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Harold washington college free tax service Publication 1212 - Main Content Table of Contents Definitions Debt Instruments on the OID List Debt Instruments Not on the OID List Information for Brokers and Other MiddlemenShort-Term Obligations Redeemed at Maturity Long-Term Debt Instruments Certificates of Deposit Bearer Bonds and Coupons Backup Withholding Information for Owners of OID Debt InstrumentsExceptions. Harold washington college free tax service Adjustment for premium. Harold washington college free tax service Adjustment for acquisition premium. Harold washington college free tax service Adjustment for market discount. Harold washington college free tax service Form 1099-OID How To Report OID Figuring OID on Long-Term Debt Instruments Figuring OID on Stripped Bonds and Coupons How To Get Tax HelpLow Income Taxpayer Clinics Definitions The following terms are used throughout this publication. Harold washington college free tax service “Original issue discount” is defined first. Harold washington college free tax service The other terms are listed alphabetically. Harold washington college free tax service Original issue discount (OID). Harold washington college free tax service   OID is a form of interest. Harold washington college free tax service It is the excess of a debt instrument's stated redemption price at maturity over its issue price (acquisition price for a stripped bond or coupon). Harold washington college free tax service Zero coupon bonds and debt instruments that pay no stated interest until maturity are examples of debt instruments that have OID. Harold washington college free tax service Accrual period. Harold washington college free tax service   An accrual period is an interval of time used to measure OID. Harold washington college free tax service The length of an accrual period can be 6 months, a year, or some other period, depending on when the debt instrument was issued. Harold washington college free tax service Acquisition premium. Harold washington college free tax service   Acquisition premium is the excess of a debt instrument's adjusted basis immediately after purchase, including purchase at original issue, over the debt instrument's adjusted issue price at that time. Harold washington college free tax service A debt instrument does not have acquisition premium, however, if the debt instrument was purchased at a premium. Harold washington college free tax service See Premium, later. Harold washington college free tax service Adjusted issue price. Harold washington college free tax service   The adjusted issue price of a debt instrument at the beginning of an accrual period is used to figure the OID allocable to that period. Harold washington college free tax service In general, the adjusted issue price at the beginning of the debt instrument's first accrual period is its issue price. Harold washington college free tax service The adjusted issue price at the beginning of any subsequent accrual period is the sum of the issue price and all the OID includible in income before that accrual period minus any payment previously made on the debt instrument, other than a payment of qualified stated interest. Harold washington college free tax service Debt instrument. Harold washington college free tax service   The term “debt instrument” means any instrument or contractual arrangement that constitutes indebtedness under general principles of federal income tax law (including, for example, a bond, debenture, note, certificate, or other evidence of indebtedness). Harold washington college free tax service It generally does not include an annuity contract. Harold washington college free tax service Issue price. Harold washington college free tax service   For debt instruments listed in Section I-A and Section I-B, the issue price generally is the initial offering price to the public (excluding bond houses and brokers) at which a substantial amount of these instruments was sold. Harold washington college free tax service Market discount. Harold washington college free tax service   Market discount arises when a debt instrument purchased in the secondary market has decreased in value since its issue date, generally because of an increase in interest rates. Harold washington college free tax service An OID debt instrument has market discount if your adjusted basis in the debt instrument immediately after you acquired it (usually its purchase price) was less than the debt instrument's issue price plus the total OID that accrued before you acquired it. Harold washington college free tax service The market discount is the difference between the issue price plus accrued OID and your adjusted basis. Harold washington college free tax service Premium. Harold washington college free tax service   A debt instrument is purchased at a premium if its adjusted basis immediately after purchase is greater than the total of all amounts payable on the debt instrument after the purchase date, other than qualified stated interest. Harold washington college free tax service The premium is the excess of the adjusted basis over the payable amounts. Harold washington college free tax service See Publication 550 for information on the tax treatment of bond premium. Harold washington college free tax service Qualified stated interest. Harold washington college free tax service   In general, qualified stated interest is stated interest that is unconditionally payable in cash or property (other than debt instruments of the issuer) at least annually over the term of the debt instrument at a single fixed rate. Harold washington college free tax service Stated redemption price at maturity. Harold washington college free tax service   A debt instrument's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on the debt instrument other than qualified stated interest. Harold washington college free tax service Yield to maturity (YTM). Harold washington college free tax service   In general, the YTM is the discount rate that, when used in figuring the present value of all principal and interest payments, produces an amount equal to the issue price of the debt instrument. Harold washington college free tax service The YTM is generally shown on the face of the debt instrument or in the literature you receive from your broker. Harold washington college free tax service If you do not have this information, consult your broker, tax advisor, or the issuer. Harold washington college free tax service Debt Instruments on the OID List The OID list on the IRS website can be used by brokers and other middlemen to prepare information returns. Harold washington college free tax service If you own a listed debt instrument, you generally should not rely on the information in the OID list to determine (or compare) the OID to be reported on your tax return. Harold washington college free tax service The OID amounts listed are figured without reference to the price or date at which you acquired the debt instrument. Harold washington college free tax service For information about determining the OID to be reported on your tax return, see the instructions for figuring OID under Information for Owners of OID Debt Instruments, later. Harold washington college free tax service The following discussions explain what information is contained in each section of the list. Harold washington college free tax service Section I. Harold washington college free tax service   This section contains publicly offered, long-term debt instruments. Harold washington college free tax service Section I-A: Corporate Debt Instruments Issued Before 1985. Harold washington college free tax service Section I-B: Corporate Debt Instruments Issued After 1984. Harold washington college free tax service Section I-C: Inflation-Indexed Debt Instruments. Harold washington college free tax service For each publicly offered debt instrument in Section I, the list contains the following information. Harold washington college free tax service The name of the issuer. Harold washington college free tax service The Committee on Uniform Security Identification Procedures (CUSIP) number. Harold washington college free tax service The issue date. Harold washington college free tax service The maturity date. Harold washington college free tax service The issue price expressed as a percent of principal or of stated redemption price at maturity. Harold washington college free tax service The annual stated or coupon interest rate. Harold washington college free tax service (This rate is shown as 0. Harold washington college free tax service 00 if no annual interest payments are provided. Harold washington college free tax service ) The yield to maturity will be added to Section I-B for bonds issued after December 31, 2006. Harold washington college free tax service The total OID accrued up to January 1 of a calendar year. Harold washington college free tax service (This information is not available for every instrument. Harold washington college free tax service ) For long-term debt instruments issued after July 1, 1982, the daily OID for the accrual periods falling in a calendar year and a subsequent year. Harold washington college free tax service The total OID per $1,000 of principal or maturity value for a calendar year and a subsequent year. Harold washington college free tax service Section II. Harold washington college free tax service   This section contains stripped coupons and principal components of U. Harold washington college free tax service S. Harold washington college free tax service Treasury and Government-Sponsored Enterprise debt instruments. Harold washington college free tax service These stripped components are available through the Department of the Treasury's Separate Trading of Registered Interest and Principal of Securities (STRIPS) program and government-sponsored enterprises such as the Resolution Funding Corporation. Harold washington college free tax service This section also includes debt instruments backed by U. Harold washington college free tax service S. Harold washington college free tax service Treasury securities that represent ownership interests in those securities. Harold washington college free tax service   The obligations listed in Section II are arranged by maturity date. Harold washington college free tax service The amounts listed are the total OID for a calendar year per $1,000 of redemption price. Harold washington college free tax service Section III. Harold washington college free tax service   This section contains short-term discount obligations. Harold washington college free tax service Section III-A: Short-Term U. Harold washington college free tax service S. Harold washington college free tax service Treasury Bills. Harold washington college free tax service Section III-B: Federal Home Loan Banks. Harold washington college free tax service Section III-C: Federal National Mortgage Association. Harold washington college free tax service Section III-D: Federal Farm Credit Banks. Harold washington college free tax service Section III-E: Federal Home Loan Mortgage Corporation. Harold washington college free tax service Section III-F: Federal Agricultural Mortgage Corporation. Harold washington college free tax service    Information that supplements Section III-A is available on the Internet at http://www. Harold washington college free tax service treasurydirect. Harold washington college free tax service gov/tdhome. Harold washington college free tax service htm. Harold washington college free tax service   The short-term obligations listed in this section are arranged by maturity date. Harold washington college free tax service For each obligation, the list contains the CUSIP number, maturity date, issue date, issue price (expressed as a percent of principal), and discount to be reported as interest for a calendar year per $1,000 of redemption price. Harold washington college free tax service Brokers and other middlemen should rely on the issue price information in Section III only if they are unable to determine the price actually paid by the owner. Harold washington college free tax service Debt Instruments Not on the OID List The list of debt instruments discussed earlier does not contain the following items. Harold washington college free tax service U. Harold washington college free tax service S. Harold washington college free tax service savings bonds. Harold washington college free tax service Certificates of deposit and other face-amount certificates issued at a discount, including syndicated certificates of deposit. Harold washington college free tax service Obligations issued by tax-exempt organizations. Harold