deduction, you cannot use any part of them to figure your credit. H&r block free online    Amounts excluded from your income under your employer's dependent care benefits plan cannot be used to claim a medical expense deduction. H&r block free online Dependent Care Benefits If you receive dependent care benefits, your dollar limit for purposes of the credit may be reduced. H&r block free online See Reduced Dollar Limit , later. H&r block free online But, even if you cannot take the credit, you may be able to take an exclusion or deduction for the dependent care benefits. H&r block free online Dependent care benefits. H&r block free online   Dependent care benefits include: Amounts your employer paid directly to either you or your care provider for the care of your qualifying person while you work, The fair market value of care in a daycare facility provided or sponsored by your employer, and Pre-tax contributions you made under a dependent care flexible spending arrangement. H&r block free online Your salary may have been reduced to pay for these benefits. H&r block free online If you received benefits as an employee, they should be shown in box 10 of your Form W-2. H&r block free online See Statement for employee , later. H&r block free online Benefits you received as a partner should be shown in box 13 of your Schedule K-1 (Form 1065) with code O. H&r block free online Enter the amount of these benefits on Form 2441, Part III, line 12. H&r block free online Exclusion or deduction. H&r block free online   If your employer provides dependent care benefits under a qualified plan, you may be able to exclude these benefits from your income. H&r block free online Your employer can tell you whether your benefit plan qualifies. H&r block free online To claim the exclusion, you must complete Part III of Form 2441. H&r block free online You cannot use Form 1040EZ. H&r block free online   If you are self-employed and receive benefits from a qualified dependent care benefit plan, you are treated as both employer and employee. H&r block free online Therefore, you would not get an exclusion from wages. H&r block free online Instead, you would get a deduction on Form 1040, Schedule C, line 14; Schedule E, line 19 or 28; or Schedule F, line 15. H&r block free online To claim the deduction, you must use Form 2441. H&r block free online   The amount you can exclude or deduct is limited to the smallest of: The total amount of dependent care benefits you received during the year, The total amount of qualified expenses you incurred during the year, Your earned income, Your spouse's earned income, or $5,000 ($2,500 if married filing separately). H&r block free online The definition of earned income for the exclusion or deduction is the same as the definition used when figuring the credit except that earned income for the exclusion or deduction does not include any dependent care benefits you receive. H&r block free online See Earned Income Limit, later. H&r block free online    You can choose to include your nontaxable combat pay in earned income when figuring your exclusion or deduction, even if you choose not to include it in earned income for the earned income credit or the credit for child and dependent care expenses. H&r block free online Statement for employee. H&r block free online   Your employer must give you a Form W-2 (or similar statement) showing in box 10 the total amount of dependent care benefits provided to you during the year under a qualified plan. H&r block free online Your employer will also include any dependent care benefits over $5,000 in your wages shown on your Form W-2 in box 1. H&r block free online Effect of exclusion on credit. H&r block free online   If you exclude dependent care benefits from your income, the amount of the excluded benefits: Is not included in your work-related expenses, and Reduces the dollar limit, discussed later. H&r block free online Earned Income Limit The amount of work-related expenses you use to figure your credit cannot be more than: Your earned income for the year if you are single at the end of the year, or The smaller of your or your spouse's earned income for the year if you are married at the end of the year. H&r block free online Earned income is defined under Earned Income Test , earlier. H&r block free online For purposes of item (2), use your spouse's earned income for the entire year, even if you were married for only part of the year. H&r block free online Separated spouse. H&r block free online   If you are legally separated or married and living apart from your spouse (as described under Joint Return Test , earlier), you are not considered married for purposes of the earned income limit. H&r block free online Use only your income in figuring the earned income limit. H&r block free online Surviving spouse. H&r block free online   If your spouse died during the year and you file a joint return as a surviving spouse, you may, but are not required to, take into account the earned income of your spouse who died during the year. H&r block free online Community property laws. H&r block free online   You should disregard community property laws when you figure earned income for this credit. H&r block free online You or your spouse is a student or not able to care for self. H&r block free online   Your spouse who is either a full-time student or not able to care for himself or herself is treated as having earned income. H&r block free online His or her earned income for each month is considered to be at least $250 if there is one qualifying person in your home, or at least $500 if there are two or more. H&r block free online Spouse works. H&r block free online   If your spouse works during that month, use the higher of $250 (or $500) or his or her actual earned income for that month. H&r block free online Spouse qualifies for part of month. H&r block free online    If your spouse is a full-time student or not able to care for himself or herself for only part of a month, the full $250 (or $500) still applies for that month. H&r block free online You are a student or not able to care for self. H&r block free online   These rules also apply if you are a student or not able to care for yourself and you are filing a joint return. H&r block free online For each month or part of a month you are a student or not able to care for yourself, your earned income is considered to be at least $250 (or $500). H&r block free online If you also work during that month, use the higher of $250 (or $500) or your actual earned income for that month. H&r block free online Both spouses qualify. H&r block free online   If, in the same month, both you and your spouse are either full-time students or not able to care for yourselves, only one spouse can be considered to have this earned income of $250 (or $500) for that month. H&r block free online Dollar Limit There is a dollar limit on the amount of your work-related expenses you can use to figure the credit. H&r block free online This limit is $3,000 for one qualifying person, or $6,000 for two or more qualifying persons. H&r block free online If you paid work-related expenses for the care of two or more qualifying persons, the applicable dollar limit is $6,000. H&r block free online This $6,000 limit does not need to be divided equally among them. H&r block free online For example, if your work-related expenses for the care of one qualifying person are $3,200 and your work-related expenses for another qualifying person are $2,800, you can use the total, $6,000, when figuring the credit. H&r block free online Yearly limit. H&r block free online   The dollar limit is a yearly limit. H&r block free online The amount of the dollar limit remains the same no matter how long, during the year, you have a qualifying person in your household. H&r block free online Use the $3,000 limit if you paid work-related expenses for the care of one qualifying person at any time during the year. H&r block free online Use $6,000 if you paid work-related expenses for the care of more than one qualifying person at any time during the year. H&r block free online Reduced Dollar Limit If you received dependent care benefits that you exclude or deduct from your income, you must subtract that amount from the dollar limit that applies to you. H&r block free online Your reduced dollar limit is figured on Form 2441, Part III. H&r block free online See Dependent Care Benefits , earlier, for information on excluding or deducting these benefits. H&r block free online Example 1. H&r block free online George is a widower with one child and earns $24,000 a year. H&r block free online He pays work-related expenses of $2,900 for the care of his 4-year-old child and qualifies to claim the credit for child and dependent care expenses. H&r block free online His employer pays an additional $1,000 under a dependent care benefit plan. H&r block free online This $1,000 is excluded from George's income. H&r block free online Although the dollar limit for his work-related expenses is $3,000 (one qualifying person), George figures his credit on only $2,000 of the $2,900 work-related expenses he paid. H&r block free online This is because his dollar limit is reduced as shown next. H&r block free online   George's Reduced Dollar Limit 1) Maximum allowable expenses for one qualifying person $3,000 2) Minus: Dependent care benefits George excludes from income −1,000 3) Reduced dollar limit on expenses George can use for the credit $2,000 Example 2. H&r block free online Randall is married and both he and his wife are employed. H&r block free online Each has earned income in excess of $6,000. H&r block free online They have two children, Anne and Andy, ages 2 and 4, who attend a daycare facility licensed and regulated by the state. H&r block free online Randall's work-related expenses are $6,000 for the year. H&r block free online Randall's employer has a dependent care assistance program as part of its cafeteria plan, which allows employees to make pre-tax contributions to a dependent care flexible spending arrangement. H&r block free online Randall has elected to take the maximum $5,000 exclusion from his salary to cover dependent care expenses through this program. H&r block free online Although the dollar limit for his work- related expenses is $6,000 (two or more qualifying persons), Randall figures his credit on only $1,000 of the $6,000 work-related expense paid. H&r block free online This is because his dollar limit is reduced as shown next. H&r block free online   Randall's Reduced Dollar Limit 1) Maximum allowable expenses for two qualifying persons $6,000 2) Minus: Dependent care benefits Randall selects from employer's cafeteria plan and excludes from income −5,000 3) Reduced dollar limit on expenses Randall can use for the credit $1,000 Amount of Credit To determine the amount of your credit, multiply your work-related expenses (after applying the earned income and dollar limits) by a percentage. H&r block free online This percentage depends on your adjusted gross income shown on Form 1040, line 38, or Form 1040A, line 22. H&r block free online The following table shows the percentage to use based on adjusted gross income. H&r block free online   IF your adjusted gross income is: THEN the percentage is:       Over   But not over         $0   $15,000   35%       15,000   17,000   34%       17,000   19,000   33%       19,000   21,000   32%       21,000   23,000   31%       23,000   25,000   30%       25,000   27,000   