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Myfreetax Accelerated Cost Recovery System (ACRS) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: ACRS Defined What Can and Cannot Be Depreciated Under ACRSRecovery Property Nonrecovery Property How To Figure the DeductionUnadjusted Basis Classes of Recovery Property Recovery Periods Alternate ACRS Method (Modified Straight Line Method) ACRS Deduction in Short Tax Year DispositionsEarly dispositions of ACRS property other than 15-, 18-, or 19-year real property. Myfreetax Dispositions — mass asset accounts. Myfreetax Early dispositions — 15-year real property. Myfreetax Early dispositions — 18- and 19-year real property. Myfreetax Depreciation Recapture Topics - This chapter discusses: The definition of ACRS What can and cannot be depreciated under ACRS How to figure the deduction Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization The Accelerated Cost Recovery System (ACRS) applies to property first used before 1987. Myfreetax It is the name given to tax rules for getting back (recovering) through depreciation deductions the cost of property used in a trade or business or to produce income. Myfreetax These rules are mandatory and generally apply to tangible property placed in service after 1980 and before 1987. Myfreetax If you placed property in service during this period, you must continue to figure your depreciation under ACRS. Myfreetax If you used listed property placed in service after June 18, 1984, less than 50% for business in 1995, see Predominant Use Test in chapter 3. Myfreetax Listed property includes cars, other means of transportation, and certain computers. Myfreetax Any additions or improvements placed in service after 1986, including any components of a building (such as plumbing, wiring, storm windows, etc. Myfreetax ), are depreciated using MACRS, discussed in chapter 3 of Publication 946. Myfreetax It does not matter that the underlying property is depreciated under ACRS or one of the other methods. Myfreetax ACRS Defined ACRS consists of accelerated depreciation methods and an alternate ACRS method that could have been elected. Myfreetax The alternate ACRS method used a recovery percentage based on a modified straight line method. Myfreetax The law prescribes fixed percentages to be uses for each class of property. Myfreetax Property depreciable under ACRS is called recovery property. Myfreetax The recovery class of property determines the recovery period. Myfreetax Generally, the class life of property places it in a 3-year, 5-year, 10-year, 15-year, 18-year, or 19-year recovery class. Myfreetax Under ACRS, the prescribed percentages are used to recover the unadjusted basis of recovery property. Myfreetax To figure a depreciation deduction, you multiply the prescribed percentage for the recovery class by the unadjusted basis of the recovery property. Myfreetax You must continue to figure your depreciation under ACRS for property placed in service after 1980 and before 1987. Myfreetax For property you placed in service after 1986, you must use MACRS, discussed in chapter 3 of Publication 946. Myfreetax What Can and Cannot Be Depreciated Under ACRS ACRS applies to most depreciable tangible property placed in service after 1980 and before 1987. Myfreetax It includes new or used and real or personal property. Myfreetax The property must be for use in a trade or business or for the production of income. Myfreetax Property you acquired before 1981 or after 1986 is not ACRS recovery property. Myfreetax For information on depreciating property acquired before 1981, see chapter 2. Myfreetax For information on depreciating property acquired after 1986, see chapter 3 of Publication 946. Myfreetax Recovery Property Recovery property under ACRS is tangible depreciable property placed in service after 1980 and before 1987. Myfreetax It generally includes new or used property that you acquired after 1980 and before 1987 for use in your trade or business or for the production of income. Myfreetax Nonrecovery Property You cannot use ACRS for property you placed in service before 1981 or after 1986. Myfreetax Nonrecovery property also includes: Intangible property, Property you elected to exclude from ACRS that is properly depreciated under a method of depreciation that is not based on a term of years, Certain public utility property, and Certain property acquired and excluded from ACRS because of the antichurning rules. Myfreetax Intangible property. Myfreetax   Intangible property is not depreciated under ACRS. Myfreetax Property depreciated under methods not expressed in a term of years. Myfreetax   Certain property depreciated under a method not expressed in a term of years is not depreciated under ACRS. Myfreetax This included any property: If you made an irrevocable election to exclude such property, and In the first year that you could have claimed depreciation, you properly used the unit-of-production method or any method of depreciation not expressed in a term of years (not including the retirement-replacement-betterment method). Myfreetax Public utility property. Myfreetax   Public utility property for which the taxpayer does not use a normalization method of accounting is excluded from ACRS and is subject to depreciation under a special rule. Myfreetax Additions or improvements to ACRS property after 1986. Myfreetax   Any additions or improvements placed in service after 1986, including any components of a building (plumbing, wiring, storm windows, etc. Myfreetax ) are depreciated using MACRS, discussed in chapter 3 of Publication 946. Myfreetax It does not matter that the underlying property is depreciated under ACRS or one of the other methods. Myfreetax How To Figure the Deduction After you determine that your property can be depreciated under ACRS, you are ready to figure your deduction. Myfreetax Because the conventions are built into the percentage table rates, you only need to know the following: The unadjusted basis of your recovery property, The classes of recovery property, The recovery periods, and Whether to use the prescribed percentages based on accelerated methods or percentages based on using the alternate ACRS method. Myfreetax Unadjusted Basis To figure your ACRS deduction, you multiply the unadjusted basis in your recovery property by its applicable percentage for the year. Myfreetax Unadjusted basis is the same amount you would use to figure gain on a sale, but it is figured without taking into account any depreciation taken in earlier years. Myfreetax However, reduce your original basis by the amount of amortization taken on the property and by any section 179 deduction claimed as discussed in chapter 2 of Publication 946. Myfreetax If you buy property, your unadjusted basis is usually its cost minus any amortized amount and minus any section 179 deduction elected. Myfreetax If you acquire property in some other way, such as by inheriting it, getting it as a gift, or building it yourself, you figure your unadjusted basis under other rules. Myfreetax See Publication 551. Myfreetax Classes of Recovery Property All recovery property under ACRS is in one of the following classes. Myfreetax The class for your property was determined when you began to depreciate it. Myfreetax 3-Year Property 3-year property includes automobiles, light-duty trucks (actual unloaded weight less than 13,000 pounds), and tractor units for use over-the-road. Myfreetax Race horses over 2 years old when placed in service are 3-year property. Myfreetax Any other horses over 12 years old when you placed them in service are also included in the 3-year property class. Myfreetax The ACRS percentages for 3-year recovery property are: Recovery Period Percentage 1st year 25% 2nd year 38% 3rd year 37% If you used the percentages above to depreciate your 3-year recovery property, your property, except for certain passenger automobiles, is fully depreciated. Myfreetax You cannot claim depreciation for this property after 1988. Myfreetax 5-Year Property 5-year property includes computers, copiers, and equipment, such as office furniture and fixtures. Myfreetax It also includes