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Tax Deductions For College Students

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Tax Deductions For College Students

Tax deductions for college students 2. Tax deductions for college students   American Opportunity Credit Table of Contents Introduction Can You Claim the CreditWho Can Claim the Credit Who Cannot Claim the Credit What Expenses QualifyQualified Education Expenses No Double Benefit Allowed Expenses That Do Not Qualify Who Is an Eligible StudentException. Tax deductions for college students Who Can Claim a Dependent's Expenses Figuring the CreditEffect of the Amount of Your Income on the Amount of Your Credit Refundable Part of Credit Claiming the Credit Introduction For 2013, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. Tax deductions for college students They are the American opportunity credit (this chapter) and the lifetime learning credit ( chapter 3 ). Tax deductions for college students This chapter explains: Who can claim the American opportunity credit, What expenses qualify for the credit, Who is an eligible student, Who can claim a dependent's expenses, How to figure the credit, How to claim the credit, and When the credit must be repaid. Tax deductions for college students What is the tax benefit of the American opportunity credit. Tax deductions for college students   For the tax year, you may be able to claim an American opportunity credit of up to $2,500 for qualified education expenses paid for each eligible student. Tax deductions for college students   A tax credit reduces the amount of income tax you may have to pay. Tax deductions for college students Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. Tax deductions for college students Forty percent of the American opportunity credit may be refundable. Tax deductions for college students This means that if the refundable portion of your credit is more than your tax, the excess will be refunded to you. Tax deductions for college students   Your allowable American opportunity credit may be limited by the amount of your income. Tax deductions for college students Also, the nonrefundable part of the credit may be limited by the amount of your tax. Tax deductions for college students Overview of the American opportunity credit. Tax deductions for college students   See Table 2-1, Overview of the American Opportunity Credit , for the basics of this credit. Tax deductions for college students The details are discussed in this chapter. Tax deductions for college students Can you claim more than one education credit this year. Tax deductions for college students   For each student, you can elect for any year only one of the credits. Tax deductions for college students For example, if you elect to take the American opportunity credit for a child on your 2013 tax return, you cannot use that same child's qualified education expenses to figure the lifetime learning credit for 2013. Tax deductions for college students   If you pay qualified education expenses for more than one student in the same year, you can choose to take the American opportunity credit on a per-student, per-year basis. Tax deductions for college students If you pay qualified education expenses for a student (or students) for whom you do not claim the American opportunity credit, you can use the adjusted qualified education expenses of that student (or those students) in figuring your lifetime learning credit. Tax deductions for college students This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year. Tax deductions for college students Differences between the American opportunity and lifetime learning credits. Tax deductions for college students   There are several differences between these two credits. Tax deductions for college students For example, you can claim the American opportunity credit based on the same student's expenses for no more than 4 tax years, which includes any tax years you claimed the Hope Scholarship Credit for that student. Tax deductions for college students However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses. Tax deductions for college students The differences between these credits are shown in Appendix B, Highlights of Education Tax Benefits for Tax Year 2013 near the end of this publication. Tax deductions for college students If you claim the American opportunity credit for any student, you can choose between using that student's adjusted qualified education expenses for the American opportunity credit or the lifetime learning credit. Tax deductions for college students If you have the choice, the American opportunity credit will always be greater than the lifetime learning credit. Tax deductions for college students Table 2-1. Tax deductions for college students Overview of the American Opportunity Credit Maximum credit Up to $2,500 credit per eligible student Limit on modified adjusted gross income (MAGI) $180,000 if married filing jointly; $90,000 if single, head of household, or qualifying widow(er) Refundable or nonrefundable 40% of credit may be refundable; the rest is nonrefundable Number of years of postsecondary education Available ONLY if the student had not completed the first 4 years of postsecondary education before 2013 Number of tax years credit available Available ONLY for 4 tax years per eligible student (including any year(s) Hope Scholarship Credit was claimed) Type of program required Student must be pursuing a program leading to a degree or other recognized education credential Number of courses Student must be enrolled at least half time for at least one academic period that begins during the tax year Felony drug conviction As of the end of 2013, the student had not been convicted of a felony for possessing or distributing a controlled substance Qualified expenses Tuition, required enrollment fees, and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance Payments for academic periods Payments made in 2013 for academic periods beginning in 2013 or beginning in the first 3 months of 2014 Can You Claim the Credit The following rules will help you determine if you are eligible to claim the American opportunity credit on your tax return. Tax deductions for college