29%       27,000   29,000   28%       29,000   31,000   27%       31,000   33,000   26%       33,000   35,000   25%       35,000   37,000   24%       37,000   39,000   23%       39,000   41,000   22%       41,000   43,000   21%       43,000   No limit   20%   How To Claim the Credit To claim the credit, you can file Form 1040 or Form 1040A. H&r block free online You cannot claim the credit on Form 1040EZ. H&r block free online Form 1040 or 1040A. H&r block free online   You must complete Form 2441 and attach it to your Form 1040 or 1040A. H&r block free online Enter the credit on Form 1040, line 48, or Form 1040A, line 29. H&r block free online Limit on credit. H&r block free online   The amount of credit you can claim is generally limited to the amount of your tax. H&r block free online For more information, see the Instructions for Form 2441. H&r block free online Tax credit not refundable. H&r block free online   You cannot get a refund for any part of the credit that is more than this limit. H&r block free online Recordkeeping. H&r block free online You should keep records of your work-related expenses. H&r block free online Also, if your dependent or spouse is not able to care for himself or herself, your records should show both the nature and the length of the disability. H&r block free online Other records you should keep to support your claim for the credit are described earlier under Provider Identification Test . H&r block free online Employment Taxes for Household Employers If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer. H&r block free online If you are a household employer, you will need an employer identification number (EIN) and you may have to pay employment taxes. H&r block free online If the individuals who work in your home are self-employed, you are not liable for any of the taxes discussed in this section. H&r block free online Self-employed persons who are in business for themselves are not household employees. H&r block free online Usually, you are not a household employer if the person who cares for your dependent or spouse does so at his or her home or place of business. H&r block free online If you use a placement agency that exercises control over what work is done and how it will be done by a babysitter or companion who works in your home, the worker is not your employee. H&r block free online This control could include providing rules of conduct and appearance and requiring regular reports. H&r block free online In this case, you do not have to pay employment taxes. H&r block free online But, if an agency merely gives you a list of sitters and you hire one from that list, and pay the sitter directly, the sitter may be your employee. H&r block free online If you have a household employee, you may be subject to: Social security and Medicare taxes, Federal unemployment tax, and Federal income tax withholding. H&r block free online Social security and Medicare taxes are generally withheld from the employee's pay and matched by the employer. H&r block free online Federal unemployment (FUTA) tax is paid by the employer only and provides for payments of unemployment compensation to workers who have lost their jobs. H&r block free online Federal income tax is withheld from the employee's total pay if the employee asks you to do so and you agree. H&r block free online For more information on a household employer's tax responsibilities, see Publication 926 and Schedule H (Form 1040) and its instructions. H&r block free online State employment tax. H&r block free online   You may also have to pay state unemployment tax. H&r block free online Contact your state unemployment tax office for information. H&r block free online You should also find out whether you need to pay or collect other state employment taxes or carry workers' compensation insurance. H&r block free online For a list of state unemployment tax agencies, visit the U. H&r block free online S. H&r block free online Department of Labor's website. H&r block free online A link to that website is in Publication 926, or you can find it with an online search. H&r block free online Prev  Up  Next   Home   More Online Publications
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The H&r Block Free Online

H&r block free online 1. H&r block free online   Investment Income Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: General InformationSSN for joint account. H&r block free online Custodian account for your child. H&r block free online Penalty for failure to supply SSN. H&r block free online Certification. H&r block free online Underreported interest and dividends. H&r block free online How to stop backup withholding due to underreporting. H&r block free online How to stop backup withholding due to an incorrect identification number. H&r block free online Reporting backup withholding. H&r block free online Nonresident aliens. H&r block free online Penalties. H&r block free online Savings account with parent as trustee. H&r block free online Interest IncomeInterest not reported on Form 1099-INT. H&r block free online Nominees. H&r block free online Incorrect amount. H&r block free online Information reporting requirement. H&r block free online Taxable Interest — General Below-Market Loans U. H&r block free online S. H&r block free online Savings Bonds U. H&r block free online S. H&r block free online Treasury Bills, Notes, and Bonds Bonds Sold Between Interest Dates Insurance State or Local Government Obligations Discount on Debt InstrumentsOriginal Issue Discount (OID) Market Discount Bonds Discount on Short-Term Obligations Election To Report All Interest as OID When To Report Interest IncomeConstructive receipt. H&r block free online How To Report Interest IncomeSchedule B (Form 1040A or 1040). H&r block free online Worksheet for savings bonds distributed from a retirement or profit-sharing plan. H&r block free online File Form 1099-INT with the IRS. H&r block free online Dividends and Other DistributionsDividends not reported on Form 1099-DIV. H&r block free online Nominees. H&r block free online Ordinary Dividends Capital Gain Distributions Nondividend Distributions Liquidating Distributions Distributions of Stock and Stock Rights Other Distributions How To Report Dividend IncomeElection. H&r block free online Independent contractor. H&r block free online Investment interest deducted. H&r block free online Exception 1. H&r block free online Exception 2. H&r block free online Undistributed capital gains. H&r block free online File Form 1099-DIV with the IRS. H&r block free online Stripped Preferred Stock REMICs, FASITs, and Other CDOsREMICs Collateralized Debt Obligations (CDOs) FASITs S CorporationsLimit on losses and deductions. H&r block free online Passive activity losses. H&r block free online Form 8582. H&r block free online Investment ClubsInvestments in name of member. H&r block free online Tax Treatment of the Club Topics - This chapter discusses: Interest Income , Discount on Debt Instruments , When To Report Interest Income , How To Report Interest Income , Dividends and Other Distributions , How To Report Dividend Income , Stripped Preferred Stock , Real estate mortgage investment conduits (REMICs), financial asset securitization investment trusts (FASITs), and other collateralized debt obligations (CDOs) , S Corporations , and Investment Clubs . H&r block free online Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 537 Installment Sales 590 Individual Retirement Arrangements (IRAs) 925 Passive Activity and At-Risk Rules 1212 Guide to Original Issue Discount (OID) Instruments Form (and Instructions) Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends Schedule D (Form 1040) Capital Gains and Losses 1040 U. H&r block free online S. H&r block free online Individual Income Tax Return 1040A U. H&r block free online S. H&r block free online Individual Income Tax Return 1040EZ Income Tax Return for Single and Joint Filers With No Dependents 1099 General Instructions for Certain Information Returns 2439 Notice to Shareholder of Undistributed Long-Term Capital Gains 3115 Application for Change in Accounting Method 6251 Alternative Minimum Tax — Individuals 8582 Passive Activity Loss Limitations 8615 Tax for Certain Children Who Have Unearned Income 8814 Parents' Election To Report Child's Interest and Dividends 8815 Exclusion of Interest From Series EE and I U. H&r block free online S. H&r block free online Savings Bonds Issued After 1989 8818 Optional Form To Record Redemption of Series EE and I U. H&r block free online S. H&r block free online Savings Bonds Issued After 1989 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets 8960 Net Investment Income Tax—Individuals, Estates, and Trusts See chapter 5, How To Get Tax Help , for information about getting these publications and forms. H&r block free online General Information A few items of general interest are covered here. H&r block free online Recordkeeping. H&r block free online You should keep a list showing sources and investment income amounts you receive during the year. H&r block free online Also keep the forms you receive showing your investment income (Forms 1099-INT, Interest Income, and 1099-DIV, Dividends and Distributions, for example) as an important part of your records. H&r block free online Net investment income tax (NIIT). H&r block free online   Beginning in 2013, you may be subject to the NIIT. H&r block free online The NIIT is a 3. H&r block free online 8% tax on the lesser of your net investment income or the amount of your modified adjusted gross income (MAGI) that is over a threshold amount based on your filing status. H&r block free online    Filing Status Threshold Amount Married filing jointly $250,000 Married filing separately $125,000 Single $200,000 Head of household (with qualifying person) $200,000 Qualifying Widow(er) with dependent child $250,000    For more information, see Form 8960 and Instructions for Form 8960. H&r block free online Tax on unearned income of certain children. H&r block free online   Part of a child's 2013 unearned income may be taxed at the parent's tax rate. H&r block free online This may happen if all of the following are true. H&r block free online The child had more than $2,000 of unearned income. H&r block free online The child is required to file a tax return. H&r block free online The child was: Under age 18 at the end of 2013, Age 18 at the end of 2013 and did not have earned income that was more than half of the child's support, or A full-time student over age 18 and under age 24 at the end of 2013 and did not have earned income that was more than half of the child's support. H&r block free online At least one of the child's parents was alive at the end of 2013. H&r block free online The child does not file a joint return for 2013. H&r block free online A child born on January 1, 1996, is considered to be age 18 at the end of 2013; a child born on January 1, 1995, is considered to be age 19 at the end of 2013; a child born on January 1, 1990, is considered to be age 24 at the end of 2013. H&r block free online   If all of these statements are true, Form 8615 must be completed and attached to the child's tax return. H&r block free online If any of these statements is not true, Form 8615 is not required and the child's income is taxed at his or her own tax rate. H&r block free online    However, the parent can choose to include the child's interest and dividends on the parent's return if certain requirements