single purpose agricultural or horticultural structures and petroleum storage facilities (other than buildings and their structural components). Myfreetax The ACRS percentages for 5-year recovery property are: Recovery period Percentage 1st year 15% 2nd year 22% 3rd through 5th year 21% If you used the percentages above to depreciate your 5-year recovery property, it is fully depreciated. Myfreetax You cannot claim depreciation for this property after 1990. Myfreetax 10-Year Property 10-year property includes certain real property such as theme-park structures and certain public utility property. Myfreetax Manufactured homes (including mobile homes) and railroad tank cars are also 10-year property. Myfreetax You do not treat a building, and its structural components, as 10-year property by reason of a change in use after you placed the property in service. Myfreetax For example, a building (15-year real property) that was placed in service in 1981 and was converted to a theme-park structure in 1986 remains 15-year real property. Myfreetax The ACRS percentages for 10-year recovery property are: Recovery Period Percentage 1st year 8% 2nd year 14% 3rd year 12% 4th through 6th year 10% 7th through 10th year 9% If you used the percentages above, you cannot claim depreciation for this property after 1995. Myfreetax Example. Myfreetax On April 21, 1986, you bought and placed in service a new mobile home for $26,000 to be used as rental property. Myfreetax You paid $10,000 cash and signed a note for $16,000 giving you an unadjusted basis of $26,000. Myfreetax On June 8, 1986, you bought and placed in service a used mobile home for use as rental property at a total cost of $11,500. Myfreetax The total unadjusted basis of your 10-year recovery property placed in service in 1986 was $37,500 ($26,000 + $11,500). Myfreetax Your ACRS deduction was $3,000 (8% × $37,500). Myfreetax In 1987, your ACRS deduction was $5,250 (14% × $37,500). Myfreetax In 1988, your ACRS deduction was $4,500 (12% × $37,500). Myfreetax In 1989, 1990, and 1991, your ACRS deduction was $3,750 (10% × $37,500). Myfreetax In 1992, 1993, 1994, and 1995 your deduction for each year is $3,375 (9% × $37,500). Myfreetax 15-Year Real Property 15-year real property is real property that is recovery property placed in service before March 16, 1984. Myfreetax It includes all real property, such as buildings, other than that designated as 5-year or 10-year property. Myfreetax Unlike the 3-, 5-, or 10-year classes of property, the percentages for 15-year real property depend on when you placed the property in service during your tax year. Myfreetax You could group 15-year real property by month and year placed in service. Myfreetax In Table 1, at the end of this publication in the Appendix, find the month in your tax year that you placed the property in service in your trade or business or for the production of income. Myfreetax You use the percentages listed under that month for each year of the recovery period to determine your depreciation deduction each year. Myfreetax Example. Myfreetax On March 5, 1984, you placed an apartment building in service in your business. Myfreetax It is 15-year real property. Myfreetax After subtracting the value of the land, your unadjusted basis in the building is $250,000. Myfreetax You use the calendar year as your tax year. Myfreetax March is the third month of your tax year. Myfreetax Your ACRS deduction for 1984 was $25,000 (10% × $250,000). Myfreetax For 1985, the percentage for the third month of the second year of the recovery period is 11%. Myfreetax Your deduction was $27,500 (11% × $250,000). Myfreetax For the third, fourth, and fifth years of the recovery period (1986, 1987, and 1988), the percentages are 9%, 8%, and 7%. Myfreetax For 1989 through 1992, the percentage for the third month is 6%. Myfreetax Your deduction each year is $15,000 (6% × $250,000). Myfreetax For 1993, 1994, and 1995, the percentage for the third month is 5%. Myfreetax Your depreciation deduction is $12,500 (5% × $250,000) for 1993, 1994, and 1995. Myfreetax Low-Income Housing Low-income housing that was assigned a 15-year recovery period under ACRS includes the following types of property: Federally assisted housing projects where the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. Myfreetax Low-income rental housing for which a depreciation deduction for rehabilitation expenditures is allowed. Myfreetax Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under the provisions of state or local laws that authorize similar subsidies for low-income families. Myfreetax Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. Myfreetax The ACRS percentages for low-income housing real property, like the regular 15-year real property percentages, depend on when you placed the property in service. Myfreetax Find the month in your tax year in Table 2 or 3 at the end of this publication in the Appendix that you first placed the property in service as rental housing. Myfreetax Use the percentages listed under that month for each year of the recovery period. Myfreetax Table 2 shows percentages for low-income housing placed in service before May 9, 1985. Myfreetax Table 3 shows percentages for low-income housing placed in service after May 8, 1985, and before 1987. Myfreetax Example. Myfreetax In May 1986, you acquired and placed in service a house that qualified as low-income rental housing under item 3) of the above listing. Myfreetax You use the calendar year as your tax year. Myfreetax You use Table C–3 because the property was placed in service after May 8, 1985. Myfreetax Your unadjusted basis for the property, not including the land, was $59,000. Myfreetax Your deduction for 1986 through 2001 is shown in the following table. Myfreetax Year Rate Deduction 1986 8. Myfreetax 9% $5,251 1987 12. Myfreetax 1% 7,139 1988 10. Myfreetax 5% 6,195 1989 9. Myfreetax 1% 5,369 1990 7. Myfreetax 9% 4,661 1991 6. Myfreetax 9% 4,071 1992 5. Myfreetax 9% 3,481 1993 5. Myfreetax 2% 3,068 1994 4. Myfreetax 6% 2,714 1995 4. Myfreetax 6% 2,714 1996 4. Myfreetax 6% 2,714 1997 4. Myfreetax 6% 2,714 1998 4. Myfreetax 6% 2,714 1999 4. Myfreetax 5% 2,655 2000 4. Myfreetax 5% 2,655 2001 1. Myfreetax 5% 885 18-Year Real Property 18-year real property is real property that is recovery property placed in service after March 15, 1984, and before May 9, 1985. Myfreetax It includes real property, such as buildings, other than that designated as 5-year, 10-year, 15-year real property, or low-income housing. Myfreetax The ACRS percentages for 18-year real property depend on when you placed the property in service in your trade or business or for the production of income during your tax year. Myfreetax There are also tables for 18-year real property in the Appendix. Myfreetax Table 4 shows the percentages for 18-year real property you placed in service after June 22, 1984, and before May 9, 1985. Myfreetax Table 5 is for 18-year real property placed in service after March 15, 1984, and before June 23, 1984. Myfreetax Find the month in your tax year that you placed the property in service in a trade or business or for the production of income. Myfreetax Use the percentages listed under that month for each year of the recovery period. Myfreetax Example. Myfreetax On April 28, 1985, you bought and placed in service a rental house. Myfreetax The house, not including the land, cost $95,000. Myfreetax This is your unadjusted basis for the house. Myfreetax You use the calendar year as your tax year. Myfreetax Because the house was placed in service after June 22, 1984, and before May 9, 1985, it is 18-year real property. Myfreetax You use Table 4 to figure your deduction for the house. Myfreetax April is the fourth month of your tax year. Myfreetax Your deduction for 1985 through 2003 is shown in the following table. Myfreetax Year Rate Deduction 1985 7. Myfreetax 0% $6,650 1986 9. Myfreetax 0% 8,550 1987 8. Myfreetax 0% 7,600 1988 7. Myfreetax 0% 6,650 1989 7. Myfreetax 0% 6,650 1990 6. Myfreetax 0% 5,700 1991 5. Myfreetax 0% 4,750 1992 5. Myfreetax 0% 4,750 1993 5. Myfreetax 0% 4,750 1994 5. Myfreetax 0% 4,750 