washington college free tax service OID debt instruments that matured or were entirely called by the issuer before the tables were posted on the IRS website. Harold washington college free tax service Mortgage-backed securities and mortgage participation certificates. Harold washington college free tax service Long-term OID debt instruments issued before May 28, 1969. Harold washington college free tax service Short-term obligations, other than the obligations listed in Section III. Harold washington college free tax service Debt instruments issued at a discount by states or their political subdivisions. Harold washington college free tax service REMIC regular interests and CDOs. Harold washington college free tax service Commercial paper and banker's acceptances issued at a discount. Harold washington college free tax service Obligations issued at a discount by individuals. Harold washington college free tax service Foreign obligations not traded in the United States and obligations not issued in the United States. Harold washington college free tax service Information for Brokers and Other Middlemen The following discussions contain specific instructions for brokers and middlemen who hold or redeem a debt instrument for the owner. Harold washington college free tax service In general, you must file a Form 1099 for the debt instrument if the interest or OID to be included in the owner's income for a calendar year totals $10 or more. Harold washington college free tax service You also must file a Form 1099 if you were required to deduct and withhold tax, even if the interest or OID is less than $10. Harold washington college free tax service See Backup Withholding, later. Harold washington college free tax service If you must file a Form 1099, furnish a copy to the owner of the debt instrument by January 31 in the year it is due. Harold washington college free tax service File all your Forms 1099 with the IRS, accompanied by Form 1096, by February 28 in the year it is due (March 31 if you file electronically). Harold washington college free tax service Electronic payee statements. Harold washington college free tax service   You can issue Form 1099-OID electronically with the consent of the recipient. Harold washington college free tax service More information. Harold washington college free tax service   For more information, including penalties for failure to file (or furnish) required information returns or statements, see the General Instructions for Certain Information Returns (Forms 1098, 1099, 3921, 3922, 5498, and W-2G) for the appropriate calendar year. Harold washington college free tax service Short-Term Obligations Redeemed at Maturity If you redeem a short-term discount obligation for the owner at maturity, you must report the discount as interest on Form 1099-INT. Harold washington college free tax service To figure the discount, use the purchase price shown on the owner's copy of the purchase confirmation receipt or similar record, or the price shown in your transaction records. Harold washington college free tax service If you sell the obligation for the owner before maturity, you must file Form 1099-B to reflect the gross proceeds to the seller. Harold washington college free tax service Do not report the accrued discount to the date of sale on either Form 1099-INT or Form 1099-OID. Harold washington college free tax service If the owner's purchase price cannot be determined, figure the discount as if the owner had purchased the obligation at its original issue price. Harold washington college free tax service A special rule is used to determine the original issue price for information reporting on U. Harold washington college free tax service S. Harold washington college free tax service Treasury bills (T-bills) listed in Section III-A. Harold washington college free tax service Under this rule, you treat as the original issue price of the T-bill the noncompetitive (weighted average of accepted auction bids) discount price for the longest-maturity T-bill maturing on the same date as the T-bill being redeemed. Harold washington college free tax service This noncompetitive discount price is the issue price (expressed as a percent of principal) shown in Section III-A. Harold washington college free tax service A similar rule is used to figure the discount on short-term discount obligations issued by the organizations listed in Section III-B through Section III-F. Harold washington college free tax service Example 1. Harold washington college free tax service There are 13-week and 26-week T-bills maturing on the same date as the T-bill being redeemed. Harold washington college free tax service The price actually paid by the owner cannot be established by owner or middleman records. Harold washington college free tax service You treat as the issue price of the T-bill the noncompetitive discount price (expressed as a percent of principal) shown in Section III-A for a 26-week bill maturing on the same date as the T-bill redeemed. Harold washington college free tax service The interest you report on Form 1099-INT is the OID (per $1,000 of principal) shown in Section III-A for that obligation. Harold washington college free tax service Long-Term Debt Instruments If you hold a long-term OID debt instrument as a nominee for the true owner, you generally must file Form 1099-OID. Harold washington college free tax service For this purpose, you can rely on Section I of the OID list to determine the following information. Harold washington college free tax service Whether a debt instrument has OID. Harold washington college free tax service The OID to be reported on the Form 1099-OID. Harold washington college free tax service In general, you must report OID on publicly offered, long-term debt instruments listed in Section I. Harold washington college free tax service You also can report OID on other long-term debt instruments. Harold washington college free tax service Form 1099-OID. Harold washington college free tax service   On Form 1099-OID for a calendar year show the following information. Harold washington college free tax service Box 1. Harold washington college free tax service The OID for the actual dates the owner held the debt instruments during a calendar year. Harold washington college free tax service To determine this amount, see Figuring OID, next. Harold washington college free tax service Box 2. Harold washington college free tax service The qualified stated interest paid or credited during the calendar year. Harold washington college free tax service Interest reported here is not reported on Form 1099-INT. Harold washington college free tax service The qualified stated interest on Treasury inflation-protected securities may be reported on Form 1099-INT in box 3 instead. Harold washington college free tax service Box 3. Harold washington college free tax service Any interest or principal forfeited because of an early withdrawal that the owner can deduct from gross income. Harold washington college free tax service Do not reduce the amounts in boxes 1 and 2 by the forfeiture. Harold washington college free tax service Box 4. Harold washington college free tax service Any backup withholding for this debt instrument. Harold washington college free tax service Box 7. Harold washington college free tax service The CUSIP number, if any. Harold washington college free tax service If there is no CUSIP number, give a description of the debt instrument, including the abbreviation for the stock exchange, the abbreviation used by the stock exchange for the issuer, the coupon rate, and the year of maturity (for example, NYSE XYZ 12. Harold washington college free tax service 50 2006). Harold washington college free tax service If the issuer of the debt instrument is other than the payer, show the name of the issuer in this box. Harold washington college free tax service Box 8. Harold washington college free tax service The OID on a U. Harold washington college free tax service S. Harold washington college free tax service Treasury obligation for the part of the year the owner held the debt instrument. Harold washington college free tax service Box 9. Harold washington college free tax service Investment expenses passed on to holders of a single-class REMIC. Harold washington college free tax service Boxes 10-12. Harold washington college free tax service Use to report any state income tax withheld for this debt instrument. Harold washington college free tax service Figuring OID. Harold washington college free tax service   You can determine the OID on a long-term debt instrument by using either of the following. Harold washington college free tax service Section I of the OID list. Harold washington college free tax service The income tax regulations. Harold washington college free tax service Using Section I. Harold washington college free tax service   If the owner held the debt instrument for the entire calendar year, report the OID shown in Section I for the calendar year. Harold washington college free tax service Because OID is listed for each $1,000 of stated redemption price at maturity, you must adjust the listed amount to reflect the debt instrument's actual stated redemption price at maturity. Harold washington college free tax service For example, if the debt instrument's stated redemption price at maturity is $500, report one-half the listed OID. Harold washington college free tax service   If the owner held the debt instrument for less than the entire calendar year, figure the OID to report as follows. Harold washington college free tax service Look up the daily OID for the first accrual period in the calendar year during which the owner held the debt instrument. Harold washington college free tax service Multiply the daily OID by the number of days the owner held the debt instrument during that accrual period. Harold washington college free tax service Repeat steps (1) and (2) for any remaining accrual periods for the year during which the owner held the debt instrument. Harold washington college free tax service Add the results in steps (2) and (3) to determine the owner's OID per $1,000 of stated redemption price at maturity. Harold washington college free tax service If necessary, adjust the OID in (4) to reflect the debt instrument's stated redemption price at maturity. Harold washington college free tax service Report the result on Form 1099-OID in box 1. Harold washington college free tax service Using the income tax regulations. Harold washington college free tax service   Instead of using Section I to figure OID, you can use the regulations under sections 1272 through 1275 of the Internal Revenue Code. Harold washington college free tax service For example, under the regulations, you can use monthly accrual periods in figuring OID for a debt instrument issued after April 3, 1994, that provides for monthly payments. Harold washington college free tax service (If you use Section I-B, the OID is figured using 6-month accrual periods. Harold washington college free tax service )   For a general explanation of the rules for figuring OID under the regulations, see Figuring OID on Long-Term Debt Instruments under Information for Owners of OID Debt Instruments, later. Harold washington college free tax service Certificates of Deposit If you hold a bank certificate of deposit (CD) as a nominee, you must determine whether the CD has OID and any OID includible in the income of the owner. Harold washington college free tax service You must file an information return showing the reportable interest and OID, if any, on the CD. Harold washington college free tax service These rules apply whether or not you sold the CD to the owner. Harold washington college free tax service Report OID on a CD in the same way as OID on other debt instruments. Harold washington college free tax service See Short-Term Obligations Redeemed at Maturity and Long-Term Debt Instruments, earlier. Harold washington college free tax service Bearer Bonds and Coupons If a coupon from a bearer bond is presented to you for collection before the bond matures, you generally must report the interest on Form 1099-INT. Harold washington college free tax service However, do not report the interest if either of the following apply. Harold washington college free tax service You hold the bond as a nominee for the true owner. Harold washington college free tax service The payee is a foreign person. Harold washington college free tax service See Payments to foreign person under Backup Withholding, later. Harold washington college free tax service Because you cannot assume the presenter of the coupon also owns the bond, you should not report OID on the bond on Form 1099-OID. Harold