are met. H&r block free online Use Form 8814 for this purpose. H&r block free online   For more information about the tax on unearned income of children and the parents' election, see Publication 929, Tax Rules for Children and Dependents. H&r block free online Beneficiary of an estate or trust. H&r block free online   Interest, dividends, and other investment income you receive as a beneficiary of an estate or trust is generally taxable income. H&r block free online You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. H&r block free online , from the fiduciary. H&r block free online Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040. H&r block free online Social security number (SSN). H&r block free online   You must give your name and SSN or individual tax identification number (ITIN) to any person required by federal tax law to make a return, statement, or other document that relates to you. H&r block free online This includes payers of interest and dividends. H&r block free online If you do not give your SSN or ITIN to the payer of interest, you may have to pay a penalty. H&r block free online SSN for joint account. H&r block free online   If the funds in a joint account belong to one person, list that person's name first on the account and give that person's SSN to the payer. H&r block free online (For information on who owns the funds in a joint account, see Joint accounts , later. H&r block free online ) If the joint account contains combined funds, give the SSN of the person whose name is listed first on the account. H&r block free online This is because only one name and SSN can be shown on Form 1099. H&r block free online   These rules apply both to joint ownership by a married couple and to joint ownership by other individuals. H&r block free online For example, if you open a joint savings account with your child using funds belonging to the child, list the child's name first on the account and give the child's SSN. H&r block free online Custodian account for your child. H&r block free online   If your child is the actual owner of an account that is recorded in your name as custodian for the child, give the child's SSN to the payer. H&r block free online For example, you must give your child's SSN to the payer of dividends on stock owned by your child, even though the dividends are paid to you as custodian. H&r block free online Penalty for failure to supply SSN. H&r block free online   You will be subject to a penalty if, when required, you fail to: Include your SSN on any return, statement, or other document, Give your SSN to another person who must include it on any return, statement, or other document, or Include the SSN of another person on any return, statement, or other document. H&r block free online The penalty is $50 for each failure up to a maximum penalty of $100,000 for any calendar year. H&r block free online   You will not be subject to this penalty if you can show that your failure to provide the SSN was due to reasonable cause and not to willful neglect. H&r block free online   If you fail to supply an SSN, you may also be subject to backup withholding. H&r block free online Backup withholding. H&r block free online   Your investment income is generally not subject to regular withholding. H&r block free online However, it may be subject to backup withholding to ensure that income tax is collected on the income. H&r block free online Under backup withholding, the bank, broker, or other payer of interest, original issue discount (OID), dividends, cash patronage dividends, or royalties must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate. H&r block free online   Backup withholding applies if: You do not give the payer your identification number (either a social security number or an employer identification number) in the required manner, The IRS notifies the payer that you gave an incorrect identification number, The IRS notifies the payer that you are subject to backup withholding on interest or dividends because you have underreported interest or dividends on your income tax return, or You are required, but fail, to certify that you are not subject to backup withholding for the reason described in (3). H&r block free online Certification. H&r block free online   For new accounts paying interest or dividends, you must certify under penalties of perjury that your SSN is correct and that you are not subject to backup withholding. H&r block free online Your payer will give you a Form W-9, Request for Taxpayer Identification Number and Certification, or similar form, to make this certification. H&r block free online If you fail to make this certification, backup withholding may begin immediately on your new account or investment. H&r block free online Underreported interest and dividends. H&r block free online   You will be considered to have underreported your interest and dividends if the IRS has determined for a tax year that: You failed to include any part of a reportable interest or dividend payment required to be shown on your return, or You were required to file a return and to include a reportable interest or dividend payment on that return, but you failed to file the return. H&r block free online How to stop backup withholding due to underreporting. H&r block free online   If you have been notified that you underreported interest or dividends, you can request a determination from the IRS to prevent backup withholding from starting or to stop backup withholding once it has begun. H&r block free online You must show that at least one of the following situations applies. H&r block free online No underreporting occurred. H&r block free online You have a bona fide dispute with the IRS about whether underreporting occurred. H&r block free online Backup withholding will cause or is causing an undue hardship, and it is unlikely that you will underreport interest and dividends in the future. H&r block free online You have corrected the underreporting by filing a return if you did not previously file one and by paying all taxes, penalties, and interest due for any underreported interest or dividend payments. H&r block free online   If the IRS determines that backup withholding should stop, it will provide you with a certification and will notify the payers who were sent notices earlier. H&r block free online How to stop backup withholding due to an incorrect identification number. H&r block free online   If you have been notified by a payer that you are subject to backup withholding because you have provided an incorrect SSN or employer identification number, you can stop it by following the instructions the payer gives you. H&r block free online Reporting backup withholding. H&r block free online   If backup withholding is deducted from your interest or dividend income or other reportable payment, the bank or other business must give you an information return for the year (for example, a Form 1099-INT) indicating the amount withheld. H&r block free online The information return will show any backup withholding as “Federal income tax withheld. H&r block free online ” Nonresident aliens. H&r block free online    Generally, payments made to nonresident aliens are not subject to backup withholding. H&r block free online You can use Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to certify exempt status. H&r block free online However, this does not exempt you from the 30% (or lower treaty) withholding rate that may apply to your investment income. H&r block free online For information on the 30% rate, see Publication 519, U. H&r block free online S. H&r block free online Tax Guide for Aliens. H&r block free online Penalties. H&r block free online   There are civil and criminal penalties for giving false information to avoid backup withholding. H&r block free online The civil penalty is $500. H&r block free online The criminal penalty, upon conviction, is a fine of up to $1,000, or imprisonment of up to 1 year, or both. H&r block free online Where to report investment income. H&r block free online   Table 1-1 gives an overview of the forms and schedules to use to report some common types of investment income. H&r block free online But see the rest of this publication for detailed information about reporting investment income. H&r block free online Joint accounts. H&r block free online   If two or more persons hold property (such as a savings account, bond, or stock) as joint tenants, tenants by the entirety, or tenants in common, each person's share of any interest or dividends from the property is determined by local law. H&r block free online Community property states. H&r block free online   If you are married and receive a distribution that is community income, one-half of the distribution is generally considered to be received by each spouse. H&r block free online If you file separate returns, you must each report one-half of any taxable distribution. H&r block free online See Publication 555, Community Property, for more information on community income. H&r block free online   If the distribution is not considered community property and you and your spouse file separate returns, each of you must report your separate taxable distributions. H&r block free online Example. H&r block free online You and your spouse have a joint money market account. H&r block free online Under state law, half the income from the account belongs to you, and half belongs to your spouse. H&r block free online If you file separate returns, you each report half the income. H&r block free online Income from property given to a child. H&r block free online   Property you give as a parent to your child under the Model Gifts of Securities to Minors Act, the Uniform Gifts to Minors Act, or any similar law becomes the child's property. H&r block free online   Income from the property is taxable to the child, except that any part used to satisfy a legal obligation to support the child is taxable to the parent or guardian having that legal obligation. H&r block free online Savings account with parent as trustee. H&r block free online   Interest income from a savings account opened for a minor child, but placed in the name and subject to the order of the parents as trustees, is taxable to the child if, under the law of the state in which the child resides, both of the following are true. H&r block free online The savings account legally belongs to the child. H&r block free online The parents are not legally permitted to use any of the funds to support the child. H&r block free online Table 1-1. H&r block free online Where To Report Common Types of Investment Income (For detailed information about reporting investment income, see the rest of this publication, especially How To Report Interest Income and How To Report Dividend Income in chapter 1. H&r block free online ) Type of Income If you file Form 1040, report on . H&r block free online . H&r block free online . H&r block free online If you can file Form 1040A, report on . H&r block free online . H&r block free online . H&r block free online If you can file Form 1040EZ, report on . H&r block free online . H&r block free online . H&r block free online Tax-exempt interest (Form 1099-INT, box 8) Line 8b Line 8b Space to the left of line 2 (enter “TEI” and the amount) Taxable interest that totals $1,500 or less Line 8a (You may need to file Schedule B as well. H&r block free online ) Line 8a (You may need to file Schedule B as well. H&r block free online ) Line 2 Taxable interest