1995 5. Myfreetax 0% 4,750 1996 5. Myfreetax 0% 4,750 1997 5. Myfreetax 0% 4,750 1998 4. Myfreetax 0% 3,800 1999 4. Myfreetax 0% 3,800 2000 4. Myfreetax 0% 3,800 2001 4. Myfreetax 0% 3,800 2002 4. Myfreetax 0% 3,800 2003 1. Myfreetax 0% 950 19-Year Real Property 19-year real property is real property that is recovery property placed in service after May 8, 1985, and before 1987. Myfreetax It includes all real property, other than that designated as 5-year, 10-year, 15-year, or 18-year real property, or low-income housing. Myfreetax The ACRS percentages for 19-year real property depend on when you placed the property in service in a trade or business or for the production of income during your tax year. Myfreetax Table 6 shows the percentages for 19-year real property. Myfreetax You find the month in your tax year that you placed the property in service. Myfreetax You use the percentages listed under that month for each year of the recovery period. Myfreetax Recovery Periods Each item of recovery property is assigned to a class of property. Myfreetax The classes of recovery property establish the recovery periods over which the unadjusted basis of items in a class is recovered. Myfreetax The classes of property are: 3-Year property 5-Year property 10-Year property 15-Year real property Low-income housing 18-Year real property 19-Year real property Alternate ACRS Method (Modified Straight Line Method) ACRS provides an alternate ACRS method that could be elected. Myfreetax This alternate ACRS method uses a recovery percentage based on a modified straight line method. Myfreetax This alternate ACRS method generally uses percentages other than those from the tables. Myfreetax If you elected the alternate ACRS method, you determine the recovery period by using the following schedule. Myfreetax This schedule is for other than 18- and 19-year real property and low-income housing: In the case of: You could have elected a recovery period of: 3-year property 3, 5, or 12 years 5-year property 5, 12, or 25 years 15-year real property 15, 35, or 45 years Percentages. Myfreetax   The straight-line percentages for the alternate ACRS method are: Recovery Period Percentage 5 years 20. Myfreetax 00% 10 years 10. Myfreetax 00% 12 years 8. Myfreetax 333% 15 years 6. Myfreetax 667% 25 years 4. Myfreetax 00% 35 years 2. Myfreetax 857%   You apply the percentage to the unadjusted basis(defined earlier) of the property to figure your ACRS deduction. Myfreetax There are tables for 18- and 19-year real property later in this publication in the Appendix. Myfreetax For 15-year real property, see 15-year real property, later. Myfreetax 3-, 5-, and 10-year property. Myfreetax   If you elected to use an alternate recovery percentage, you have to use the same recovery percentage for all property in that class that you placed in service in that tax year. Myfreetax This applies throughout the recovery period you selected. Myfreetax Half-year convention. Myfreetax   If you elected the alternate method, only a half-year of depreciation was deducted for the year you placed the property in service. Myfreetax This applied regardless of when in the tax year you placed the property in service. Myfreetax For each of the remaining years in the recovery period, you take a full year's deduction. Myfreetax If you hold the property for the entire recovery period, a half-year of depreciation is allowable for the year following the end of the recovery period. Myfreetax Example. Myfreetax You operate a small upholstery business. Myfreetax On March 19, 1986, you bought and placed in service a $13,000 light-duty panel truck to be used in your business and a $500 electric saw. Myfreetax You elected to use the alternate ACRS method. Myfreetax You did not elect to take a section 179 deduction. Myfreetax You decided to recover the cost of the truck, which is 3-year recovery property, over 5 years. Myfreetax The saw is 5-year property, but you decided to recover its cost over 12 years. Myfreetax For 1986, your ACRS deduction reflected the half-year convention. Myfreetax In the first year, you deducted half of the amount determined for a full year. Myfreetax Your ACRS deduction for 1986 is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600 Half-year convention -½ of $2,600= $1,300. Myfreetax 00     Electric saw   12 years straight line = 8. Myfreetax 333% 8. Myfreetax 333% ÷ $500 = $41. Myfreetax 67 Half-year convention -½ of $41. Myfreetax 67= 20. Myfreetax 84 Total ACRS deduction for 1986 $1,320. Myfreetax 84       You take a full year of depreciation for both the truck and the saw for the years 1987 through 1990. Myfreetax Your ACRS deduction for each of those years is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600     Electric saw     12 years straight line = 8. Myfreetax 333% 8. Myfreetax 333% ÷ $500 = $41. Myfreetax 67 Total annual ACRS deduction for 1987 through 1990 $2,641. Myfreetax 67       In 1991, you take a half-year of depreciation for the truck and a full year of depreciation for the saw. Myfreetax Your ACRS deduction for 1991 is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600 Half-year convention -½ of $2,600= $1,300. Myfreetax 00     Electric saw   12 years straight line = 8. Myfreetax 333% 8. Myfreetax 333% ÷ $500 = $41. Myfreetax 67 Total ACRS deduction for 1991 $1,341. Myfreetax 67       The truck is fully depreciated after 1991. Myfreetax You take a full year of depreciation for the saw for the years 1992 through 1997. Myfreetax Your ACRS deduction for each of those years is as follows: Electric saw     12 years straight line = 8. Myfreetax 333% 8. Myfreetax 333% ÷ $500 = $41. Myfreetax 67 Total annual ACRS deduction for 1992 through 1997 $41. Myfreetax 67       You take a half-year of depreciation for the saw for 1998. Myfreetax Your ACRS deduction for 1998 is as follows: Electric saw   12 years straight line = 8. Myfreetax 333% 8. Myfreetax 333% ÷ $500 = $41. Myfreetax 67 Half-year convention -½ of $41. Myfreetax 67= 20. Myfreetax 84 Total ACRS deduction for 1998 $20. Myfreetax 84       The saw is fully depreciated after 1998. Myfreetax 15-year real property. Myfreetax   Under ACRS, you could also elect to use the alternate ACRS method for 15-year real property. Myfreetax The alternate ACRS method allows you to depreciate your 15-year real property using the straight line ACRS method over the alternate recovery periods of 15, 35, or 45 years. Myfreetax If you selected a 15-year recovery period, you use the percentage (6. Myfreetax 667%) from the schedule above. Myfreetax You prorate this percentage for the number of months the property was in service in the first year. Myfreetax If you selected a 35- or 45-year recovery period, you use either Table 11 or 15. Myfreetax Alternate periods for 18-year real property. Myfreetax   For 18-year real property, the alternate recovery periods are 18, 35, or 45 years. Myfreetax The percentages for 18-year real property under the alternate method are in Tables 7, 8, 10, 11, 14, and 15 in the Appendix. Myfreetax There are two tables for each alternate recovery period. Myfreetax One table shows the percentage for property placed in service after June 22, 1984. Myfreetax The other table has the percentages for property placed in service after March 15, 1984, and before June 23, 1984. Myfreetax Alternate periods for 19-year real property. Myfreetax   For 19-year real property, the alternate recovery periods are 19, 35, or 45 years. Myfreetax If you selected a 19-year recovery period, use Table 9 to determine your deduction. Myfreetax If you select a 35- or 45-year recovery period, use either Table 13 or 14. Myfreetax Example. Myfreetax You placed in service an apartment building on August 3, 1986. Myfreetax The building is 19-year real property. Myfreetax The sales contract allocated $300,000 to the building and $100,000 to the land. Myfreetax You use the calendar year as your tax year. Myfreetax You chose the alternate ACRS method over a recovery period of 35 years. Myfreetax For 1986, you figure your ACRS deduction usingTable 13. Myfreetax August is the eighth month of your tax year. Myfreetax The percentage from