washington college free tax service The coupon may have been “stripped” (separated) from the bond and separately purchased. Harold washington college free tax service However, if a long-term bearer bond on the OID list is presented to you for redemption upon call or maturity, you should prepare a Form 1099-OID showing the OID for that calendar year, as well as any coupon interest payments collected at the time of redemption. Harold washington college free tax service Backup Withholding If you report OID on Form 1099-OID or interest on Form 1099-INT for a calendar year, you may be required to apply backup withholding to the reportable payment at a rate of 28%. Harold washington college free tax service The backup withholding is deducted at the time a cash payment is made. Harold washington college free tax service See Pub. Harold washington college free tax service 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), for more information. Harold washington college free tax service Backup withholding generally applies in the following situations. Harold washington college free tax service The payee does not give you a taxpayer identification number (TIN). Harold washington college free tax service The IRS notifies you that the payee gave an incorrect TIN. Harold washington college free tax service The IRS notifies you that the payee is subject to backup withholding due to payee underreporting. Harold washington college free tax service For debt instruments acquired after 1983: The payee does not certify, under penalties of perjury, that he or she is not subject to backup withholding under (3), or The payee does not certify, under penalties of perjury, that the TIN given is correct. Harold washington college free tax service However, for short-term discount obligations (other than government obligations), bearer bonds and coupons, and U. Harold washington college free tax service S. Harold washington college free tax service savings bonds, backup withholding applies only if the payee does not give you a TIN or gives you an obviously incorrect number for a TIN. Harold washington college free tax service Short-term obligations. Harold washington college free tax service   Backup withholding applies to OID on a short-term obligation only when the OID is paid at maturity. Harold washington college free tax service However, backup withholding applies to any interest payable before maturity when the interest is paid or credited. Harold washington college free tax service   If the owner of a short-term obligation at maturity is not the original owner and can establish the purchase price of the obligation, the amount subject to backup withholding must be determined by treating the purchase price as the issue price. Harold washington college free tax service However, you can choose to disregard that price if it would require significant manual intervention in the computer or recordkeeping system used for the obligation. Harold washington college free tax service If the purchase price of a listed obligation is not established or is disregarded, you must use the issue price shown in Section III. Harold washington college free tax service Long-term obligations. Harold washington college free tax service   If no cash payments are made on a long-term obligation before maturity, backup withholding applies only at maturity. Harold washington college free tax service The amount subject to backup withholding is the OID includible in the owner's gross income for the calendar year when the obligation matures. Harold washington college free tax service The amount to be withheld is limited to the cash paid. Harold washington college free tax service Registered long-term obligations with cash payments. Harold washington college free tax service   If a registered long-term obligation has cash payments before maturity, backup withholding applies when a cash payment is made. Harold washington college free tax service The amount subject to backup withholding is the total of the qualified stated interest (defined earlier under Definitions) and OID includible in the owner's gross income for the calendar year when the payment is made. Harold washington college free tax service If more than one cash payment is made during the year, the OID subject to withholding for the year must be allocated among the expected cash payments in the ratio that each bears to the total of the expected cash payments. Harold washington college free tax service For any payment, the required withholding is limited to the cash paid. Harold washington college free tax service Payee not the original owner. Harold washington college free tax service   If the payee is not the original owner of the obligation, the OID subject to backup withholding is the OID includible in the gross income of all owners during the calendar year (without regard to any amount paid by the new owner at the time of transfer). Harold washington college free tax service The amount subject to backup withholding at maturity of a listed obligation must be determined using the issue price shown in Section I. Harold washington college free tax service Bearer long-term obligations with cash payments. Harold washington college free tax service   If a bearer long-term obligation has cash payments before maturity, backup withholding applies when the cash payments are made. Harold washington college free tax service For payments before maturity, the amount subject to withholding is the qualified stated interest (defined earlier under Definitions) includible in the owner's gross income for the calendar year. Harold washington college free tax service For a payment at maturity, the amount subject to withholding is only the total of any qualified stated interest paid at maturity and the OID includible in the owner's gross income for the calendar year when the obligation matures. Harold washington college free tax service The required withholding at maturity is limited to the cash paid. Harold washington college free tax service Sales and redemptions. Harold washington college free tax service   If you report the gross proceeds from a sale, exchange, or redemption of a debt instrument on Form 1099-B for a calendar year, you may be required to withhold 28% of the amount reported. Harold washington college free tax service Backup withholding applies in the following situations. Harold washington college free tax service The payee does not give you a TIN. Harold washington college free tax service The IRS notifies you that the payee gave an incorrect TIN. Harold washington college free tax service For debt instruments held in an account opened after 1983, the payee does not certify, under penalties of perjury, that the TIN given is correct. Harold washington college free tax service Payments outside the United States to U. Harold washington college free tax service S. Harold washington college free tax service person. Harold washington college free tax service   The requirements for backup withholding and information reporting apply to payments of OID and interest made outside the United States to a U. Harold washington college free tax service S. Harold washington college free tax service person, a controlled foreign corporation, or a foreign person at least 50% of whose income for the preceding 3-year period is effectively connected with the conduct of a U. Harold washington college free tax service S. Harold washington college free tax service trade or business. Harold washington college free tax service Payments to foreign person. Harold washington college free tax service   The following discussions explain the rules for backup withholding and information reporting on payments to foreign persons. Harold washington college free tax service U. Harold washington college free tax service S. Harold washington college free tax service -source amount. Harold washington college free tax service   Backup withholding and information reporting are not required for payments of U. Harold washington college free tax service S. Harold washington college free tax service -source OID, interest, or proceeds from a sale or redemption of an OID instrument if the payee has given you proof (generally the appropriate Form W-8 or an acceptable substitute) that the payee is a foreign person. Harold washington college free tax service A U. Harold washington college free tax service S. Harold washington college free tax service resident is not a foreign person. Harold washington college free tax service For proof of the payee's foreign status, you can rely on the appropriate Form W-8 or on documentary evidence for payments made outside the United States to an offshore account or, in case of broker proceeds, a sale effected outside the United States. Harold washington college free tax service Receipt of the appropriate Form W-8 does not relieve you from information reporting and backup withholding if you actually know the payee is a U. Harold washington college free tax service S. Harold washington college free tax service person. Harold washington college free tax service   For information about the 28% withholding tax that may apply to payments of U. Harold washington college free tax service S. Harold washington college free tax service -source OID or interest to foreign persons, see Publication 515. Harold washington college free tax service Foreign-source amount. Harold washington college free tax service   Backup withholding and information reporting are not required for payments of foreign-source OID and interest made outside the United States. Harold washington college free tax service However, if the payments are made inside the United States, the requirements for backup withholding and information reporting will apply unless the payee has given you the appropriate Form W-8 or acceptable substitute as proof that the payee is a foreign person. Harold washington college free tax service More information. Harold washington college free tax service   For more information about backup withholding and information reporting on foreign-source amounts or payments to foreign persons, see Regulations section 1. Harold washington college free tax service 6049-5. Harold washington college free tax service Information for Owners of OID Debt Instruments This section is for persons who prepare their own tax returns. Harold washington college free tax service It discusses the income tax rules for figuring and reporting OID on long-term debt instruments. Harold washington college free tax service It also includes a similar discussion for stripped bonds and coupons, such as zero coupon bonds available through the Department of the Treasury's STRIPS program and government-sponsored enterprises such as the Resolution Funding Corporation. Harold washington college free tax service However, the information provided does not cover every situation. Harold washington college free tax service More information can be found in the regulations under sections 1271 through 1275 of the Internal Revenue Code. Harold washington college free tax service Including OID in income. Harold washington college free tax service   Generally, you include OID in income as it accrues each year, whether or not you receive any payments from the debt instrument issuer. Harold washington college free tax service Exceptions. Harold washington college free tax service   The rules for including OID in income as it accrues generally do not apply to the following debt instruments. Harold washington college free tax service U. Harold washington college free tax service S. Harold washington college free tax service savings bonds. Harold washington college free tax service Tax-exempt obligations. Harold washington college free tax service (However, see Tax-Exempt Bonds and Coupons, later. Harold washington college free tax service ) Obligations issued by individuals before March 2, 1984. Harold washington college free tax service Loans of $10,000 or less between individuals who are not in the business of lending money. Harold washington college free tax service (The dollar limit includes outstanding prior loans by the lender to the borrower. Harold washington college free tax service ) This exception does not apply if a principal purpose of the loan is to avoid any federal tax. Harold washington college free tax service   See chapter 1 of Publication 550 for information about the rules for these and other types of discounted debt instruments, such as short-term and market discount obligations. Harold washington college free tax service Publication 550 also discusses rules for holders of REMIC interests and CDOs. Harold washington college free tax service De minimis rule. Harold washington college free tax service   