that totals more than $1,500 Line 8a; also use Schedule B, line 1 Line 8a; also use Schedule B, line 1   Savings bond interest you will exclude because of higher education expenses Schedule B; also use Form 8815 Schedule B; also use Form 8815   Ordinary dividends that total $1,500 or less Line 9a (You may need to file Schedule B as well. H&r block free online ) Line 9a (You may need to file Schedule B as well. H&r block free online )   Ordinary dividends that total more than $1,500 Line 9a; also use Schedule B, line 5 Line 9a; also use Schedule B, line 5   Qualified dividends (if you do not have to file Schedule D) Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 2 Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 2   Qualified dividends (if you have to file Schedule D) Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet, line 2 You cannot use Form 1040A    You cannot use Form 1040EZ Capital gain distributions (if you do not have to file Schedule D) Line 13; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 3 Line 10; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 3   Capital gain distributions (if you have to file Schedule D) Schedule D, line 13; also use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet     Section 1250, 1202, or collectibles gain (Form 1099-DIV, box 2b, 2c, or 2d) Form 8949 and Schedule D     Nondividend distributions (Form 1099-DIV, box 3) Generally not reported*     Undistributed capital gains (Form 2439, boxes 1a - 1d) Schedule D     Gain or loss from sales of stocks or bonds Line 13; also use Form 8949, Schedule D, and the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet You cannot use Form 1040A   Gain or loss from exchanges of like-kind investment property Line 13; also use Schedule D, Form 8824, and the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet     *Report any amounts in excess of your basis in your mutual fund shares on Form 8949. H&r block free online Use Part II if you held the shares more than 1 year. H&r block free online Use Part I if you held your mutual fund shares 1 year or less. H&r block free online For details on Form 8949, see Reporting Capital Gains and Losses in chapter 4, and the Instructions for Form 8949. H&r block free online Accuracy-related penalty. H&r block free online   An accuracy-related penalty of 20% can be charged for underpayments of tax due to negligence or disregard of rules or regulations or substantial understatement of tax. H&r block free online For information on the penalty and any interest that applies, see Penalties in chapter 2. H&r block free online Interest Income This section discusses the tax treatment of different types of interest income. H&r block free online In general, any interest that you receive or that is credited to your account and can be withdrawn is taxable income. H&r block free online (It does not have to be entered in your passbook. H&r block free online ) Exceptions to this rule are discussed later. H&r block free online Form 1099-INT. H&r block free online   Interest income is generally reported to you on Form 1099-INT, or a similar statement, by banks, savings and loans, and other payers of interest. H&r block free online This form shows you the interest you received during the year. H&r block free online Keep this form for your records. H&r block free online You do not have to attach it to your tax return. H&r block free online   Report on your tax return the total interest income you receive for the tax year. H&r block free online Interest not reported on Form 1099-INT. H&r block free online   Even if you do not receive Form 1099-INT, you must still report all of your interest income. H&r block free online For example, you may receive distributive shares of interest from partnerships or S corporations. H&r block free online This interest is reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. H&r block free online , and Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. H&r block free online Nominees. H&r block free online   Generally, if someone receives interest as a nominee for you, that person must give you a Form 1099-INT showing the interest received on your behalf. H&r block free online   If you receive a Form 1099-INT that includes amounts belonging to another person, see the discussion on Nominee distributions , later, under How To Report Interest Income. H&r block free online Incorrect amount. H&r block free online   If you receive a Form 1099-INT that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. H&r block free online The new Form 1099-INT you receive will be marked “Corrected. H&r block free online ” Form 1099-OID. H&r block free online   Reportable interest income also may be shown on Form 1099-OID, Original Issue Discount. H&r block free online For more information about amounts shown on this form, see Original Issue Discount (OID) , later in this chapter. H&r block free online Exempt-interest dividends. H&r block free online   Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. H&r block free online (However, see Information reporting requirement , next. H&r block free online ) Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. H&r block free online You do not reduce your basis for distributions that are exempt-interest dividends. H&r block free online Information reporting requirement. H&r block free online   Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file. H&r block free online This is an information reporting requirement and does not change the exempt-interest dividends into taxable income. H&r block free online See How To Report Interest Income , later. H&r block free online Note. H&r block free online Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. H&r block free online The exempt-interest dividends subject to the alternative minimum tax are shown in box 11 of Form 1099-DIV. H&r block free online See Form 6251 and its instructions for more information about this tax. H&r block free online Private activity bonds are discussed later under State or Local Government Obligations. H&r block free online Interest on VA dividends. H&r block free online   Interest on insurance dividends left on deposit with the Department of Veterans Affairs (VA) is not taxable. H&r block free online This includes interest paid on dividends on converted United States Government Life Insurance policies and on National Service Life Insurance policies. H&r block free online Individual retirement arrangements (IRAs). H&r block free online   Interest on a Roth IRA generally is not taxable. H&r block free online Interest on a traditional IRA is tax deferred. H&r block free online You generally do not include it in your income until you make withdrawals from the IRA. H&r block free online See Publication 590 for more information. H&r block free online Taxable Interest — General Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. H&r block free online The following are some sources of taxable interest. H&r block free online Dividends that are actually interest. H&r block free online   Certain distributions commonly called dividends are actually interest. H&r block free online You must report as interest so-called “dividends” on deposits or on share accounts in: Cooperative banks, Credit unions, Domestic building and loan associations, Domestic savings and loan associations, Federal savings and loan associations, and Mutual savings banks. H&r block free online  The “dividends” will be shown as interest income on Form 1099-INT. H&r block free online Money market funds. H&r block free online   Money market funds are offered by nonbank financial institutions such as mutual funds and stock brokerage houses, and pay dividends. H&r block free online Generally, amounts you receive from money market funds should be reported as dividends, not as interest. H&r block free online Certificates of deposit and other deferred interest accounts. H&r block free online   If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the account. H&r block free online You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. H&r block free online The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. H&r block free online If interest is deferred for more than 1 year, see Original Issue Discount (OID) , later. H&r block free online Interest subject to penalty for early withdrawal. H&r block free online   If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. H&r block free online You must report the total amount of interest paid or credited to your account during the year, without subtracting the penalty. H&r block free online See Penalty on early withdrawal of savings under How To Report Interest Income, later, for more information on how to report the interest and deduct the penalty. H&r block free online Money borrowed to invest in certificate of deposit. H&r block free online   The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. H&r block free online You must report the total interest you earn on the certificate in your income. H&r block free online If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income. H&r block free online See Interest Expenses in chapter 3. H&r block free online Example. H&r block free online You deposited $5,000 with a bank and borrowed $5,000 from the bank to make up the $10,000 minimum deposit required to buy a 6-month certificate of deposit. H&r block free online The certificate earned $575 at maturity in 2013, but you received only $265, which represented the $575 you earned minus $310 interest charged on your $5,000 loan. H&r block free online The bank gives you a Form 1099-INT for 2013 showing the $575 interest you earned. H&r block free online The bank also gives you a statement showing that you paid $310 interest for 2013. H&r block free online You must include the $575 in your income. H&r block free online If you itemize your deductions on Schedule A (Form 1040), Itemized Deductions, you can deduct $310, subject to the net investment income limit. H&r block free online Gift for opening account. H&r block free online   If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest. H&r block free online   For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. H&r block free online For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. H&r block free online The value is determined by the cost to the financial institution. H&r block free online Example. H&r block free online You open a savings account at your local bank and deposit $800. H&r block free online The account earns $20 interest. H&r block free online You also receive a $15 calculator. H&r block free online If no other interest is credited to your account during the year, the Form 1099-INT you receive will show $35 interest for the year. H&r block free online You must report $35 interest income on your tax return. H&r block free online Interest on insurance dividends. H&r block free online   Interest on insurance dividends left on deposit with an insurance company that can be withdrawn annually is taxable to you in the year it is credited to your account. H&r block free online However, if you can withdraw it only on the anniversary date of the policy (or other specified date), the interest is taxable in the year that date occurs. H&r block free online Prepaid insurance premiums. H&r block free online   Any increase in the value of prepaid insurance premiums, advance premiums, or premium deposit funds is interest if it is applied to the payment of premiums due on insurance policies or made available