students Who Can Claim the Credit Generally, you can claim the American opportunity credit if all three of the following requirements are met. Tax deductions for college students You pay qualified education expenses of higher education. Tax deductions for college students You pay the education expenses for an eligible student. Tax deductions for college students The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Tax deductions for college students Student qualifications. Tax deductions for college students   Generally, you can take the American opportunity credit for a student only if all of the following four requirements are met. Tax deductions for college students As of the beginning of 2013, the student had not completed the first four years of postsecondary education (generally, the freshman through senior years of college), as determined by the eligible educational institution. Tax deductions for college students For this purpose, do not include academic credit awarded solely because of the student's performance on proficiency examinations. Tax deductions for college students Neither the American opportunity credit nor the Hope Scholarship Credit has been claimed (by you or anyone else) for this student for any four tax years before 2013. Tax deductions for college students If the American opportunity credit (and Hope Scholarship Credit) has been claimed for this student for any three or fewer tax years before 2013, this requirement is met. Tax deductions for college students For at least one academic period beginning (or treated as beginning) in 2013, the student both: Was enrolled in a program that leads to a degree, certificate, or other recognized educational credential; and Carried at least one-half the normal full-time workload for his or her course of study. Tax deductions for college students The standard for what is half of the normal full-time work load is determined by each eligible educational institution. Tax deductions for college students However, the standard may not be lower than any of those established by the U. Tax deductions for college students S. Tax deductions for college students Department of Education under the Higher Education Act of 1965. Tax deductions for college students For purposes of whether the student satisfies this third requirement for 2013, treat an academic period beginning in the first three months of 2014 as if it began in 2013 if qualified education expenses for the student were paid in 2013 for that academic period. Tax deductions for college students See Prepaid expenses, later. Tax deductions for college students As of the end of 2013, the student had not been convicted of a federal or state felony for possessing or distributing a controlled substance. Tax deductions for college students Example 1. Tax deductions for college students Sharon was eligible for the Hope Scholarship Credit for 2007 and 2008 and for the American opportunity credit for 2010 and 2012. Tax deductions for college students Her parents claimed the Hope Scholarship Credit for Sharon on their tax returns for 2007 and 2008 and claimed the American opportunity credit for Sharon on their 2010 tax return. Tax deductions for college students Sharon claimed the American opportunity credit on her 2012 tax return. Tax deductions for college students The American opportunity credit and Hope Scholarship Credit have been claimed for Sharon for four tax years before 2013. Tax deductions for college students Therefore, the American opportunity credit cannot be claimed by Sharon for 2013. Tax deductions for college students If Sharon were to file Form 8863 for 2013, she would check “Yes” for Part III, line 23, and would be eligible to claim only the lifetime learning credit. Tax deductions for college students Example 2. Tax deductions for college students Wilbert was eligible for the American opportunity credit for 2009, 2010, 2011, and 2013. Tax deductions for college students His parents claimed the American opportunity credit for Wilbert on their tax returns for 2009, 2010, and 2011. Tax deductions for college students No one claimed an American opportunity credit or Hope Scholarship Credit for Wilbert for any other tax year. Tax deductions for college students The American opportunity credit and Hope Scholarship Credit have been claimed for Wilbert for only three tax years before 2013. Tax deductions for college students Therefore, Wilbert meets the second requirement to be eligible for the American opportunity credit. Tax deductions for college students If Wilbert were to file Form 8863 for 2013, he would check “No” for Part III, line 23. Tax deductions for college students If Wilbert meets all of the other requirements, he is eligible for the American opportunity credit. Tax deductions for college students Example 3. Tax deductions for college students Glenda enrolls on a full-time basis in a degree program for the 2014 Spring semester, which begins in January 2014. Tax deductions for college students Glenda pays her tuition for the 2014 Spring semester in December 2013. Tax deductions for college students Because the tuition Glenda paid in 2013 relates to an academic period that begins in the first 3 months of 2014, her eligibility to claim an American opportunity credit in 2013 is determined as if the 2014 Spring semester began in 2013. Tax deductions for college students If the requirements above are not met for any student, you cannot take the American opportunity credit for that student. Tax deductions for college students You may be able to take the lifetime learning credit for part or all of that student's qualified education expenses instead. Tax deductions for college students Note. Tax deductions for college students Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you. Tax deductions for college students “Qualified education expenses” are defined later under Qualified Education Expenses . Tax deductions for college students “Eligible students” are defined later under Who Is an Eligible Student . Tax deductions for college students A dependent for whom you claim an exemption is defined later under Who Can Claim a Dependent's Expenses . Tax deductions for college students You may find Figure 2-1, Can You