You can treat OID as zero if the total OID on a debt instrument is less than one-fourth of 1% (. Harold washington college free tax service 0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. Harold washington college free tax service Debt instruments with de minimis OID are not listed in this publication. Harold washington college free tax service There are special rules to determine the de minimis amount in the case of debt instruments that provide for more than one payment of principal. Harold washington college free tax service Also, the de minimis rules generally do not apply to tax-exempt obligations. Harold washington college free tax service Example 2. Harold washington college free tax service You bought at issuance a 10-year debt instrument with a stated redemption price at maturity of $1,000, issued at $980 with OID of $20. Harold washington college free tax service One-fourth of 1% of $1,000 (the stated redemption price) times 10 (the number of full years from the date of original issue to maturity) equals $25. Harold washington college free tax service Under the de minimis rule, you can treat the OID as zero because the $20 discount is less than $25. Harold washington college free tax service Example 3. Harold washington college free tax service Assume the same facts as Example 2, except the debt instrument was issued at $950. Harold washington college free tax service You must report part of the $50 OID each year because it is more than $25. Harold washington college free tax service Choice to report all interest as OID. Harold washington college free tax service   Generally, you can choose to treat all interest on a debt instrument acquired after April 3, 1994, as OID and include it in gross income by using the constant yield method. Harold washington college free tax service See Constant yield method under Debt Instruments Issued After 1984, later, for more information. Harold washington college free tax service   For this choice, interest includes stated interest, acquisition discount, OID, de minimis OID, market discount, de minimis market discount, and unstated interest, as adjusted by any amortizable bond premium or acquisition premium. Harold washington college free tax service For more information, see Regulations section 1. Harold washington college free tax service 1272-3. Harold washington college free tax service Purchase after date of original issue. Harold washington college free tax service   A debt instrument you purchased after the date of original issue may have premium, acquisition premium, or market discount. Harold washington college free tax service If so, the OID reported to you on Form 1099-OID may have to be adjusted. Harold washington college free tax service For more information, see Showing an OID adjustment under How To Report OID, later. Harold washington college free tax service The following rules generally do not apply to contingent payment debt instruments. Harold washington college free tax service Adjustment for premium. Harold washington college free tax service   If your debt instrument (other than an inflation-indexed debt instrument) has premium, do not report any OID as ordinary income. Harold washington college free tax service Your adjustment is the total OID shown on your Form 1099-OID. Harold washington college free tax service Adjustment for acquisition premium. Harold washington college free tax service   If your debt instrument has acquisition premium, reduce the OID you report. Harold washington college free tax service Your adjustment is the difference between the OID shown on your Form 1099-OID and the reduced OID amount figured using the rules explained later under Figuring OID on Long-Term Debt Instruments. Harold washington college free tax service Adjustment for market discount. Harold washington college free tax service   If your debt instrument has market discount that you choose to include in income currently, increase the OID you report. Harold washington college free tax service Your adjustment is the accrued market discount for the year. Harold washington college free tax service See Market Discount Bonds in chapter 1 of Publication 550 for information on how to figure accrued market discount and include it in your income currently and for other information about market discount bonds. Harold washington college free tax service If you choose to use the constant yield method to figure accrued market discount, also see Figuring OID on Long-Term Debt Instruments, later. Harold washington college free tax service The constant yield method of figuring accrued OID, explained in those discussions under Constant yield method, is also used to figure accrued market discount. Harold washington college free tax service For more information concerning premium or market discount on an inflation-indexed debt instrument, see Regulations section 1. Harold washington college free tax service 1275-7. Harold washington college free tax service Sale, exchange, or redemption. Harold washington college free tax service   Generally, you treat your gain or loss from the sale, exchange, or redemption of a discounted debt instrument as a capital gain or loss if you held the debt instrument as a capital asset. Harold washington college free tax service If you sold the debt instrument through a broker, you should receive Form 1099-B or an equivalent statement from the broker. Harold washington college free tax service Use the Form 1099-B or other statement and your brokerage statements to complete Form 8949, and Schedule D (Form 1040). Harold washington college free tax service   Your gain or loss is the difference between the amount you realized on the sale, exchange, or redemption and your basis in the debt instrument. Harold washington college free tax service Your basis, generally, is your cost increased by the OID you have included in income each year you held it. Harold washington college free tax service In general, to determine your gain or loss on a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable. Harold washington college free tax service   See chapter 4 of Publication 550 for more information about the tax treatment of the sale or redemption of discounted debt instruments. Harold washington college free tax service Example 4. Harold washington college free tax service Larry, a calendar year taxpayer, bought a corporate debt instrument at original issue for $86,235. Harold washington college free tax service 00 on November 1 of Year 1. Harold washington college free tax service The 15-year debt instrument matures on October 31 of Year 16 at a stated redemption price of $100,000. Harold washington college free tax service The debt instrument provides for semiannual payments of interest at 10%. Harold washington college free tax service Assume the debt instrument is a capital asset in Larry's hands. Harold washington college free tax service The debt instrument has $13,765. Harold washington college free tax service 00 of OID ($100,000 stated redemption price at maturity minus $86,235. Harold washington college free tax service 00 issue price). Harold washington college free tax service Larry sold the debt instrument for $90,000 on November 1 of Year 4. Harold washington college free tax service Including the OID he will report for the period he held the debt instrument in Year 4, Larry has included $4,556. Harold washington college free tax service 00 of OID in income and has increased his basis by that amount to $90,791. Harold washington college free tax service 00. Harold washington college free tax service Larry has realized a loss of $791. Harold washington college free tax service 00. Harold washington college free tax service All of Larry's loss is capital loss. Harold washington college free tax service Form 1099-OID The issuer of the debt instrument (or your broker, if you purchased or held the debt instrument through a broker) should give you a copy of Form 1099-OID or a similar statement if the accrued OID for the calendar year is $10 or more and the term of the debt instrument is more than 1 year. Harold washington college free tax service Form 1099-OID shows all OID income in box 1 except OID on a U. Harold washington college free tax service S. Harold washington college free tax service Treasury obligation, which is shown in box 8. Harold washington college free tax service It also shows, in box 2, any qualified stated interest you must include in income. Harold washington college free tax service (However, any qualified stated interest on Treasury inflation-protected securities can be reported on Form 1099-INT in box 3. Harold washington college free tax service ) A copy of Form 1099-OID will be sent to the IRS. Harold washington college free tax service Do not attach your copy to your tax return. Harold washington college free tax service Keep it for your records. Harold washington college free tax service If you are required to file a tax return and you receive Form 1099-OID showing taxable amounts, you must report these amounts on your return. Harold washington college free tax service A 20% accuracy-related penalty may be charged for underpayment of tax due to either negligence or disregard of rules and regulations or substantial understatement of tax. Harold washington college free tax service Form 1099-OID not received. Harold washington college free tax service   If you held an OID debt instrument for a calendar year but did not receive a Form 1099-OID, refer to the discussions under Figuring OID on Long-Term Debt Instruments, later, for information on the OID you must report. Harold washington college free tax service Refiguring OID. Harold washington college free tax service   You must refigure the OID shown on Form 1099-OID, in box 1 or box 8, to determine the proper amount to include in income if one of the following applies. Harold washington college free tax service You bought the debt instrument at a premium or at an acquisition premium. Harold washington college free tax service The debt instrument is a stripped bond or coupon (including zero coupon bonds backed by U. Harold washington college free tax service S. Harold washington college free tax service Treasury securities). Harold washington college free tax service The debt instrument is a contingent payment or inflation-indexed debt instrument. Harold washington college free tax service See the discussions under Figuring OID on Long-Term Debt Instruments or Figuring OID on Stripped Bonds and Coupons, later, for the specific computations. Harold washington college free tax service Refiguring interest. Harold washington college free tax service   If you disposed of a debt instrument or acquired it from another holder between interest dates, see the discussion under Bonds Sold Between Interest Dates in chapter 1 of Publication 550 for information about refiguring the interest shown on Form 1099-OID in box 2. Harold washington college free tax service Nominee. Harold washington college free tax service   If you are the holder of an OID debt instrument and you receive a Form 1099-OID that shows your taxpayer identification number and includes amounts belonging to another person, you are considered a “nominee. Harold washington college free tax service ” You must file another Form 1099-OID for each actual owner, showing the OID for the owner. Harold washington college free tax service Show the owner of the debt instrument as the “recipient” and you as the “payer. Harold washington college free tax service ”   Complete Form 1099-OID and Form 1096 and file the forms with the Internal Revenue Service Center for your area. Harold washington college free tax service You must also give a copy of the Form 1099-OID to the actual owner. Harold washington college free tax service However, you are not required to file a nominee return to show amounts belonging to your spouse. Harold washington college free tax service See the Form 1099 instructions for more information. Harold washington college free tax service   When preparing your tax return, follow the instructions under Showing an OID adjustment in the next discussion. Harold washington college free tax service How To Report OID Generally, you report your taxable interest and OID income on the interest line of Form 1040EZ, Form 1040A, or Form 1040. Harold washington college free tax service Form 1040 or Form 1040A required. Harold washington college free tax service   You must use Form 1040 or Form 1040A (you cannot use Form 1040EZ) under either of the following conditions. Harold washington college free tax service You received a Form 1099-OID as a nominee for the actual owner. Harold washington college free tax service Your total interest and OID income