Table 13 for the eighth month is 1. Myfreetax 1%. Myfreetax Your deduction was $3,300 ($300,000 ÷ 1. Myfreetax 1%). Myfreetax The deduction rate from ACRS Table 13 for years 2 through 20 is 2. Myfreetax 9% so that your deduction in 1987 through 2005 is $8,700 ($300,000 ÷ 2. Myfreetax 9%). Myfreetax Alternate periods for low-income housing. Myfreetax   For low-income housing, the alternate recovery periods are 15, 35, or 45 years. Myfreetax If you selected a 15-year period for this property, use 6. Myfreetax 667% as the percentage. Myfreetax If you selected a 35- or 45-year period, use either Table 11, 12, or 15. Myfreetax Election. Myfreetax   You had to make the election to use the alternate ACRS method by the return due date (including extensions) for the tax year you placed the property in service. Myfreetax Revocation of election. Myfreetax   Your election to use an alternate ACRS method, once made, can be changed only with the consent of the Commissioner. Myfreetax The Commissioner grants consent only in extraordinary circumstances. Myfreetax Any request for a revocation will be considered a request for a ruling. Myfreetax ACRS Deduction in Short Tax Year For a tax year that is less than 12 months, the ACRS deduction is prorated on a 12-month basis. Myfreetax Figure the amount of the ACRS deduction for a short tax year as follows: First, you figure the ACRS deduction for a full year. Myfreetax You figure this by multiplying the unadjusted basis by the recovery percentage. Myfreetax You then multiply the ACRS deduction determined for a full tax year by a fraction. Myfreetax The numerator (top number) of the fraction is the number of months in the short tax year and the denominator (bottom number) is 12. Myfreetax For example, a corporation placed in service in June 1986 an item of 3-year property with an unadjusted basis of $10,000. Myfreetax The corporation files a tax return, because of a change in its accounting period, for the 6-month short tax year ending June 30, 1986. Myfreetax The full year's ACRS deduction for this item is $2,500 ($10,000 ÷ 25%), the first year percentage from the 3-year table. Myfreetax The ACRS deduction for the short tax year is $1,250 ($2,500 ÷ 6/12). Myfreetax You use the full ACRS percentages during the remaining years of the recovery period. Myfreetax For the first tax year after the recovery period, the unrecovered basis will be deductible. Myfreetax Exception. Myfreetax   For the tax year in which you placed 15-, 18-, or 19-year real property in service or in the tax year you dispose of it, you compute the ACRS deduction for the number of months that the property is in service during that tax year. Myfreetax You compute the number of months using either a full month or mid-month convention. Myfreetax This is true regardless of the number of months in the tax year and the recovery period and method used. Myfreetax Dispositions A disposition is the permanent withdrawal of property from use in your trade or business or in the production of income. Myfreetax You can make a withdrawal by sale, exchange, retirement, abandonment, or destruction. Myfreetax You generally recognize gain or loss on the disposition of an asset by sale. Myfreetax However, nonrecognition rules can allow you to postpone some gain. Myfreetax See Publication 544. Myfreetax If you physically abandon property, you can deduct as a loss the adjusted basis of the asset at the time of its abandonment. Myfreetax Your intent must be to discard the asset so that you will not use it again or retrieve it for sale, exchange, or other disposition. Myfreetax Early dispositions. Myfreetax   The disposal of an asset before the end of its specified recovery period, is referred to as an early disposition. Myfreetax When an early disposition occurs, the depreciation deduction in the year of disposition depends on the class of property involved. Myfreetax Early dispositions of ACRS property other than 15-, 18-, or 19-year real property. Myfreetax   Generally, you get no ACRS deduction for the tax year in which you dispose of or retire recovery property, except for 15-, 18-, and 19-year real property. Myfreetax This means there is no depreciation deduction under ACRS in the year you dispose of or retire any of your 3-, 5-, or 10-year recovery property. Myfreetax Dispositions — mass asset accounts. Myfreetax   The law provides a special rule to avoid the calculation of gain on the disposition of assets from mass asset accounts. Myfreetax A mass asset account includes items usually minor in value in relation to the group, numerous in quantity, impractical to separately identify, and not usually accounted for on a separate basis, but on a total dollar value. Myfreetax Examples of mass assets include minor items of office, plant, and store furniture and fixtures. Myfreetax   Under the special rule, if you elected to use a mass asset account, you recognize gain to the extent of the proceeds from the disposition of the asset. Myfreetax You leave the unadjusted basis of the property in the account until recovered in future years. Myfreetax If you did this, include the total proceeds realized from the disposition in income on the tax return for the year of disposition. Myfreetax Early dispositions — 15-year real property. Myfreetax   If you dispose of 15-year real property, you base your ACRS deduction for the year of disposition on the number of months in use. Myfreetax You use a full-month convention. Myfreetax For a disposition at any time during a particular month before the end of the recovery period, no deduction is allowed for the month of disposition. Myfreetax This applies whether you use the regular ACRS method or elected the alternate ACRS method. Myfreetax Example. Myfreetax You purchased and placed in service a rental house on March 2, 1984, for $98,000 (not including the cost of land). Myfreetax You file your return based on a calendar year. Myfreetax Your rate from Table 1 for the third month is 10%. Myfreetax Your ACRS deduction for 1984 was $9,800 ($98. Myfreetax 000 ÷ 10%). Myfreetax For 1985 through 1988, you figured your ACRS deductions using 11%, 9%, 8%, and 7% ÷ $98,000. Myfreetax For 1989 through 1992, you figured your ACRS deductions using 6% for each year. Myfreetax The deduction each year was $98,000 ÷ 6%. Myfreetax For 1993 and 1994, the ACRS deduction is ($98,000 ÷ 5%) $4,900 for each year. Myfreetax You sell the house on June 1, 1995. Myfreetax You figure your ACRS deduction for 1995 for the full year and then prorate that amount for the months of use. Myfreetax The full ACRS deduction for 1995 is $4,900 ($98,000 ÷ 5%). Myfreetax You then prorate this amount to the 5 months in 1995 during which it was rented. Myfreetax Your ACRS deduction for 1995 is $2,042 ($4,900 ÷ 5/12). Myfreetax Early dispositions — 18- and 19-year real property. Myfreetax   If you dispose of 18- or 19-year real property, you base your ACRS deduction for the year of disposition on the number of months in use. Myfreetax For 18-year property placed in service before June 23, 1984, use a full-month convention on a disposition. Myfreetax For 18-year property placed in service after June 22, 1984, and for 19-year property, determine the number of months in use by using the mid-month convention. Myfreetax Under the mid-month convention,treat real property disposed of any time during a month as disposed of in the middle of that month. Myfreetax Count the month of disposition as half a month of use. Myfreetax Example. Myfreetax You purchased and placed in service a rental house on July 2, 1984, for $100,000 (not including the cost of land). Myfreetax You file your return based on a calendar year. Myfreetax Your rate from Table 4 for the seventh month is 4%. Myfreetax You figured your ACRS deduction for 1984 was $4,000 ($100,000 ÷ 4%). Myfreetax In 1985 through 1994, your ACRS deductions were 9%, 8%, 8%, 7%, 6%, 6%, 5%, 5%, and 5% ÷ $100,000. Myfreetax You sell the house on September 24, 1995. Myfreetax Figure your ACRS deduction for 1995 for the months of use. Myfreetax The full ACRS deduction for 1995 is $5,000 ($100,000 ÷ 5%). Myfreetax Prorate this amount for the 