for you to withdraw. H&r block free online U. H&r block free online S. H&r block free online obligations. H&r block free online   Interest on U. H&r block free online S. H&r block free online obligations, such as U. H&r block free online S. H&r block free online Treasury bills, notes, and bonds, issued by any agency or instrumentality of the United States is taxable for federal income tax purposes. H&r block free online Interest on tax refunds. H&r block free online   Interest you receive on tax refunds is taxable income. H&r block free online Interest on condemnation award. H&r block free online   If the condemning authority pays you interest to compensate you for a delay in payment of an award, the interest is taxable. H&r block free online Installment sale payments. H&r block free online   If a contract for the sale or exchange of property provides for deferred payments, it also usually provides for interest payable with the deferred payments. H&r block free online That interest is taxable when you receive it. H&r block free online If little or no interest is provided for in a deferred payment contract, part of each payment may be treated as interest. H&r block free online See Unstated Interest and Original Issue Discount (OID) in Publication 537. H&r block free online Interest on annuity contract. H&r block free online   Accumulated interest on an annuity contract you sell before its maturity date is taxable. H&r block free online Usurious interest. H&r block free online   Usurious interest is interest charged at an illegal rate. H&r block free online This is taxable as interest unless state law automatically changes it to a payment on the principal. H&r block free online Interest income on frozen deposits. H&r block free online   Exclude from your gross income interest on frozen deposits. H&r block free online A deposit is frozen if, at the end of the year, you cannot withdraw any part of the deposit because: The financial institution is bankrupt or insolvent, or The state in which the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt or insolvent. H&r block free online   The amount of interest you must exclude is the interest that was credited on the frozen deposits minus the sum of: The net amount you withdrew from these deposits during the year, and The amount you could have withdrawn as of the end of the year (not reduced by any penalty for premature withdrawals of a time deposit). H&r block free online If you receive a Form 1099-INT for interest income on deposits that were frozen at the end of 2013, see Frozen deposits under How To Report Interest Income for information about reporting this interest income exclusion on your tax return. H&r block free online   The interest you exclude is treated as credited to your account in the following year. H&r block free online You must include it in income in the year you can withdraw it. H&r block free online Example. H&r block free online $100 of interest was credited on your frozen deposit during the year. H&r block free online You withdrew $80 but could not withdraw any more as of the end of the year. H&r block free online You must include $80 in your income and exclude $20 from your income for the year. H&r block free online You must include the $20 in your income for the year you can withdraw it. H&r block free online Bonds traded flat. H&r block free online    If you buy a bond at a discount when interest has been defaulted or when the interest has accrued but has not been paid, the transaction is described as trading a bond flat. H&r block free online The defaulted or unpaid interest is not income and is not taxable as interest if paid later. H&r block free online When you receive a payment of that interest, it is a return of capital that reduces the remaining cost basis of your bond. H&r block free online Interest that accrues after the date of purchase, however, is taxable interest income for the year received or accrued. H&r block free online See Bonds Sold Between Interest Dates , later in this chapter. H&r block free online Below-Market Loans If you make a below-market gift or demand loan, you must report as interest income any forgone interest (defined later) from that loan. H&r block free online The below-market loan rules and exceptions are described in this section. H&r block free online For more information, see section 7872 of the Internal Revenue Code and its regulations. H&r block free online If you receive a below-market loan, you may be able to deduct the forgone interest as well as any interest you actually paid, but not if it is personal interest. H&r block free online Loans subject to the rules. H&r block free online   The rules for below-market loans apply to: Gift loans, Pay-related loans, Corporation-shareholder loans, Tax avoidance loans, and Certain loans made to qualified continuing care facilities under a continuing care contract. H&r block free online A pay-related loan is any below-market loan between an employer and an employee or between an independent contractor and a person for whom the contractor provides services. H&r block free online A tax avoidance loan is any below-market loan where the avoidance of federal tax is one of the main purposes of the interest arrangement. H&r block free online Forgone interest. H&r block free online   For any period, forgone interest is: The amount of interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. H&r block free online Applicable federal rate. H&r block free online   Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. H&r block free online Some IRS offices have these bulletins available for research. H&r block free online See chapter 5, How To Get Tax Help , for other ways to get this information. H&r block free online Rules for below-market loans. H&r block free online   The rules that apply to a below-market loan depend on whether the loan is a gift loan, demand loan, or term loan. H&r block free online Gift and demand loans. H&r block free online   A gift loan is any below-market loan where the forgone interest is in the nature of a gift. H&r block free online   A demand loan is a loan payable in full at any time upon demand by the lender. H&r block free online A demand loan is a below-market loan if no interest is charged or if interest is charged at a rate below the applicable federal rate. H&r block free online   A demand loan or gift loan that is a below-market loan is generally treated as an arm's-length transaction in which the lender is treated as having made: A loan to the borrower in exchange for a note that requires the payment of interest at the applicable federal rate, and An additional payment to the borrower in an amount equal to the forgone interest. H&r block free online The borrower is generally treated as transferring the additional payment back to the lender as interest. H&r block free online The lender must report that amount as interest income. H&r block free online   The lender's additional payment to the borrower is treated as a gift, dividend, contribution to capital, pay for services, or other payment, depending on the substance of the transaction. H&r block free online The borrower may have to report this payment as taxable income, depending on its classification. H&r block free online These transfers are considered to occur annually, generally on December 31. H&r block free online Term loans. H&r block free online   A term loan is any loan that is not a demand loan. H&r block free online A term loan is a below-market loan if the amount of the loan is more than the present value of all payments due under the loan. H&r block free online   A lender who makes a below-market term loan other than a gift loan is treated as transferring an additional lump-sum cash payment to the borrower (as a dividend, contribution to capital, etc. H&r block free online ) on the date the loan is made. H&r block free online The amount of this payment is the amount of the loan minus the present value, at the applicable federal rate, of all payments due under the loan. H&r block free online An equal amount is treated as original issue discount (OID). H&r block free online The lender must report the annual part of the OID as interest income. H&r block free online The borrower may be able to deduct the OID as interest expense. H&r block free online See Original Issue Discount (OID) , later. H&r block free online Exceptions to the below-market loan rules. H&r block free online   Exceptions to the below-market loan rules are discussed here. H&r block free online Exception for loans of $10,000 or less. H&r block free online   The rules for below-market loans do not apply to any day on which the total outstanding amount of loans between the borrower and lender is $10,000 or less. H&r block free online This exception applies only to: Gift loans between individuals if the gift loan is not directly used to buy or carry income-producing assets, and Pay-related loans or corporation-shareholder loans if the avoidance of federal tax is not a principal purpose of the interest arrangement. H&r block free online This exception does not apply to a term loan described in (2) earlier that previously has been subject to the below-market loan rules. H&r block free online Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. H&r block free online Exception for loans to continuing care facilities. H&r block free online   Loans to qualified continuing care facilities under continuing care contracts are not subject to the rules for below-market loans for the calendar year if the lender or the lender's spouse is age 62 or older at the end of the year. H&r block free online For the definitions of qualified continuing care facility and continuing care contract, see Internal Revenue Code section 7872(h). H&r block free online Exception for loans without significant tax effect. H&r block free online   Loans are excluded from the below-market loan rules if their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. H&r block free online These loans include: Loans made available by the lender to the general public on the same terms and conditions that are consistent with the lender's customary business practice; Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public; Certain employee-relocation loans; Certain loans from a foreign person, unless the interest income would be effectively connected with the conduct of a U. H&r block free online S. H&r block free online trade or business and would not be exempt from U. H&r block free online S. H&r block free online tax under an income tax treaty; Gift loans to a charitable organization, contributions to which are deductible, if the total outstanding amount of loans between the organization and lender is $250,000 or less at all times during the tax year; and Other loans on which the interest arrangement can be shown to have no significant effect on the federal tax liability of the lender or the borrower. H&r block free online For a loan described in (6) above, all the facts and circumstances are used to determine if the interest arrangement has a significant effect on the federal tax liability of the lender or borrower. H&r block free online Some factors to be considered are: Whether items of income and deduction generated by the loan offset each other; The amount of these items; The cost to you of complying with the below-market loan rules, if they were to apply; and Any reasons other than taxes for structuring the transaction as a below-market loan. H&r block free online If