for the year was more than $1,500. Harold washington college free tax service Form 1040 required. Harold washington college free tax service   You must use Form 1040 (you cannot use Form 1040A or Form 1040EZ) if you are reporting more or less OID than the amount shown on Form 1099-OID, other than because you are a nominee. Harold washington college free tax service For example, if you paid a premium or an acquisition premium when you purchased the debt instrument, you must use Form 1040 because you will report less OID than shown on Form 1099-OID. Harold washington college free tax service Also, you must use Form 1040 if you were charged an early withdrawal penalty. Harold washington college free tax service Where to report. Harold washington college free tax service   List each payer's name (if a brokerage firm gave you a Form 1099, list the brokerage firm as the payer) and the amount received from each payer on Form 1040A, Schedule B, Part I, line 1, or Form 1040, Schedule B, line 1. Harold washington college free tax service Include all OID and periodic interest shown on any Form 1099-OID, boxes 1, 2, and 8, you received for the tax year. Harold washington college free tax service Also include any other OID and interest income for which you did not receive a Form 1099. Harold washington college free tax service Showing an OID adjustment. Harold washington college free tax service   If you use Form 1040 to report more or less OID than shown on Form 1099-OID, list the full OID on Schedule B, Part I, line 1, and follow the instructions under 1 or 2, next. Harold washington college free tax service   If you use Form 1040A to report the OID shown on a Form 1099-OID you received as a nominee for the actual owner, list the full OID on Schedule B, Part I, line 1 and follow the instructions under 1. Harold washington college free tax service If the OID, as adjusted, is less than the amount shown on Form 1099-OID, show the adjustment as follows. Harold washington college free tax service Under your last entry on line 1, subtotal all interest and OID income listed on line 1. Harold washington college free tax service Below the subtotal, write “Nominee Distribution” or “OID Adjustment” and show the OID you are not required to report. Harold washington college free tax service Subtract that OID from the subtotal and enter the result on line 2. Harold washington college free tax service If the OID, as adjusted, is more than the amount shown on Form 1099-OID, show the adjustment as follows. Harold washington college free tax service Under your last entry on line 1, subtotal all interest and OID income listed on line 1. Harold washington college free tax service Below the subtotal, write “OID Adjustment” and show the additional OID. Harold washington college free tax service Add that OID to the subtotal and enter the result on line 2. Harold washington college free tax service Figuring OID on Long-Term Debt Instruments How you figure the OID on a long-term debt instrument depends on the date it was issued. Harold washington college free tax service It also may depend on the type of the debt instrument. Harold washington college free tax service There are different rules for each of the following debt instruments. Harold washington college free tax service Corporate debt instruments issued after 1954 and before May 28, 1969, and government debt instruments issued after 1954 and before July 2, 1982. Harold washington college free tax service Corporate debt instruments issued after May 27, 1969, and before July 2, 1982. Harold washington college free tax service Debt instruments issued after July 1, 1982, and before 1985. Harold washington college free tax service Debt instruments issued after 1984 (other than debt instruments described in (5) and (6)). Harold washington college free tax service Contingent payment debt instruments issued after August 12, 1996. Harold washington college free tax service Inflation-indexed debt instruments (including Treasury inflation-protected securities) issued after January 5, 1997. Harold washington college free tax service Zero coupon bonds. Harold washington college free tax service   The rules for figuring OID on zero coupon bonds backed by U. Harold washington college free tax service S. Harold washington college free tax service Treasury securities are discussed under Figuring OID on Stripped Bonds and Coupons, later. Harold washington college free tax service Corporate Debt Instruments Issued After 1954 and Before May 28, 1969, and Government Debt Instruments Issued After 1954 and Before July 2, 1982 If you hold these debt instruments as capital assets, you include OID in income only in the year the debt instrument is sold, exchanged, or redeemed, and only if you have a gain. Harold washington college free tax service The OID, which is taxed as ordinary income, generally equals the following amount. Harold washington college free tax service   number of full months you held the debt instrument  number of full months from date of original issue to date of maturity X original issue discount The balance of the gain is capital gain. Harold washington college free tax service If there is a loss on the sale of the debt instrument, the entire loss is a capital loss and no OID is reported. Harold washington college free tax service Corporate Debt Instruments Issued After May 27, 1969, and Before July 2, 1982 If you hold these debt instruments as capital assets, you must include part of the OID in income each year you own the debt instruments. Harold washington college free tax service For information about showing the correct OID on your tax return, see the discussion under How To Report OID, earlier. Harold washington college free tax service Your basis in the debt instrument is increased by the OID you include in income. Harold washington college free tax service Form 1099-OID. Harold washington college free tax service   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. Harold washington college free tax service However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Harold washington college free tax service See Reduction for acquisition premium, later. Harold washington college free tax service If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-A available at www. Harold washington college free tax service irs. Harold washington college free tax service gov/pub1212 by clicking the link under Recent Developments. Harold washington college free tax service Form 1099-OID not received. Harold washington college free tax service    The OID listed is for each $1,000 of redemption price. Harold washington college free tax service You must adjust the listed amount if your debt instrument has a different principal amount. Harold washington college free tax service For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Harold washington college free tax service   If you held the debt instrument the entire year, use the OID shown in Section I-A for a calendar year. Harold washington college free tax service (If your debt instrument is not listed in Section I-A, consult the issuer for information about the issue price and the OID that accrued for that year. Harold washington college free tax service ) If you did not hold the debt instrument the entire year, figure your OID using the following method. Harold washington college free tax service Divide the OID shown by 12. Harold washington college free tax service Multiply the result in (1) by the number of complete and partial months (for example, 6½ months) you held the debt instrument during a calendar year. Harold washington college free tax service This is the OID to include in income unless you paid an acquisition premium. Harold washington college free tax service The reduction for acquisition premium is discussed next. Harold washington college free tax service Reduction for acquisition premium. Harold washington college free tax service   If you bought the debt instrument at an acquisition premium, figure the OID to include in income as follows. Harold washington college free tax service Divide the total OID on the debt instrument by the number of complete months, and any part of a month, from the date of original issue to the maturity date. Harold washington college free tax service This is the monthly OID. Harold washington college free tax service Subtract from your cost the issue price and the accumulated OID from the date of issue to the date of purchase. Harold washington college free tax service (If the result is zero or less, stop here. Harold washington college free tax service You did not pay an acquisition premium. Harold washington college free tax service ) Divide the amount figured in (2) by the number of complete months, and any part of a month, from the date of your purchase to the maturity date. Harold washington college free tax service Subtract the amount figured in (3) from the amount figured in (1). Harold washington college free tax service This is the OID to include in income for each month you hold the debt instrument during the year. Harold washington college free tax service Transfers during the month. Harold washington college free tax service   If you buy or sell a debt instrument on any day other than the same day of the month as the date of original issue, the ratable monthly portion of OID for the month of sale is divided between the seller and the buyer according to the number of days each held the debt instrument. Harold washington college free tax service Your holding period for this purpose begins the day you acquire the debt instrument and ends the day before you dispose of it. Harold washington college free tax service Debt Instruments Issued After July 1, 1982, and Before 1985 If you hold these debt instruments as capital assets, you must include part of the OID in income each year you own the debt instruments and increase your basis by the amount included. Harold washington college free tax service For information about showing the correct OID on your tax return, see How To Report OID, earlier. Harold washington college free tax service Form 1099-OID. Harold washington college free tax service   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. Harold washington college free tax service However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Harold washington college free tax service See Constant yield method and the discussions on acquisition premium that follow, later. Harold washington college free tax service If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-A available at www. Harold washington college free tax service irs. Harold washington college free tax service gov/pub1212 by clicking the link under Recent Developments. Harold washington college free tax service Form 1099-OID not received. Harold washington college free tax service    The OID listed is for each $1,000 of redemption price. Harold washington college free tax service You must adjust the listed amount if your debt instrument has a different principal amount. Harold washington college free tax service For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Harold washington college free tax service   If you held the debt instrument the entire year, use the OID shown in Section I-A. Harold washington college free tax service (If your instrument is not listed in Section I-A, consult the issuer for information about the issue price, the yield to maturity, and the OID that accrued for that year. Harold washington college free tax service ) If you did not hold the debt instrument the entire year, figure your OID using either of the following methods. Harold washington college free tax service Method 1. Harold washington college free tax service    Divide the total OID for a calendar year by 365 (366 for leap years). Harold washington college free tax service Multiply the result in (1) by the number of days you held the debt instrument during that particular year. Harold washington college free tax service  This computation is an approximation and may result in a slightly higher OID than Method 2. Harold washington college free tax service Method 2. Harold washington college free tax service    Look up the daily OID for the first accrual period you held the debt instrument during a calendar year. Harold washington college free tax service (See Accrual period under Constant yield method, next. Harold washington college free tax service ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. Harold washington college free tax service If you held the debt instrument for part of both accrual periods, repeat (1) and (2) for the second accrual period. Harold washington college free tax service Add the results of (2) and (3). Harold washington college free