8. Myfreetax 5 months in 1995 that you held the property. Myfreetax Under the mid-month convention, you count September as half a month. Myfreetax Your ACRS deduction for 1995 is $3,542 ($5,000 ÷ 8. Myfreetax 5/12). Myfreetax Depreciation Recapture If you dispose of property depreciated under ACRS that is section 1245 recovery property, you will generally recognize gain or loss. Myfreetax Gain recognized on a disposition is ordinary income to the extent of prior depreciation deductions taken. Myfreetax This recapture rule applies to all personal property in the 3-year, 5-year, and 10-year classes. Myfreetax You recapture gain on manufactured homes and theme park structures in the 10-year class as section 1245 property. Myfreetax Section 1245 property generally includes all personal property. Myfreetax See Section 1245 property in chapter 4 of Publication 544 for more information. Myfreetax You treat dispositions of section 1250 real property on which you have a gain as section 1245 recovery property. Myfreetax You recognize gain on this property as ordinary income to the extent of prior depreciation deductions taken. Myfreetax Section 1250 property includes most real property. Myfreetax See Section 1250 property in chapter 4 of Publication 544 for more information. Myfreetax This rule applies to all section 1250 real property except the following property: Any 15-, 18-, or 19-year real property that is residential rental property. Myfreetax Any 15-, 18-, or 19-year real property that you elected to depreciate using the alternate ACRS method. Myfreetax Any 15-, 18-, or 19-year real property that is subsidized low-income housing. Myfreetax For these recapture rules, you treat the section 179 deduction and 50% of the investment credit that reduced your basis as depreciation. Myfreetax See Publication 544 for further discussion of dispositions of section 1245 and 1250 property. Myfreetax Prev  Up  Next   Home   More Online Publications
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Myfreetax 19. Myfreetax   Education- Related Adjustments Table of Contents Introduction Useful Items - You may want to see: Student Loan Interest DeductionStudent Loan Interest Defined Can You Claim the Deduction How Much Can You Deduct How Do You Figure the Deduction Tuition and Fees DeductionCan You Claim the Deduction What Expenses Qualify Who Is an Eligible Student Who Can Claim a Dependent's Expenses How Much Can You Deduct Educator Expenses Introduction This chapter discusses the education-related adjustment you can deduct in figuring your adjusted gross income. Myfreetax This chapter covers the student loan interest deduction, tuition and fees deduction, and the deduction for educator expenses. Myfreetax Useful Items - You may want to see: Publication 970 Tax Benefits for Education Student Loan Interest Deduction Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. Myfreetax However, if your modified adjusted gross income (MAGI) is less than $75,000 ($155,000 if filing a joint return) there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Myfreetax For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. Myfreetax This deduction can reduce the amount of your income subject to tax by up to $2,500 in 2013. Myfreetax Table 19-1 summarizes the features of the student loan interest deduction. Myfreetax Table 19-1. Myfreetax Student Loan Interest Deduction at a Glance Do not rely on this table alone. Myfreetax Refer to the text for more details. Myfreetax Feature Description Maximum benefit You can reduce your income subject to tax by up to $2,500. Myfreetax Loan qualifications Your student loan: •  must have been taken out solely to pay qualified education expenses, and   • cannot be from a related person or made under a qualified employer plan. Myfreetax Student qualifications The student must be: • you, your spouse, or your dependent, and   • enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential at an eligible educational institution. Myfreetax Time limit on deduction You can deduct interest paid during the remaining period of your student loan. Myfreetax Phaseout The amount of your deduction depends on your income level. Myfreetax Student Loan Interest Defined Student loan interest is interest you paid during the year on a qualified student loan. Myfreetax It includes both required and voluntary interest payments. Myfreetax Qualified Student Loan This is a loan you took out solely to pay qualified education expenses (defined later) that were: For you, your spouse, or a person who was your dependent (defined in chapter 3) when you took out the loan, Paid or incurred within a reasonable period of time before or after you took out the loan, and For education provided during an academic period when the student is an eligible student. Myfreetax Loans from the following sources are not qualified student loans. Myfreetax A related person. Myfreetax A qualified employer plan. Myfreetax Exceptions. Myfreetax   For purposes of the student loan interest deduction, the following are exceptions to the general rules for dependents. Myfreetax An individual can be your dependent even if you are the dependent of another taxpayer. Myfreetax An individual can be your dependent even if the individual files a joint return with a spouse. Myfreetax An individual can be your dependent even if the individual had gross income for the year that was equal to or more than the exemption amount for the year ($3,900 for 2013). Myfreetax    Reasonable period of time. Myfreetax   Qualified education expenses are treated as paid or incurred within a reasonable period of time before or after you take out the loan if they are paid with the proceeds of student loans that are part of a federal postsecondary education loan program. Myfreetax   Even if not paid with the proceeds of that type of loan, the expenses are treated as paid or incurred within a reasonable period of time if both of the following requirements are met. Myfreetax The expenses relate to a specific academic period. Myfreetax The loan proceeds are disbursed within a period that begins 90 days before the start of that academic period and ends 90 days after the end of that academic period. Myfreetax   If neither of the above situations applies, the reasonable period of time is determined based on all the relevant facts and circumstances. Myfreetax Academic period. Myfreetax   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. Myfreetax In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. Myfreetax Eligible student. Myfreetax   This is a student who was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. Myfreetax Enrolled at least half-time. Myfreetax   A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study. Myfreetax   The standard for what is half of the normal full-time work load is determined by each eligible educational institution. Myfreetax However, the standard may not be lower than any of those established by the U. Myfreetax S. Myfreetax Department of Education under the Higher Education Act of 1965. Myfreetax Related person. Myfreetax   You cannot deduct interest on a loan you get from a related person. Myfreetax Related persons include: Your spouse, Your brothers and sisters, Your half brothers and half sisters, Your ancestors (parents, grandparents, etc. Myfreetax ), Your lineal descendants (children, grandchildren, etc. Myfreetax ), and Certain corporations, partnerships, trusts, and exempt organizations. Myfreetax Qualified employer plan. Myfreetax   You cannot deduct interest on a loan made under a qualified employer plan or under a contract purchased under such a plan. Myfreetax Qualified Education Expenses For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. Myfreetax They include amounts paid for the following items. Myfreetax Tuition and fees. Myfreetax Room and board. Myfreetax Books, supplies, and equipment. Myfreetax Other necessary expenses (such as transportation). Myfreetax The cost of room and board qualifies only to the extent that it is not more than: The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student, or If greater, the actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. Myfreetax Eligible educational institution. Myfreetax   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Myfreetax S. Myfreetax Department of Education. Myfreetax It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Myfreetax   Certain educational institutions located outside the United States also participate in the U. Myfreetax S. Myfreetax Department of Education's Federal Student Aid (FSA) programs. Myfreetax   For purposes of the student loan interest deduction, an eligible educational institution also includes an institution conducting an internship or residency program leading to a degree or certificate from an institution of higher education, a hospital, or a health care facility that offers postgraduate training. Myfreetax   An educational institution must meet the above criteria only during the academic period(s) for which the student loan was incurred. Myfreetax The deductibility of interest on the loan is not affected by the institution's subsequent loss of eligibility. Myfreetax    The educational institution should be able to tell you if it is an eligible educational institution. Myfreetax Adjustments to qualified education expenses. Myfreetax   You must reduce your qualified education expenses by certain tax-free items (such as the tax-free part of scholarships and fellowships). Myfreetax See chapter 4 of Publication 970 for details. Myfreetax Include as Interest In addition to simple interest on the loan, certain loan origination fees, capitalized interest, interest on revolving lines of credit, and interest on refinanced student loans can be student loan interest if all other requirements are met. Myfreetax Loan origination fee. Myfreetax   In general, this is a one-time fee charged by the lender when a loan is made. Myfreetax To be deductible as interest, the fee must be for the use of money rather than for property or services (such as commitment fees or processing costs) provided by the lender. Myfreetax A loan origination fee treated as interest accrues over the life of the loan. Myfreetax Capitalized interest. Myfreetax    This is unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan. Myfreetax Interest on revolving lines of credit. Myfreetax   This interest, which includes interest on credit card debt, is student loan interest if the borrower uses the line of credit (credit card) only to pay qualified education expenses. Myfreetax See Qualified Education Expenses , earlier. Myfreetax Interest on refinanced student loans. Myfreetax   This includes interest on both: Consolidated loans—loans used to refinance more than one student loan of the same borrower, and Collapsed loans—two or more loans of the same borrower that are treated by both the lender and the borrower as one loan. Myfreetax If you refinance a qualified student loan for more than your original loan and you use the additional amount for any purpose other than qualified education expenses, you cannot deduct any interest paid on the refinanced loan. Myfreetax Voluntary interest payments. Myfreetax   These are payments made on a qualified student loan during a period when interest payments are not required, such as when the borrower has been granted a deferment or the loan has not yet entered repayment status. Myfreetax Do Not Include as Interest You cannot claim a student loan interest deduction for any of the following items. Myfreetax Interest you paid on a loan if, under the terms of the loan, you are not legally obligated to make interest payments. Myfreetax Loan origination fees that are payments for property or services provided by the lender, such as commitment fees or processing costs. Myfreetax Interest you paid on a loan to the extent payments were made through your participation in the National Health Service Corps Loan Repayment Program (the “NHSC Loan Repayment Program”) or certain other loan repayment assistance programs. Myfreetax For more information, see Student Loan Repayment Assistance in chapter 5 of Publication 970. Myfreetax Can You Claim the Deduction Generally, you can claim the deduction if all of the following requirements are met. Myfreetax Your filing status is any filing status except married filing separately. Myfreetax No one else is claiming an exemption for you on his or her tax return. Myfreetax You are legally obligated to pay interest on a qualified student loan. Myfreetax You paid interest on a qualified student loan. Myfreetax Interest paid by others. Myfreetax   If you are the person legally obligated to make interest payments and someone else makes a payment of interest on your behalf, you are treated as receiving the payments from the other person and, in turn, paying the interest. Myfreetax See chapter 4 of Publication 970 for more information. Myfreetax No Double Benefit Allowed You cannot deduct as interest on a student loan any amount that is an allowable deduction under any other provision of the tax law (for example, home mortgage interest). Myfreetax How Much Can You Deduct Your student loan interest deduction for 2013 is generally the smaller of: $2,500, or The interest you paid in 2013. Myfreetax However, the amount determined above is phased out (gradually reduced) if your MAGI is between $60,000 and $75,000 ($125,000 and $155,000 if you file a joint return). Myfreetax You cannot take a student loan interest deduction if your MAGI is $75,000 or more ($155,000 or more if you file a joint return). Myfreetax For details on figuring your MAGI, see chapter 4 of Publication 970. Myfreetax How Do You Figure the Deduction Generally, you figure the deduction using the Student Loan Interest Deduction Worksheet in the Form 1040 or Form 1040A instructions. Myfreetax However, if you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from sources within Puerto Rico, you must complete Worksheet 4-1 in chapter 4 of Publication 970. Myfreetax To help you figure your student loan interest deduction, you should receive Form 1098-E, Student Loan Interest Statement. Myfreetax Generally, an institution (such as a bank or governmental agency) that received interest payments of $600 or more during 2013 on one or more qualified student loans must send Form 1098-E (or acceptable substitute) to each borrower by January 31, 2014. Myfreetax For qualified student loans taken out before September 1, 2004, the institution is required to include on Form 1098-E only payments of stated interest. Myfreetax Other interest payments, such as certain loan origination fees and capitalized interest, may not appear on the form you receive. Myfreetax However, if you pay qualifying interest that is not included on Form 1098-E, you can also deduct those amounts. Myfreetax For information on allocating payments between interest and principal, see chapter 4 of Publication 970. Myfreetax To claim the deduction, enter the allowable amount on Form 1040, line 33, or Form 1040A, line 18. Myfreetax Tuition and Fees Deduction You may be able to deduct qualified education expenses paid during the year for yourself, your spouse, or your dependent(s). Myfreetax You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. Myfreetax The qualified expenses must be for higher education, as explained later under What Expenses Qualify . Myfreetax The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000. Myfreetax Table 19-2 summarizes the features of the tuition and fees deduction. Myfreetax You may be able to take a credit for your education expenses instead of a deduction. Myfreetax You can choose the one that will give you the lower tax. Myfreetax See chapter 35, Education Credits, for details about the credits. Myfreetax Can You Claim the Deduction The following rules will help you determine if you can claim the tuition and fees deduction. Myfreetax Who Can Claim the Deduction Generally, you can claim the tuition and fees deduction if all three of the following requirements are met. Myfreetax You paid qualified education expenses of higher education in 2013 for academic periods beginning in 2013 and those beginning in the first three months of 2014. Myfreetax You paid the education expenses for an eligible student. Myfreetax