you structure a transaction to meet this exception and one of the principal purposes of that structure is the avoidance of federal tax, the loan will be considered a tax-avoidance loan, and this exception will not apply. H&r block free online Limit on forgone interest for gift loans of $100,000 or less. H&r block free online   For gift loans between individuals, if the outstanding loans between the lender and borrower total $100,000 or less, the forgone interest to be included in income by the lender and deducted by the borrower is limited to the amount of the borrower's net investment income for the year. H&r block free online If the borrower's net investment income is $1,000 or less, it is treated as zero. H&r block free online This limit does not apply to a loan if the avoidance of federal tax is one of the main purposes of the interest arrangement. H&r block free online Effective dates. H&r block free online    These rules apply to term loans made after June 6, 1984, and to demand loans outstanding after that date. H&r block free online U. H&r block free online S. H&r block free online Savings Bonds This section provides tax information on U. H&r block free online S. H&r block free online savings bonds. H&r block free online It explains how to report the interest income on these bonds and how to treat transfers of these bonds. H&r block free online U. H&r block free online S. H&r block free online savings bonds currently offered to individuals include Series EE bonds and Series I bonds. H&r block free online For other information on U. H&r block free online S. H&r block free online savings bonds, write to:  For Series HH/H: Bureau of the Fiscal Service Division of Customer Assistance P. H&r block free online O. H&r block free online Box 2186 Parkersburg, WV 26106-2186  For Series EE and I paper savings bonds: Bureau of the Fiscal Service Division of Customer Assistance P. H&r block free online O. H&r block free online Box 7012 Parkersburg, WV 26106-7012  For Series EE and I electronic bonds: Bureau of the Fiscal Service  Division of Customer Assistance P. H&r block free online O. H&r block free online Box 7015 Parkersburg, WV 26106-7015 Or, on the Internet, visit: www. H&r block free online treasurydirect. H&r block free online gov/indiv/indiv. H&r block free online htm. H&r block free online Accrual method taxpayers. H&r block free online   If you use an accrual method of accounting, you must report interest on U. H&r block free online S. H&r block free online savings bonds each year as it accrues. H&r block free online You cannot postpone reporting interest until you receive it or until the bonds mature. H&r block free online Cash method taxpayers. H&r block free online   If you use the cash method of accounting, as most individual taxpayers do, you generally report the interest on U. H&r block free online S. H&r block free online savings bonds when you receive it. H&r block free online But see Reporting options for cash method taxpayers , later. H&r block free online Series HH bonds. H&r block free online   These bonds were issued at face value. H&r block free online Interest is paid twice a year by direct deposit to your bank account. H&r block free online If you are a cash method taxpayer, you must report interest on these bonds as income in the year you receive it. H&r block free online   Series HH bonds were first offered in 1980 and last offered in August 2004. H&r block free online Before 1980, series H bonds were issued. H&r block free online Series H bonds are treated the same as series HH bonds. H&r block free online If you are a cash method taxpayer, you must report the interest when you receive it. H&r block free online   Series H bonds have a maturity period of 30 years. H&r block free online Series HH bonds mature in 20 years. H&r block free online The last series H bonds matured in 2009. H&r block free online The last series HH bonds will mature in 2024. H&r block free online Series EE and series I bonds. H&r block free online   Interest on these bonds is payable when you redeem the bonds. H&r block free online The difference between the purchase price and the redemption value is taxable interest. H&r block free online Series EE bonds. H&r block free online   Series EE bonds were first offered in January 1980 and have a maturity period of 30 years. H&r block free online Before July 1980, series E bonds were issued. H&r block free online The original 10-year maturity period of series E bonds has been extended to 40 years for bonds issued before December 1965 and 30 years for bonds issued after November 1965. H&r block free online Paper series EE and series E bonds are issued at a discount. H&r block free online The face value is payable to you at maturity. H&r block free online Electronic series EE bonds are issued at their face value. H&r block free online The face value plus accrued interest is payable to you at maturity. H&r block free online As of January 1, 2012, paper savings bonds were no longer sold at financial institutions. H&r block free online    Owners of paper series EE bonds can convert them to electronic bonds. H&r block free online These converted bonds do not retain the denomination listed on the paper certificate but are posted at their purchase price (with accrued interest). H&r block free online Series I bonds. H&r block free online   Series I bonds were first offered in 1998. H&r block free online These are inflation-indexed bonds issued at their face amount with a maturity period of 30 years. H&r block free online The face value plus all accrued interest is payable to you at maturity. H&r block free online Reporting options for cash method taxpayers. H&r block free online   If you use the cash method of reporting income, you can report the interest on series EE, series E, and series I bonds in either of the following ways. H&r block free online Method 1. H&r block free online Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year in which they mature. H&r block free online (However, see Savings bonds traded , later. H&r block free online )  Note. H&r block free online Series EE bonds issued in 1983 matured in 2013. H&r block free online If you have used method 1, you generally must report the interest on these bonds on your 2013 return. H&r block free online The last series E bonds were issued in 1980 and matured in 2010. H&r block free online If you used method 1, you generally should have reported the interest on these bonds on your 2010 return. H&r block free online Method 2. H&r block free online Choose to report the increase in redemption value as interest each year. H&r block free online  You must use the same method for all series EE, series E, and series I bonds you own. H&r block free online If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1. H&r block free online If you plan to cash your bonds in the same year you will pay for higher educational expenses, you may want to use method 1 because you may be able to exclude the interest from your income. H&r block free online To learn how, see Education Savings Bond Program, later. H&r block free online Change from method 1. H&r block free online   If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission from the IRS. H&r block free online In the year of change, you must report all interest accrued to date and not previously reported for all your bonds. H&r block free online   Once you choose to report the interest each year, you must continue to do so for all series EE, series E, and series I bonds you own and for any you get later, unless you request permission to change, as explained next. H&r block free online Change from method 2. H&r block free online   To change from method 2 to method 1, you must request permission from the IRS. H&r block free online Permission for the change is automatically granted if you send the IRS a statement that meets all the following requirements. H&r block free online You have typed or printed the following number at the top: “131. H&r block free online ” It includes your name and social security number under “131. H&r block free online ” It includes the year of change (both the beginning and ending dates). H&r block free online It identifies the savings bonds for which you are requesting this change. H&r block free online It includes your agreement to: Report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest; and Report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years. H&r block free online   You must attach this statement to your tax return for the year of change, which you must file by the due date (including extensions). H&r block free online   You can have an automatic extension of 6 months from the due date of your return for the year of change (excluding extensions) to file the statement with an amended return. H&r block free online On the statement, type or print “Filed pursuant to section 301. H&r block free online 9100-2. H&r block free online ” To get this extension, you must have filed your original return for the year of the change by the due date (including extensions). H&r block free online    By the date you file the original statement with your return, you must also send a signed copy to the address below. H&r block free online    Internal Revenue Service Attention: CC:IT&A (Automatic Rulings Branch) P. H&r block free online O. H&r block free online Box 7604 Benjamin Franklin Station Washington, DC 20044   If you use a private delivery service, send the signed copy to the address below. H&r block free online Internal Revenue Service Attention: CC:IT&A  (Automatic Rulings Branch) Room 5336 1111 Constitution Avenue, NW Washington, DC 20224    Instead of filing this statement, you can request permission to change from method 2 to method 1 by filing Form 3115. H&r block free online In that case, follow the form instructions for an automatic change. H&r block free online No user fee is required. H&r block free online Co-owners. H&r block free online   If a U. H&r block free online S. H&r block free online savings bond is issued in the names of co-owners, such as you and your child or you and your spouse, interest on the bond is generally taxable to the co-owner who bought the bond. H&r block free online One co-owner's funds used. H&r block free online   If you used your funds to buy the bond, you must pay the tax on the interest. H&r block free online This is true even if you let the other co-owner redeem the bond and keep all the proceeds. H&r block free online Under these circumstances, the co-owner who redeemed the bond will receive a Form 1099-INT at the time of redemption and must provide you with another Form 1099-INT showing the amount of interest from the bond taxable to you. H&r block free online The co-owner who redeemed the bond is a “nominee. H&r block free online ” See Nominee distributions under How To Report Interest Income, later, for more information about how a person who is a nominee reports interest income belonging to another person. H&r block free online Both co-owners' funds used. H&r block free online   If you and the other co-owner each contribute part of the bond's purchase price, the interest is generally taxable to each of you, in proportion to the amount each of you paid. H&r block free online Community property. H&r block free online   If you and your spouse live in a community property state and hold bonds as community property, one-half of the interest is considered received by each of you. H&r block free online If you file separate