tax service This is the OID to include in income, unless you paid an acquisition premium. Harold washington college free tax service (The reduction for acquisition premium is discussed later. Harold washington college free tax service ) Constant yield method. Harold washington college free tax service   This discussion shows how to figure OID on debt instruments issued after July 1, 1982, and before 1985, using a constant yield method. Harold washington college free tax service OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. Harold washington college free tax service   Figure the OID allocable to any accrual period as follows. Harold washington college free tax service Multiply the adjusted issue price at the beginning of the accrual period by the debt instrument's yield to maturity. Harold washington college free tax service Subtract from the result in (1) any qualified stated interest allocable to the accrual period. Harold washington college free tax service Accrual period. Harold washington college free tax service   An accrual period for any OID debt instrument issued after July 1, 1982, and before 1985 is each 1-year period beginning on the date of the issue of the obligation and each anniversary thereafter, or the shorter period to maturity for the last accrual period. Harold washington college free tax service Your tax year will usually include parts of two accrual periods. Harold washington college free tax service Daily OID. Harold washington college free tax service   The OID for any accrual period is allocated equally to each day in the accrual period. Harold washington college free tax service You must include in income the sum of the OID amounts for each day you hold the debt instrument during the year. Harold washington college free tax service If your tax year includes parts of two or more accrual periods, you must include the proper daily OID amounts for each accrual period. Harold washington college free tax service Figuring daily OID. Harold washington college free tax service   The daily OID for the initial accrual period is figured using the following formula. Harold washington college free tax service   (ip × ytm) − qsi     p   ip = issue price ytm = yield to maturity qsi = qualified stated interest p = number of days in accrual period         The daily OID for subsequent accrual periods is figured the same way except the adjusted issue price at the beginning of each period is used in the formula instead of the issue price. Harold washington college free tax service Reduction for acquisition premium on debt instruments purchased before July 19, 1984. Harold washington college free tax service   If you bought the debt instrument at an acquisition premium before July 19, 1984, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. Harold washington college free tax service Figure the daily acquisition premium by dividing the total acquisition premium by the number of days in the period beginning on your purchase date and ending on the day before the date of maturity. Harold washington college free tax service Reduction for acquisition premium on debt instruments purchased after July 18, 1984. Harold washington college free tax service   If you bought the debt instrument at an acquisition premium after July 18, 1984, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. Harold washington college free tax service However, the method of figuring the daily acquisition premium is different from the method described in the preceding discussion. Harold washington college free tax service To figure the daily acquisition premium under this method, multiply the daily OID by the following fraction. Harold washington college free tax service The numerator is the acquisition premium. Harold washington college free tax service The denominator is the total OID remaining for the debt instrument after your purchase date. Harold washington college free tax service Section I-A is available at www. Harold washington college free tax service irs. Harold washington college free tax service gov/pub1212 and clicking the link under Recent Developments. Harold washington college free tax service Using Section I-A to figure accumulated OID. Harold washington college free tax service   If you bought your corporate debt instrument in a calendar year or the subsequent year, you can figure the accumulated OID to the date of purchase by adding the following amounts. Harold washington college free tax service The amount from the “Total OID to January 1, YYYY” column for your debt instrument. Harold washington college free tax service The OID from January 1 of a calendar year to the date of purchase, figured as follows. Harold washington college free tax service Multiply the daily OID for the first accrual period in the calendar year by the number of days from January 1 to the date of purchase, or the end of the accrual period if the debt instrument was purchased in the second or third accrual period. Harold washington college free tax service Multiply the daily OID for each subsequent accrual period by the number of days in the period to the date of purchase or the end of the accrual period, whichever applies. Harold washington college free tax service Add the amounts figured in (2a) and (2b). Harold washington college free tax service Debt Instruments Issued After 1984 If you hold debt instruments issued after 1984, you must report part of the OID in gross income each year that you own the debt instruments. Harold washington college free tax service You must include the OID in gross income whether or not you hold the debt instrument as a capital asset. Harold washington college free tax service Your basis in the debt instrument is increased by the OID you include in income. Harold washington college free tax service For information about showing the correct OID on your tax return, see How To Report OID, earlier. Harold washington college free tax service Form 1099-OID. Harold washington college free tax service   You should receive a Form 1099-OID showing OID for the part of a calendar year you held the debt instrument. Harold washington college free tax service However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Harold washington college free tax service See Constant yield method and Reduction for acquisition premium, later. Harold washington college free tax service   You may also need to refigure the OID for a contingent payment or inflation-indexed debt instrument on which the amount reported on Form 1099-OID is inaccurate. Harold washington college free tax service See Contingent Payment Debt Instruments or Inflation-Indexed Debt Instruments, later. Harold washington college free tax service If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-B available at www. Harold washington college free tax service irs. Harold washington college free tax service gov/pub1212 by clicking the link under Recent Developments. Harold washington college free tax service Form 1099-OID not received. Harold washington college free tax service   The OID listed is for each $1,000 of redemption price. Harold washington college free tax service You must adjust the listed amount if your debt instrument has a different principal amount. Harold washington college free tax service For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Harold washington college free tax service   Use the OID shown in Section I-B for a calendar year if you held the debt instrument the entire year. Harold washington college free tax service (If your debt instrument is not listed in Section I-B, consult the issuer for information about the issue price, the yield to maturity, and the OID that accrued for that year. Harold washington college free tax service ) If you did not hold the debt instrument the entire year, figure your OID as follows. Harold washington college free tax service Look up the daily OID for the first accrual period in which you held the debt instrument during a calendar year. Harold washington college free tax service (See Accrual period under Constant yield method, later. Harold washington college free tax service ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. Harold washington college free tax service Repeat (1) and (2) for any remaining accrual periods in which you held the debt instrument. Harold washington college free tax service Add the results of (2) and (3). Harold washington college free tax service This is the OID to include in income for that year, unless you paid an acquisition premium. Harold washington college free tax service (The reduction for acquisition premium is discussed later. Harold washington college free tax service ) Tax-exempt bond. Harold washington college free tax service   If you own a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable. Harold washington college free tax service You need to make this adjustment to determine if you have a gain or loss on a later disposition of the bond. Harold washington college free tax service In general, use the rules that follow to determine your OID. Harold washington college free tax service Constant yield method. Harold washington college free tax service   This discussion shows how to figure OID on debt instruments issued after 1984 using a constant yield method. Harold washington college free tax service (The special rules that apply to contingent payment debt instruments and inflation-indexed debt instruments are explained later. Harold washington college free tax service ) OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. Harold washington college free tax service   Figure the OID allocable to any accrual period as follows. Harold washington college free tax service Multiply the adjusted issue price at the beginning of the accrual period by a fraction. Harold washington college free tax service The numerator of the fraction is the debt instrument's yield to maturity and the denominator is the number of accrual periods per year. Harold washington college free tax service The yield must be stated appropriately taking into account the length of the particular accrual period. Harold washington college free tax service Subtract from the result in (1) any qualified stated interest allocable to the accrual period. Harold washington college free tax service Accrual period. Harold washington college free tax service   For debt instruments issued after 1984 and before April 4, 1994, an accrual period is each 6-month period that ends on the day that corresponds to the stated maturity date of the debt instrument or the date 6 months before that date. Harold washington college free tax service For example, a debt instrument maturing on March 31 has accrual periods that end on September 30 and March 31 of each calendar year. Harold washington college free tax service Any short period is included as the first accrual period. Harold washington college free tax service   For debt instruments issued after April 3, 1994, accrual periods may be of any length and may vary in length over the term of the debt instrument, as long as each accrual period is no longer than 1 year and all payments are made on the first or last day of an accrual period. Harold washington college free tax service However, the OID listed for these debt instruments in Section I-B has been figured using 6-month accrual periods. Harold washington college free tax service Daily OID. Harold washington college free tax service   The OID for any accrual period is allocated equally to each day in the accrual period. Harold washington college free tax service Figure the amount to include in income by adding the OID for each day you hold the debt instrument during the year. Harold washington college free tax service Since your tax year will usually include parts of two or more accrual periods, you must include the proper daily OID for each accrual period. Harold washington college free tax service If your debt instrument has 6-month accrual periods, your tax year will usually include one full 6-month accrual period and parts of two other 6-month periods. Harold washington college free tax service Figuring daily OID. Harold washington college free tax service   The daily OID for the initial accrual period is figured using the following formula. Harold washington college free tax service   (ip × ytm/n) − qsi     p   ip = issue price ytm = yield to maturity n = number of accrual periods in 1 year qsi = qualified stated interest p = number of days in accrual period       The daily OID for subsequent accrual periods is figured the same way except the adjusted issue price at the beginning of each period is used in the formula instead of the issue price. Harold washington college free tax service Example 5. Harold washington college