The eligible student is yourself, your spouse, or your dependent for whom you claim an exemption (defined in chapter 3) on your tax return. Myfreetax Qualified education expenses are defined under What Expenses Qualify . Myfreetax Eligible students are defined later under Who Is an Eligible Student . Myfreetax Who Cannot Claim the Deduction You cannot claim the tuition and fees deduction if any of the following apply. Myfreetax Your filing status is married filing separately. Myfreetax Another person can claim an exemption for you as a dependent on his or her tax return. Myfreetax You cannot take the deduction even if the other person does not actually claim that exemption. Myfreetax Your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return). Myfreetax You (or your spouse) were a nonresident alien for any part of 2013 and the nonresident alien did not elect to be treated as a resident alien for tax purposes. Myfreetax More information on nonresident aliens can be found in Publication 519, U. Myfreetax S. Myfreetax Tax Guide for Aliens. Myfreetax You or anyone else claims an American opportunity or lifetime learning credit in 2013 with respect to expenses of the student for whom the qualified education expenses were paid. Myfreetax However, a state tax credit will not disqualify you from claiming a tuition and fees deduction. Myfreetax Table 19-2. Myfreetax Tuition and Fees Deduction at a Glance Do not rely on this table alone. Myfreetax Refer to the text for more details. Myfreetax Question   Answer What is the maximum benefit?   You can reduce your income subject to tax by up to $4,000. Myfreetax Where is the deduction taken?   As an adjustment to income on Form 1040, line 34, or Form 1040A, line 19. Myfreetax For whom must the expenses be paid?   A student enrolled in an eligible educational institution who is either: you, your spouse, or your dependent for whom you claim an exemption. Myfreetax What tuition and fees are deductible?   Tuition and fees required for enrollment or attendance at an eligible postsecondary educational institution, but not including personal, living, or family expenses, such as room and board. Myfreetax What Expenses Qualify The tuition and fees deduction is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Myfreetax Generally, the deduction is allowed for qualified education expenses paid in 2013 in connection with enrollment at an institution of higher education during 2013 or for an academic period (defined earlier under Student Loan Interest Deduction ) beginning in 2013 or in the first 3 months of 2014. Myfreetax Payments with borrowed funds. Myfreetax   You can claim a tuition and fees deduction for qualified education expenses paid with the proceeds of a loan. Myfreetax Use the expenses to figure the deduction for the year in which the expenses are paid, not the year in which the loan is repaid. Myfreetax Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account. Myfreetax Student withdraws from class(es). Myfreetax   You can claim a tuition and fees deduction for qualified education expenses not refunded when a student withdraws. Myfreetax Qualified Education Expenses For purposes of the tuition and fees deduction, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Myfreetax Eligible educational institution. Myfreetax   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Myfreetax S. Myfreetax Department of Education. Myfreetax It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Myfreetax The educational institution should be able to tell you if it is an eligible educational institution. Myfreetax   Certain educational institutions located outside the United States also participate in the U. Myfreetax S. Myfreetax Department of Education's Federal Student Aid (FSA) programs. Myfreetax Academic period. Myfreetax    An academic period is any quarter, semester, trimester, or any other period of study as reasonably determined by an eligible educational institution. Myfreetax If an eligible educational institution uses credit hours and does not have academic terms, each payment period may be treated as an academic period. Myfreetax Related expenses. Myfreetax   Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses for the tuition and fees deduction only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance. Myfreetax Prepaid expenses. Myfreetax   Qualified education expenses paid in 2013 for an academic period that begins in the first three months of 2014 can be used in figuring the tuition and fees deduction. Myfreetax See Academic period, earlier. Myfreetax For example, if you pay $2,000 in December 2013 for qualified tuition for the 2014 winter quarter that begins in January 2014, you can use that $2,000 in figuring the tuition and fees deduction for 2013 only if you meet all the other requirements. Myfreetax    You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 tuition and fees deduction. Myfreetax No Double Benefit Allowed You cannot do any of the following. Myfreetax Deduct qualified education expenses you deduct under any other provision of the law, for example, as a business expense. Myfreetax Deduct qualified education expenses for a student on your income tax return if you or anyone else claims an American opportunity or lifetime learning credit for that same student in the same year. Myfreetax Deduct qualified education expenses that have been used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or a qualified tuition program (QTP). Myfreetax For a QTP, this applies only to the amount of tax-free earnings that were distributed, not to the recovery of contributions to the program. Myfreetax See Figuring the Taxable Portion of a Distribution in chapter 7 (Coverdell ESA) and chapter 8 (QTP) of Publication 970. Myfreetax Deduct qualified education expenses that have been paid with tax-free interest on U. Myfreetax S. Myfreetax savings bonds (Form 8815). Myfreetax See Figuring the Tax-Free Amount in chapter 10 of Publication 970. Myfreetax Deduct qualified education expenses that have been paid with tax-free educational assistance such as a scholarship, grant, or employer-provided educational assistance. Myfreetax See Adjustments to qualified education expenses, later. Myfreetax Adjustments to qualified education expenses. Myfreetax   For each student, reduce the qualified education expenses paid by or on behalf of that student under the following rules. Myfreetax The result is the amount of adjusted qualified education expenses for each student. Myfreetax Tax-free educational assistance. Myfreetax   For tax-free educational assistance you received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance to that academic period. Myfreetax See Academic period, earlier. Myfreetax   This includes: The tax-free part of scholarships and fellowships, including Pell grants (see chapter 1 of Publication 970), The tax-free part of any employer-provided educational assistance (see chapter 11 of Publication 970), Veterans' educational assistance (see chapter 1 of Publication 970), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Myfreetax Generally, any scholarship or fellowship you receive is treated as tax-free educational assistance. Myfreetax However, a scholarship or fellowship is not treated as tax-free educational assistance to the extent you include it in gross income (if you are required to file a tax return) for the year the scholarship or fellowship is received and either: The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in Pub. Myfreetax 970, chapter 1. Myfreetax The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in Pub. Myfreetax 970, chapter 1. Myfreetax You may be able to increase the combined value of your tuition and fees deduction and certain educational assistance if you include some or all of the educational assistance in income in the year it is received. Myfreetax For details, see Adjustments to Qualified Education Expenses in chapter 6 of Pub. Myfreetax 970. Myfreetax Some tax-free educational assistance received in 2013 may be treated as a refund of qualified education expenses paid in 2013. Myfreetax This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2013 