returns, each of you generally must report one-half of the bond interest. H&r block free online For more information about community property, see Publication 555. H&r block free online Table 1-2. H&r block free online   These rules are also shown in Table 1-2. H&r block free online Child as only owner. H&r block free online   Interest on U. H&r block free online S. H&r block free online savings bonds bought for and registered only in the name of your child is income to your child, even if you paid for the bonds and are named as beneficiary. H&r block free online If the bonds are series EE, series E, or series I bonds, the interest on the bonds is income to your child in the earlier of the year the bonds are cashed or disposed of or the year the bonds mature, unless your child chooses to report the interest income each year. H&r block free online Choice to report interest each year. H&r block free online   The choice to report the accrued interest each year can be made either by your child or by you for your child. H&r block free online This choice is made by filing an income tax return that shows all the interest earned to date, and by stating on the return that your child chooses to report the interest each year. H&r block free online Either you or your child should keep a copy of this return. H&r block free online   Unless your child is otherwise required to file a tax return for any year after making this choice, your child does not have to file a return only to report the annual accrual of U. H&r block free online S. H&r block free online savings bond interest under this choice. H&r block free online However, see Tax on unearned income of certain children , earlier, under General Information. H&r block free online Neither you nor your child can change the way you report the interest unless you request permission from the IRS, as discussed earlier under Change from method 2 . H&r block free online Ownership transferred. H&r block free online   If you bought series E, series EE, or series I bonds entirely with your own funds and had them reissued in your co-owner's name or beneficiary's name alone, you must include in your gross income for the year of reissue all interest that you earned on these bonds and have not previously reported. H&r block free online But, if the bonds were reissued in your name alone, you do not have to report the interest accrued at that time. H&r block free online   This same rule applies when bonds (other than bonds held as community property) are transferred between spouses or incident to divorce. H&r block free online Example. H&r block free online You bought series EE bonds entirely with your own funds. H&r block free online You did not choose to report the accrued interest each year. H&r block free online Later, you transfer the bonds to your former spouse under a divorce agreement. H&r block free online You must include the deferred accrued interest, from the date of the original issue of the bonds to the date of transfer, in your income in the year of transfer. H&r block free online Your former spouse includes in income the interest on the bonds from the date of transfer to the date of redemption. H&r block free online Table 1-2. H&r block free online Who Pays the Tax on U. H&r block free online S. H&r block free online Savings Bond Interest IF . H&r block free online . H&r block free online . H&r block free online THEN the interest must be reported by . H&r block free online . H&r block free online . H&r block free online you buy a bond in your name and the name of another person as co-owners, using only your own funds you. H&r block free online you buy a bond in the name of another person, who is the sole owner of the bond the person for whom you bought the bond. H&r block free online you and another person buy a bond as co-owners, each contributing part of the purchase price both you and the other co-owner, in proportion to the amount each paid for the bond. H&r block free online you and your spouse, who live in a community property state, buy a bond that is community property you and your spouse. H&r block free online If you file separate returns, both you and your spouse generally report one-half of the interest. H&r block free online Purchased jointly. H&r block free online   If you and a co-owner each contributed funds to buy series E, series EE, or series I bonds jointly and later have the bonds reissued in the co-owner's name alone, you must include in your gross income for the year of reissue your share of all the interest earned on the bonds that you have not previously reported. H&r block free online The former co-owner does not have to include in gross income at the time of reissue his or her share of the interest earned that was not reported before the transfer. H&r block free online This interest, however, as well as all interest earned after the reissue, is income to the former co-owner. H&r block free online   This income-reporting rule also applies when the bonds are reissued in the name of your former co-owner and a new co-owner. H&r block free online But the new co-owner will report only his or her share of the interest earned after the transfer. H&r block free online   If bonds that you and a co-owner bought jointly are reissued to each of you separately in the same proportion as your contribution to the purchase price, neither you nor your co-owner has to report at that time the interest earned before the bonds were reissued. H&r block free online Example 1. H&r block free online You and your spouse each spent an equal amount to buy a $1,000 series EE savings bond. H&r block free online The bond was issued to you and your spouse as co-owners. H&r block free online You both postpone reporting interest on the bond. H&r block free online You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. H&r block free online At that time neither you nor your spouse has to report the interest earned to the date of reissue. H&r block free online Example 2. H&r block free online You bought a $1,000 series EE savings bond entirely with your own funds. H&r block free online The bond was issued to you and your spouse as co-owners. H&r block free online You both postponed reporting interest on the bond. H&r block free online You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. H&r block free online You must report half the interest earned to the date of reissue. H&r block free online Transfer to a trust. H&r block free online   If you own series E, series EE, or series I bonds and transfer them to a trust, giving up all rights of ownership, you must include in your income for that year the interest earned to the date of transfer if you have not already reported it. H&r block free online However, if you are considered the owner of the trust and if the increase in value both before and after the transfer continues to be taxable to you, you can continue to defer reporting the interest earned each year. H&r block free online You must include the total interest in your income in the year you cash or dispose of the bonds or the year the bonds finally mature, whichever is earlier. H&r block free online   The same rules apply to previously unreported interest on series EE or series E bonds if the transfer to a trust consisted of series HH or series H bonds you acquired in a trade for the series EE or series E bonds. H&r block free online See Savings bonds traded , later. H&r block free online Decedents. H&r block free online   The manner of reporting interest income on series E, series EE, or series I bonds, after the death of the owner (decedent), depends on the accounting and income-reporting methods previously used by the decedent. H&r block free online Decedent who reported interest each year. H&r block free online   If the bonds transferred because of death were owned by a person who used an accrual method, or who used the cash method and had chosen to report the interest each year, the interest earned in the year of death up to the date of death must be reported on that person's final return. H&r block free online The person who acquires the bonds includes in income only interest earned after the date of death. H&r block free online Decedent who postponed reporting interest. H&r block free online   If the transferred bonds were owned by a decedent who had used the cash method and had not chosen to report the interest each year, and who had bought the bonds entirely with his or her own funds, all interest earned before death must be reported in one of the following ways. H&r block free online The surviving spouse or personal representative (executor, administrator, etc. H&r block free online ) who files the final income tax return of the decedent can choose to include on that return all interest earned on the bonds before the decedent's death. H&r block free online The person who acquires the bonds then includes in income only interest earned after the date of death. H&r block free online If the choice in (1) is not made, the interest earned up to the date of death is income in respect of the decedent and should not be included in the decedent's final return. H&r block free online All interest earned both before and after the decedent's death (except any part reported by the estate on its income tax return) is income to the person who acquires the bonds. H&r block free online If that person uses the cash method and does not choose to report the interest each year, he or she can postpone reporting it until the year the bonds are cashed or disposed of or the year they mature, whichever is earlier. H&r block free online In the year that person reports the interest, he or she can claim a deduction for any federal estate tax paid on the part of the interest included in the decedent's estate. H&r block free online For more information on income in respect of a decedent, see Publication 559, Survivors, Executors, and Administrators. H&r block free online Example 1. H&r block free online Your uncle, a cash method taxpayer, died and left you a $1,000 series EE bond. H&r block free online He had bought the bond for $500 and had not chosen to report the interest each year. H&r block free online At the date of death, interest of $200 had accrued on the bond, and its value of $700 was included in your uncle's estate. H&r block free online Your uncle's executor chose not to include the $200 accrued interest in your uncle's final income tax return. H&r block free online The $200 is income in respect of the decedent. H&r block free online You are a cash method taxpayer and do not choose to report the interest each year as it is earned. H&r block free online If you cash the bond when it reaches maturity value of $1,000, you report $500 interest income—the difference between maturity value of $1,000 and the original cost of $500. H&r block free online For that year, you can deduct (as a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit) any federal estate tax paid because the $200 interest was included in your uncle's estate. H&r block free online Example 2. H&r block free online If, in Example 1 , the executor had chosen to include the $200 accrued interest in your uncle's final return, you would report only $300 as interest when you cashed the bond at maturity. H&r block free online $300 is the interest earned after your uncle's death. H&r block free online Example 3. H&r block free online If, in Example 1 , you make or have made the choice to report the increase in redemption value as interest each year, you