free tax service On January 1 of Year 1, you bought a 15-year, 10% debt instrument of A Corporation at original issue for $86,235. Harold washington college free tax service 17. Harold washington college free tax service According to the prospectus, the debt instrument matures on December 31 of Year 15 at a stated redemption price of $100,000. Harold washington college free tax service The yield to maturity is 12%, compounded semiannually. Harold washington college free tax service The debt instrument provides for qualified stated interest payments of $5,000 on June 30 and December 31 of each calendar year. Harold washington college free tax service The accrual periods are the 6-month periods ending on each of these dates. Harold washington college free tax service The number of days for the first accrual period (January 1 through June 30) is 181 days (182 for leap years). Harold washington college free tax service The daily OID for the first accrual period is figured as follows. Harold washington college free tax service   ($86,235. Harold washington college free tax service 17 x . Harold washington college free tax service 12/2) – $5,000     181 days     = $174. Harold washington college free tax service 11020 = $. Harold washington college free tax service 96193   181           The adjusted issue price at the beginning of the second accrual period is the issue price plus the OID previously includible in income ($86,235. Harold washington college free tax service 17 + $174. Harold washington college free tax service 11), or $86,409. Harold washington college free tax service 28. Harold washington college free tax service The number of days for the second accrual period (July 1 through December 31) is 184 days. Harold washington college free tax service The daily OID for the second accrual period is figured as follows. Harold washington college free tax service   ($86,409. Harold washington college free tax service 28 x . Harold washington college free tax service 12/2) – $5,000     184 days     = $184. Harold washington college free tax service 55681 = $1. Harold washington college free tax service 00303   184 Since the first and second accrual periods coincide exactly with your tax year, you include in income for Year 1 the OID allocable to the first two accrual periods, $174. Harold washington college free tax service 11 ($. Harold washington college free tax service 95665 × 182 days) plus $184. Harold washington college free tax service 56 ($1. Harold washington college free tax service 00303 × 184 days), or $358. Harold washington college free tax service 67. Harold washington college free tax service Add the OID to the $10,000 interest you report on your income tax return for Year 1. Harold washington college free tax service Example 6. Harold washington college free tax service Assume the same facts as in Example 5, except that you bought the debt instrument at original issue on May 1 of Year 1, with a maturity date of April 30, Year 16. Harold washington college free tax service Also, the interest payment dates are October 31 and April 30 of each calendar year. Harold washington college free tax service The accrual periods are the 6-month periods ending on each of these dates. Harold washington college free tax service The number of days for the first accrual period (May 1 through October 31) is 184 days. Harold washington college free tax service The daily OID for the first accrual period is figured as follows. Harold washington college free tax service   ($86,235. Harold washington college free tax service 17 x . Harold washington college free tax service 12/2) – $5,000     184 days     = $174. Harold washington college free tax service 11020 = $. Harold washington college free tax service 94625   184           The number of days for the second accrual period (November 1 through April 30) is 181 days (182 for leap years). Harold washington college free tax service The daily OID for the second accrual period is figured as follows. Harold washington college free tax service   ($86,409. Harold washington college free tax service 28 x . Harold washington college free tax service 12/2) – $5,000     181 days     = $184. Harold washington college free tax service 55681 = $1. Harold washington college free tax service 01965   181 If you hold the debt instrument through the end of Year 1, you must include $236. Harold washington college free tax service 31 of OID in income. Harold washington college free tax service This is $174. Harold washington college free tax service 11 ($. Harold washington college free tax service 94625 × 184 days) for the period May 1 through October 31 plus $62. Harold washington college free tax service 20 ($1. Harold washington college free tax service 01965 × 61 days) for the period November 1 through December 31. Harold washington college free tax service The OID is added to the $5,000 interest income paid on October 31 of Year 1. Harold washington college free tax service Your basis in the debt instrument is increased by the OID you include in income. Harold washington college free tax service On January 1 of Year 2, your basis in the A Corporation debt instrument is $86,471. Harold washington college free tax service 48 ($86,235. Harold washington college free tax service 17 + $236. Harold washington college free tax service 31). Harold washington college free tax service Short first accrual period. Harold washington college free tax service   You may have to make adjustments if a debt instrument has a short first accrual period. Harold washington college free tax service For example, a debt instrument with 6-month accrual periods that is issued on February 15 and matures on October 31 has a short first accrual period that ends April 30. Harold washington college free tax service (The remaining accrual periods begin on May 1 and November 1. Harold washington college free tax service ) For this short period, figure the daily OID as described earlier, but adjust the yield for the length of the short accrual period. Harold washington college free tax service You may use any reasonable compounding method in determining OID for a short period. Harold washington college free tax service Examples of reasonable compounding methods include continuous compounding and monthly compounding (that is, simple interest within a month). Harold washington college free tax service Consult your tax advisor for more information about making this computation. Harold washington college free tax service   The OID for the final accrual period is the difference between the amount payable at maturity (other than a payment of qualified stated interest) and the adjusted issue price at the beginning of the final accrual period. Harold washington college free tax service Reduction for acquisition premium. Harold washington college free tax service   If you bought the debt instrument at an acquisition premium, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. Harold washington college free tax service To figure the daily acquisition premium, multiply the daily OID by the following fraction. Harold washington college free tax service The numerator is the acquisition premium. Harold washington college free tax service The denominator is the total OID remaining for the debt instrument after your purchase date. Harold washington college free tax service Example 7. Harold washington college free tax service Assume the same facts as in Example 6, except that you bought the debt instrument on November 1 of Year 1 for $87,000, after its original issue on May 1 of Year 1. Harold washington college free tax service The adjusted issue price on November 1 of Year 1 is $86,409. Harold washington college free tax service 28 ($86,235. Harold washington college free tax service 17 + $174. Harold washington college free tax service 11). Harold washington college free tax service In this case, you paid an acquisition premium of $590. Harold washington college free tax service 72 ($87,000 − $86,409. Harold washington college free tax service 28). Harold washington college free tax service The daily OID for the accrual period November 1 through April 30, reduced for the acquisition premium, is figured as follows. Harold washington college free tax service 1) Daily OID on date of purchase (2nd accrual period) $1. Harold washington college free tax service 01965*  2)  Acquisition premium $590. Harold washington college free tax service 72    3)  Total OID remaining after purchase date ($13,764. Harold washington college free tax service 83 − $174. Harold washington college free tax service 11) 13,590. Harold washington college free tax service 72   4) Line 2 ÷ line 3 . Harold washington college free tax service 04346  5)  Line 1 × line 4 . Harold washington college free tax service 04432  6)  Daily OID reduced for the acquisition premium. Harold washington college free tax service Line 1 − line 5 $0. Harold washington college free tax service 97533  * As shown in Example 6. Harold washington college free tax service The total OID to include in income for Year 1 is $59. Harold washington college free tax service 50 ($. Harold washington college free tax service 97533 × 61 days). Harold washington college free tax service Contingent Payment Debt Instruments This discussion shows how to figure OID on a contingent payment debt instrument issued after August 12, 1996, that was issued for cash or publicly traded property. Harold washington college free tax service In general, a contingent payment debt instrument provides for one or more payments that are contingent as to timing or amount. Harold washington college free tax service If you hold a contingent payment bond, you must report OID as it accrues each year. Harold washington college free tax service Because the actual payments on a contingent payment debt instrument cannot be known in advance, issuers and holders cannot use the constant yield method (discussed earlier under Debt Instruments Issued After 1984) without making certain assumptions about the payments on the debt instrument. Harold washington college free tax service To figure OID accruals on contingent payment debt instruments, holders and issuers must use the noncontingent bond method. Harold washington college free tax service Noncontingent bond method. Harold washington college free tax service    Under this method, the issuer must compute a comparable yield for the debt instrument and, based on this yield, construct a projected payment schedule for the instrument, which includes a projected fixed amount for each contingent payment. Harold washington college free tax service In general, holders and issuers accrue OID on this projected payment schedule using the constant yield method that applies to fixed payment debt instruments. Harold washington college free tax service When a contingent payment differs from the projected fixed amount, the holders and issuers make adjustments to their OID accruals. Harold washington college free tax service If the actual contingent payment is larger than expected, both the issuer and the holder increase their OID accruals. Harold washington college free tax service If the actual contingent payment is smaller than expected, holders and issuers generally decrease their OID accruals. Harold washington college free tax service Form 1099-OID. Harold washington college free tax service   The amount shown on Form 1099-OID in box 1 you receive for a contingent payment debt instrument may not be the correct amount to include in income. Harold washington college free tax service For example, the amount may not be correct if the contingent payment was different from the projected amount. Harold washington college free tax service If the amount in box 1 is not correct, you must figure the OID to report on your return under the following rules. Harold washington college free tax service For information on showing an OID adjustment on your tax return, see How To Report OID, earlier. Harold washington college free tax service Figuring OID. Harold washington college free tax service   To figure OID on a contingent payment debt instrument, you need to know the “comparable yield” and “projected payment schedule” of the debt instrument. Harold washington college free tax service The issuer must make these available to you. Harold washington college free tax service Comparable yield. Harold washington college free tax service   The comparable yield generally is the yield at which the issuer would issue a fixed rate debt instrument with terms and conditions similar to those of the contingent payment debt instrument. Harold washington college free tax service The comparable yield is determined as of the debt instrument's issue date. Harold