Claim the American Opportunity Credit for 2013 , later, helpful in determining if you can claim an American opportunity credit on your tax return. Tax deductions for college students This image is too large to be displayed in the current screen. Tax deductions for college students Please click the link to view the image. Tax deductions for college students Figure 2-1 Can you claim the American opportunity credit for 2012? Who Cannot Claim the Credit You cannot claim the American opportunity credit for 2013 if any of the following apply. Tax deductions for college students Your filing status is married filing separately. Tax deductions for college students You are listed as a dependent on another person's tax return (such as your parents'). Tax deductions for college students See Who Can Claim a Dependent's Expenses , later. Tax deductions for college students Your modified adjusted gross income (MAGI) is $90,000 or more ($180,000 or more in the case of a joint return). Tax deductions for college students MAGI is explained later under Effect of the Amount of Your Income on the Amount of Your Credit . Tax deductions for college students 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. Tax deductions for college students More information on nonresident aliens can be found in Publication 519, U. Tax deductions for college students S. Tax deductions for college students Tax Guide for Aliens. Tax deductions for college students What Expenses Qualify The American opportunity credit is based on adjusted qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Tax deductions for college students Generally, the credit is allowed for adjusted qualified education expenses paid in 2013 for an academic period beginning in 2013 or beginning in the first three months of 2014. Tax deductions for college students For example, if you paid $1,500 in December 2013 for qualified tuition for the spring 2014 semester beginning January 2014, you can use that $1,500 in figuring your 2013 credit. Tax deductions for college students Academic period. Tax deductions for college students   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. Tax deductions for college students 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. Tax deductions for college students Paid with borrowed funds. Tax deductions for college students   You can claim an American opportunity credit for qualified education expenses paid with the proceeds of a loan. Tax deductions for college students Use the expenses to figure the American opportunity credit for the year in which the expenses are paid, not the year in which the loan is repaid. Tax deductions for college students Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account. Tax deductions for college students Student withdraws from class(es). Tax deductions for college students   You can claim an American opportunity credit for qualified education expenses not refunded when a student withdraws. Tax deductions for college students Qualified Education Expenses For purposes of the American opportunity credit, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Tax deductions for college students Eligible educational institution. Tax deductions for college students   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. Tax deductions for college students S. Tax deductions for college students Department of Education. Tax deductions for college students It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Tax deductions for college students The educational institution should be able to tell you if it is an eligible educational institution. Tax deductions for college students   Certain educational institutions located outside the United States also participate in the U. Tax deductions for college students S. Tax deductions for college students Department of Education's Federal Student Aid (FSA) programs. Tax deductions for college students Related expenses. Tax deductions for college students   Student-activity fees are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance. Tax deductions for college students   However, expenses for books, supplies, and equipment needed for a course of study are included in qualified education expenses whether or not the materials are purchased from the educational institution. Tax deductions for college students Prepaid expenses. Tax deductions for college students   Qualified education expenses paid in 2013 for an academic period that begins in the first three months of 2014 can be used in figuring an education credit for 2013 only. Tax deductions for college students See Academic period, earlier. Tax deductions for college students 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 an education credit for 2013 only (if you meet all the other requirements). Tax deductions for college students    You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 education credit(s). Tax deductions for college students   In the following examples, assume that each student is an eligible student at an eligible educational institution. Tax deductions for college students Example 1. Tax deductions for college students Jefferson is a sophomore in University V's degree program in dentistry. Tax deductions for college students This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. Tax deductions for college students Because the equipment rental is needed for his course of study, Jefferson's equipment rental fee is a qualified expense. Tax deductions for college students Example 2. Tax deductions for college students Grace and William, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. Tax deductions for college students The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. Tax deductions for college students William bought his books from a friend; Grace bought hers at College W's bookstore. Tax deductions for college students Both are qualified education expenses for the American opportunity credit. Tax deductions for college students Example 3. Tax deductions for college students When Kelly enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. Tax deductions for college students This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and the student government. Tax deductions for college