include in gross income for the year you acquire the bond all of the unreported increase in value of all series E, series EE, and series I bonds you hold, including the $200 on the bond you inherited from your uncle. H&r block free online Example 4. H&r block free online When your aunt died, she owned series HH bonds that she had acquired in a trade for series EE bonds. H&r block free online You were the beneficiary of these bonds. H&r block free online Your aunt used the cash method and did not choose to report the interest on the series EE bonds each year as it accrued. H&r block free online Your aunt's executor chose not to include any interest earned before your aunt's death on her final return. H&r block free online The income in respect of the decedent is the sum of the unreported interest on the series EE bonds and the interest, if any, payable on the series HH bonds but not received as of the date of your aunt's death. H&r block free online You must report any interest received during the year as income on your return. H&r block free online The part of the interest payable but not received before your aunt's death is income in respect of the decedent and may qualify for the estate tax deduction. H&r block free online For information on when to report the interest on the series EE bonds traded, see Savings bonds traded , later. H&r block free online Savings bonds distributed from a retirement or profit-sharing plan. H&r block free online   If you acquire a U. H&r block free online S. H&r block free online savings bond in a taxable distribution from a retirement or profit-sharing plan, your income for the year of distribution includes the bond's redemption value (its cost plus the interest accrued before the distribution). H&r block free online When you redeem the bond (whether in the year of distribution or later), your interest income includes only the interest accrued after the bond was distributed. H&r block free online To figure the interest reported as a taxable distribution and your interest income when you redeem the bond, see Worksheet for savings bonds distributed from a retirement or profit-sharing plan under How To Report Interest Income, later. H&r block free online Savings bonds traded. H&r block free online   If you postponed reporting the interest on your series EE or series E bonds, you did not recognize taxable income when you traded the bonds for series HH or series H bonds, unless you received cash in the trade. H&r block free online (You cannot trade series I bonds for series HH bonds. H&r block free online After August 31, 2004, you cannot trade any other series of bonds for series HH bonds. H&r block free online ) Any cash you received is income up to the amount of the interest earned on the bonds traded. H&r block free online When your series HH or series H bonds mature, or if you dispose of them before maturity, you report as interest the difference between their redemption value and your cost. H&r block free online Your cost is the sum of the amount you paid for the traded series EE or series E bonds plus any amount you had to pay at the time of the trade. H&r block free online Example. H&r block free online You traded series EE bonds (on which you postponed reporting the interest) for $2,500 in series HH bonds and $223 in cash. H&r block free online You reported the $223 as taxable income on your tax return. H&r block free online At the time of the trade, the series EE bonds had accrued interest of $523 and a redemption value of $2,723. H&r block free online You hold the series HH bonds until maturity, when you receive $2,500. H&r block free online You must report $300 as interest income in the year of maturity. H&r block free online This is the difference between their redemption value, $2,500, and your cost, $2,200 (the amount you paid for the series EE bonds). H&r block free online (It is also the difference between the accrued interest of $523 on the series EE bonds and the $223 cash received on the trade. H&r block free online ) Choice to report interest in year of trade. H&r block free online   You could have chosen to treat all of the previously unreported accrued interest on series EE or series E bonds traded for series HH bonds as income in the year of the trade. H&r block free online If you made this choice, it is treated as a change from method 1. H&r block free online See Change from method 1 under Series EE and series I bonds, earlier. H&r block free online Form 1099-INT for U. H&r block free online S. H&r block free online savings bond interest. H&r block free online   When you cash a bond, the bank or other payer that redeems it must give you a Form 1099-INT if the interest part of the payment you receive is $10 or more. H&r block free online Box 3 of your Form 1099-INT should show the interest as the difference between the amount you received and the amount paid for the bond. H&r block free online However, your Form 1099-INT may show more interest than you have to include on your income tax return. H&r block free online For example, this may happen if any of the following are true. H&r block free online You chose to report the increase in the redemption value of the bond each year. H&r block free online The interest shown on your Form 1099-INT will not be reduced by amounts previously included in income. H&r block free online You received the bond from a decedent. H&r block free online The interest shown on your Form 1099-INT will not be reduced by any interest reported by the decedent before death, or on the decedent's final return, or by the estate on the estate's income tax return. H&r block free online Ownership of the bond was transferred. H&r block free online The interest shown on your Form 1099-INT will not be reduced by interest that accrued before the transfer. H&r block free online You were named as a co-owner, and the other co-owner contributed funds to buy the bond. H&r block free online The interest shown on your Form 1099-INT will not be reduced by the amount you received as nominee for the other co-owner. H&r block free online (See Co-owners , earlier in this section, for more information about the reporting requirements. H&r block free online ) You received the bond in a taxable distribution from a retirement or profit-sharing plan. H&r block free online The interest shown on your Form 1099-INT will not be reduced by the interest portion of the amount taxable as a distribution from the plan and not taxable as interest. H&r block free online (This amount is generally shown on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. H&r block free online , for the year of distribution. H&r block free online )   For more information on including the correct amount of interest on your return, see U. H&r block free online S. H&r block free online savings bond interest previously reported or Nominee distributions under How To Report Interest Income, later. H&r block free online    Interest on U. H&r block free online S. H&r block free online savings bonds is exempt from state and local taxes. H&r block free online The Form 1099-INT you receive will indicate the amount that is for U. H&r block free online S. H&r block free online savings bonds interest in box 3. H&r block free online Do not include this income on your state or local income tax return. H&r block free online Education Savings Bond Program You may be able to exclude from income all or part of the interest you receive on the redemption of qualified U. H&r block free online S. H&r block free online savings bonds during the year if you pay qualified higher educational expenses during the same year. H&r block free online This exclusion is known as the Education Savings Bond Program. H&r block free online You do not qualify for this exclusion if your filing status is married filing separately. H&r block free online Form 8815. H&r block free online   Use Form 8815 to figure your exclusion. H&r block free online Attach the form to your Form 1040 or Form 1040A. H&r block free online Qualified U. H&r block free online S. H&r block free online savings bonds. H&r block free online   A qualified U. H&r block free online S. H&r block free online savings bond is a series EE bond issued after 1989 or a series I bond. H&r block free online The bond must be issued either in your name (sole owner) or in your and your spouse's names (co-owners). H&r block free online You must be at least 24 years old before the bond's issue date. H&r block free online For example, a bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or child. H&r block free online    The issue date of a bond may be earlier than the date the bond is purchased because the issue date assigned to a bond is the first day of the month in which it is purchased. H&r block free online Beneficiary. H&r block free online   You can designate any individual (including a child) as a beneficiary of the bond. H&r block free online Verification by IRS. H&r block free online   If you claim the exclusion, the IRS will check it by using bond redemption information from the Department of Treasury. H&r block free online Qualified expenses. H&r block free online   Qualified higher educational expenses are tuition and fees required for you, your spouse, or your dependent (for whom you claim an exemption) to attend an eligible educational institution. H&r block free online   Qualified expenses include any contribution you make to a qualified tuition program or to a Coverdell education savings account. H&r block free online For information about these programs, see Publication 970, Tax Benefits for Education. H&r block free online   Qualified expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program. H&r block free online Eligible educational institutions. H&r block free online   These institutions include most public, private, and nonprofit universities, colleges, and vocational schools that are accredited and eligible to participate in student aid programs run by the Department of Education. H&r block free online Reduction for certain benefits. H&r block free online   You must reduce your qualified higher educational expenses by all of the following tax-free benefits. H&r block free online Tax-free part of scholarships and fellowships. H&r block free online Expenses used to figure the tax-free portion of distributions from a Coverdell ESA. H&r block free online Expenses used to figure the tax-free portion of distributions from a qualified tuition program. H&r block free online Any tax-free payments (other than gifts or inheritances) received as educational assistance, such as: Veterans' educational assistance benefits, Qualified tuition reductions, or Employer-provided educational assistance. H&r block free online Any expense used in figuring the American Opportunity and lifetime learning credits. H&r block free online For information about these benefits, see Publication 970. H&r block free online Amount excludable. H&r block free online   If the total proceeds (interest and principal) from the qualified U. H&r block free online S. H&r block free online savings bonds you redeem during the year are not more than your adjusted qualified higher educational expenses for the year, you may be able to exclude all of the interest. H&r block free online If the proceeds are more than the expenses, you may be able to exclude only part of the interest. H&r block free online   To determine the excludable amount, multiply the interest part of the proceeds by a fraction. H&r block free online The numer