washington college free tax service Projected payment schedule. Harold washington college free tax service   The projected payment schedule for a contingent payment debt instrument includes all fixed payments due under the instrument and a projected fixed amount for each contingent payment. Harold washington college free tax service The projected payment schedule is created by the issuer as of the debt instrument's issue date. Harold washington college free tax service It is used to determine the issuer's and holder's interest accruals and adjustments. Harold washington college free tax service Steps for figuring OID. Harold washington college free tax service   Figure the OID on a contingent payment debt instrument in two steps. Harold washington college free tax service Figure the OID using the constant yield method (discussed earlier under Debt Instruments Issued After 1984 ) that applies to fixed payment debt instruments. Harold washington college free tax service Use the comparable yield as the yield to maturity. Harold washington college free tax service In general, use the projected payment schedule to determine the instrument's adjusted issue price at the beginning of each accrual period (other than the initial period). Harold washington college free tax service Do not treat any amount payable as qualified stated interest. Harold washington college free tax service Adjust the OID in (1) to account for actual contingent payments. Harold washington college free tax service If the contingent payment is greater than the projected fixed amount, you have a positive adjustment. Harold washington college free tax service If the contingent payment is less than the projected fixed amount, you have a negative adjustment. Harold washington college free tax service Net positive adjustment. Harold washington college free tax service   A net positive adjustment exists for a tax year when the total of any positive adjustments described in (2) above for the tax year is more than the total of any negative adjustments for the tax year. Harold washington college free tax service Treat a net positive adjustment as additional OID for the tax year. Harold washington college free tax service Net negative adjustment. Harold washington college free tax service   A net negative adjustment exists for a tax year when the total of any negative adjustments described in (2) above for the tax year is more than the total of any positive adjustments for the tax year. Harold washington college free tax service Use a net negative adjustment to offset OID on the debt instrument for the tax year. Harold washington college free tax service If the net negative adjustment is more than the OID on the debt instrument for the tax year, you can claim the difference as an ordinary loss. Harold washington college free tax service However, the amount you can claim as an ordinary loss is limited to the OID on the debt instrument you included in income in prior tax years. Harold washington college free tax service You must carry forward any net negative adjustment that is more than the total OID for the tax year and prior tax years and treat it as a negative adjustment in the next tax year. Harold washington college free tax service Basis adjustments. Harold washington college free tax service   In general, increase your basis in a contingent payment debt instrument by the OID included in income. Harold washington college free tax service Your basis, however, is not affected by any negative or positive adjustments. Harold washington college free tax service Decrease your basis by any noncontingent payment received and the projected contingent payment scheduled to be received. Harold washington college free tax service Treatment of gain or loss on sale or exchange. Harold washington college free tax service   If you sell a contingent payment debt instrument at a gain, your gain is ordinary income (interest income), even if you hold the debt instrument as a capital asset. Harold washington college free tax service If you sell a contingent payment debt instrument at a loss, your loss is an ordinary loss to the extent of your prior OID accruals on the debt instrument. Harold washington college free tax service If the debt instrument is a capital asset, treat any loss that is more than your prior OID accruals as a capital loss. Harold washington college free tax service See Regulations section 1. Harold washington college free tax service 1275-4 for exceptions to these rules. Harold washington college free tax service Premium, acquisition premium, and market discount. Harold washington college free tax service   The rules for accruing premium, acquisition premium, and market discount do not apply to a contingent payment debt instrument. Harold washington college free tax service See Regulations section 1. Harold washington college free tax service 1275-4 to determine how to account for these items. Harold washington college free tax service Inflation-Indexed Debt Instruments This discussion shows how you figure OID on certain inflation-indexed debt instruments issued after January 5, 1997. Harold washington college free tax service An inflation-indexed debt instrument is generally a debt instrument on which the payments are adjusted for inflation and d
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Harold washington college free tax service Publication 926 - Introductory Material Table of Contents Future Developments What's New Reminder IntroductionTax questions. Harold washington college free tax service Future Developments For the latest information about developments related to Publication 926, such as legislation enacted after it was published, go to www. Harold washington college free tax service irs. Harold washington college free tax service gov/pub926. Harold washington college free tax service What's New Social security and Medicare tax for 2014. Harold washington college free tax service  The social security tax rate is 6. Harold washington college free tax service 2% each for the employee and employer, unchanged from 2013. Harold washington college free tax service The social security wage base limit is $117,000. Harold washington college free tax service The Medicare tax rate is 1. Harold washington college free tax service 45% each for the employee and employer, unchanged from 2013. Harold washington college free tax service There is no wage base limit for Medicare tax. Harold washington college free tax service Social security and Medicare taxes apply to the wages of household employees you pay $1,900 or more in cash or an equivalent form of compensation. Harold washington college free tax service Qualified parking exclusion and commuter transportation benefit. Harold washington college free tax service  For 2014, the monthly exclusion for qualified parking is $250 and the monthly exclusion for commuter highway vehicle transportation and transit passes is $130. Harold washington college free tax service Reminder Additional Medicare Tax withholding. Harold washington college free tax service  In addition to withholding Medicare tax at 1. Harold washington college free tax service 45%, you must withhold a 0. Harold washington college free tax service 9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. Harold washington college free tax service You are required to begin withholding Additional Medicare Tax in the pay period in which you pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. Harold washington college free tax service Additional Medicare Tax is only imposed on the employee. Harold washington college free tax service There is no employer share of Additional Medicare Tax. Harold washington college free tax service All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold. Harold washington college free tax service For more information on Additional Medicare Tax, visit IRS. Harold washington college free tax service gov and enter “Additional Medicare Tax” in the search box. Harold washington college free tax service Credit reduction states. Harold washington college free tax service  A state that has not repaid money it borrowed from the federal government to pay unemployment benefits is a “credit reduction state. Harold washington college free tax service ” The Department of Labor (DOL) determines these states. Harold washington college free tax service If you paid any wages that are subject to the unemployment compensation laws in any credit reduction state, your federal unemployment (FUTA) tax credit is reduced. Harold washington college free tax service See the Instructions for Schedule H (Form 1040) for more information. Harold washington college free tax service Outsourcing payroll duties. Harold washington college free tax service  Employers are responsible to ensure that tax returns are filed and deposits and payments are made, even if the employer contracts with a third party to perform these acts. Harold washington college free tax service The employer remains responsible if the third party fails to perform any required action. Harold washington college free tax service If you choose to outsource any of your payroll and related tax duties (that is, withholding, reporting, and paying over social security, Medicare, FUTA, and income taxes) to a third-party payer such as a payroll service provider or reporting agent, visit IRS. Harold washington college free tax service gov and enter “outsourcing payroll duties” in the search box for helpful information on this topic. Harold washington college free tax service Photographs of missing children. Harold washington college free tax service  The IRS is a proud partner with the National Center for Missing and Exploited Children. Harold washington college free tax service Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Harold washington college free tax service You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Harold washington college free tax service Introduction The information in this publication applies to you only if you have a household employee. Harold washington college free tax service If you have a household employee in 2014, you may need to pay state and federal employment taxes for 2014. Harold washington college free tax service You generally must add your federal employment taxes to the income tax that you will report on your 2014 federal income tax return. Harold washington college free tax service This publication will help you decide whether you have a household employee and, if you do, whether you need to pay federal employment taxes (social security tax, Medicare tax, FUTA, and federal income tax withholding). Harold washington college free tax service It explains how to figure, pay, and report these taxes for your household employee. Harold washington college free tax service It also explains what records you need to keep. Harold washington college free tax service This publication also tells you where to find out whether you need to pay state unemployment tax for your household employee. Harold washington college free tax service Comments and suggestions. Harold washington college free tax service   We welcome your comments about this publication and your suggestions for future editions. Harold washington college free tax service   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Harold washington college free tax service NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Harold washington college free tax service Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Harold washington college free tax service   You can also send us comments from www. Harold washington college free tax service irs. Harold washington college free tax service gov/formspubs. Harold washington college free tax service Click on More Information and then click on Comment on Tax Forms and Publications. Harold washington college free tax service   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Harold washington college free tax service Tax questions. Harold washington college free tax service   If you have a tax question, check the information available on IRS. Harold washington college free tax service gov or call 1-800-829-1040 or 1-800-829-4933 (TDD/TTY for persons who are deaf, hard of hearing, or have a speech disability at 1-800-829-4059) Monday–Friday from 7:00 a. Harold washington college free tax service m. Harold washington college free tax service –7:00 p. Harold washington college free tax service m. Harold washington college free tax service local time (Alaska and Hawaii follow Pacific time). Harold washington college free tax service We cannot answer tax questions sent to the above address. Harold washington college free tax service Prev  Up  Next   Home   More Online Publications