for qualified education expenses paid on behalf of a student in 2013 (or attributable to enrollment at an eligible educational institution during 2013). Myfreetax If this tax-free educational assistance is received after 2013 but before you file your 2013 income tax return, see Refunds received after 2013 but before your income tax return is filed, later. Myfreetax If this tax-free educational assistance is received after 2013 and after you file your 2013 income tax return, see Refunds received after 2013 and after your income tax return is filed, later. Myfreetax Refunds. Myfreetax   A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or may require you to include some or all of the refund in your gross income for the year the refund is received. Myfreetax See chapter 6 of Pub. Myfreetax 970 for more information. Myfreetax Some tax-free educational assistance received after 2013 may be treated as a refund. Myfreetax See Tax-free educational assistance, earlier. Myfreetax Refunds received in 2013. Myfreetax    For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses paid in 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013. Myfreetax Refunds received after 2013 but before your income tax return is filed. Myfreetax   If you receive a refund after 2013 of qualified education expenses you paid in 2013 and the refund is received before you file your 2013 income tax return, reduce the amount of qualified education expenses for 2013 by the amount of the refund. Myfreetax Refunds received after 2013 and after your income tax return is filed. Myfreetax   If you receive a refund after 2013 of qualified education expenses you paid in 2013 and the refund is received after you file your 2013 income tax return, you may need to include some or all of the refund in your gross income for the year the refund is received. Myfreetax See chapter 6 of Pub. Myfreetax 970 for more information. Myfreetax Coordination with Coverdell education savings accounts and qualified tuition programs. Myfreetax    Reduce your qualified education expenses by any qualified education expenses used to figure the exclusion from gross income of (a) interest received under an education savings bond program, or (b) any distribution from a Coverdell education savings account or qualified tuition program (QTP). Myfreetax For a QTP, this applies only to the amount of tax-free earnings that were distributed, not to the recovery of contributions to the program. Myfreetax Amounts that do not reduce qualified education expenses. Myfreetax   Do not reduce qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. Myfreetax   Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations. Myfreetax The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses. Myfreetax The use of the money is not restricted. Myfreetax Expenses That Do Not Qualify Qualified education expenses do not include amounts paid for: Insurance, Medical expenses (including student health fees), Room and board, Transportation, or Similar personal, living, or family expenses. Myfreetax This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. Myfreetax Sports, games, hobbies, and noncredit courses. Myfreetax   Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. Myfreetax However, if the course of instruction or other education is part of the student's degree program, these expenses can qualify. Myfreetax Comprehensive or bundled fees. Myfreetax   Some eligible educational institutions combine all of their fees for an academic period into one amount. Myfreetax If you do not receive, or do not have access to, an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed above, contact the institution. Myfreetax The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T, Tuition Statement. Myfreetax See How Do You Figure the Deduction , later, for more information about Form 1098-T. Myfreetax Who Is an Eligible Student For purposes of the tuition and fees deduction, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution (defined earlier). Myfreetax Who Can Claim a Dependent's Expenses Generally, in order to claim the tuition and fees deduction for qualified education expenses for a dependent, you must: Have paid the expenses, and Claim an exemption for the student as a dependent. Myfreetax Table 19-3 summarizes who can claim the deduction. Myfreetax How Much Can You Deduct The maximum tuition and fees deduction in 2013 is $4,000, $2,000, or $0, depending on the amount of your MAGI. Myfreetax For details on figuring your MAGI, see chapter 6 of Publication 970. Myfreetax How Do You Figure the Deduction Figure the deduction using Form 8917. Myfreetax To help you figure your tuition and fees deduction, you should receive Form 1098-T, Tuition Statement. Myfreetax Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2014. Myfreetax To claim the deduction, enter the allowable amount on Form 1040, line 34, or Form 1040A, line 19, and attach your completed Form 8917. Myfreetax Table 19-3. Myfreetax Who Can Claim a Dependent's Expenses Do not rely on this table alone. Myfreetax See Who Can Claim a Dependent's Expenses in chapter 6 of Publication 970. Myfreetax IF your dependent is an eligible student and you. Myfreetax . Myfreetax . Myfreetax AND. Myfreetax . Myfreetax . Myfreetax THEN. Myfreetax . Myfreetax . Myfreetax claim an exemption for your dependent you paid all qualified education expenses for your dependent only you can deduct the qualified education expenses that you paid. Myfreetax Your dependent cannot take a deduction. Myfreetax claim an exemption for your dependent your dependent paid all qualified education expenses no one is allowed to take a deduction. Myfreetax do not claim an exemption for your dependent you paid all qualified education expenses no one is allowed to take a deduction. Myfreetax do not claim an exemption for your dependent your dependent paid all qualified education expenses no one is allowed to take a deduction. Myfreetax Educator Expenses If you were an eligible educator in 2013, you can deduct on Form 1040, line 23, or Form 1040A, line 16, up to $250 of qualified expenses you paid in 2013. Myfreetax If you and your spouse are filing jointly and both of you were eligible educators, the maximum deduction is $500. Myfreetax However, neither spouse can deduct more than $250 of his or her qualified expenses on Form 1040, line 23, or Form 1040A, line 16. Myfreetax You may be able to deduct expenses that are more than the $250 (or $500) limit on Schedule A (Form 1040), line 21. Myfreetax Eligible educator. Myfreetax   An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide who worked in a school for at least 900 hours during a school year. Myfreetax Qualified expenses. Myfreetax   Qualified expenses include ordinary and necessary expenses paid in connection with books, supplies, equipment (including computer equipment, software, and services), and other materials used in the classroom. Myfreetax An ordinary expense is one that is common and accepted in your educational field. Myfreetax A necessary expense is one that is helpful and appropriate for your profession as an educator. Myfreetax An expense does not have to be required to be considered necessary. Myfreetax   Qualified expenses do not include expenses for home schooling or for nonathletic supplies for courses in health or physical education. Myfreetax   You must reduce your qualified expenses by the following amounts. Myfreetax Excludable U. Myfreetax S. Myfreetax series EE and I savings bond interest from Form 8815. Myfreetax See Figuring the Tax-Free Amount in chapter 10 of Publication 970. Myfreetax Nontaxable qualified tuition program earnings or distributions. Myfreetax See Figuring the Taxable Portion of a Distribution in chapter 8 of Publication 970. Myfreetax Nontaxable distribution of earnings from a Coverdell education savings account. Myfreetax See Figuring the Taxable Portion of a Distribution in chapter 7 of Publication 970. Myfreetax Any reimbursements you received for these expenses that were not reported to you in box 1 of your Form W-2. Myfreetax Prev  Up  Next   Home   More Online Publications