students No portion of the fee covers personal expenses. Tax deductions for college students Although labeled as a student activity fee, the fee is required for Kelly's enrollment and attendance at College X and is a qualified expense. Tax deductions for college students No Double Benefit Allowed You cannot do any of the following. Tax deductions for college students Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim an American opportunity credit based on those same expenses. Tax deductions for college students Claim an American opportunity credit in the same year that you are claiming a tuition and fees deduction for the same student. Tax deductions for college students Claim an American opportunity credit for any student and use any of that student's expenses in figuring your lifetime learning credit. Tax deductions for college students Figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP) using the same expenses you used to figure the American opportunity credit. Tax deductions for college students See Coordination With American Opportunity and Lifetime Learning Credits in chapter 7, Coverdell Education Savings Account, and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8, Qualified Tuition Program. Tax deductions for college students Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. Tax deductions for college students See Adjustments to Qualified Education Expenses, next. Tax deductions for college students Adjustments to Qualified Education Expenses For each student, reduce the qualified education expenses paid by or on behalf of that student under the following rules. Tax deductions for college students The result is the amount of adjusted qualified education expenses for each student. Tax deductions for college students Tax-free educational assistance. Tax deductions for college students   For tax-free educational assistance received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. Tax deductions for college students See Academic period, earlier. Tax deductions for college students   Some tax-free educational assistance received after 2013 may be treated as a refund of qualified education expenses paid in 2013. Tax deductions for college students 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). Tax deductions for college students   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. Tax deductions for college students 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. Tax deductions for college students   Tax-free educational assistance includes: The tax-free parts of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions). Tax deductions for college students Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Tax deductions for college students Generally, any scholarship or fellowship is treated as tax free. Tax deductions for college students However, a scholarship or fellowship is not treated as tax free to the extent the student includes it in gross income (if the student is required to file a tax return for the year the scholarship or fellowship is received) and either of the following is true. Tax deductions for college students 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 chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Tax deductions for college students 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 chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Tax deductions for college students You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received. Tax deductions for college students For examples, see Coordination with Pell grants and other scholarships, later. Tax deductions for college students Refunds. Tax deductions for college students   A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. Tax deductions for college students Some tax-free educational assistance received after 2013 may be treated as a refund. Tax deductions for college students See Tax-free educational assistance, earlier. Tax deductions for college students Refunds received in 2013. Tax deductions for college students   For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses for 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013. Tax deductions for college students Refunds received after 2013 but before your income tax return is filed. Tax deductions for college students   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid before you file an income tax return for 2013, the amount of qualified education expenses for 2013 is reduced by the amount of the refund. Tax deductions for college students Refunds received after 2013 and after your income tax return is filed. Tax deductions for college students   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid after you file an income tax return for 2013, you may need to repay some or all of the credit. Tax deductions for college students See Credit recapture, next. Tax deductions for college students Credit recapture. Tax deductions for college students    If any tax-free educational assistance for the qualified education expenses paid in 2013, or any refund of your qualified education expenses paid in 2013, is received after you file your 2013 income tax return, you must recapture (repay) any excess credit. Tax deductions for college students You do this by refiguring the amount of your adjusted qualified education expenses for 2013 by reducing the expenses by the amount of the refund or tax-free educational assistance. Tax deductions for college students You then refigure your education credit(s) for 2013 and figure the amount by which your 2013 tax liability would have increased if you claimed the refigured credit(s). Tax deductions for college students Include that amount as an additional tax for the year the refund or tax-free assistance was received. Tax deductions for college students Example. Tax deductions for college students   You paid $7,000 tuition and fees in August 2013, and your child began college in September 2013. Tax deductions for college students You filed your 2013 tax return on February 17, 2014, and claimed an American opportunity credit of $2,500. Tax deductions for college students After you filed your return, you received a refund of $4,000. Tax deductions for college students You must refigure your 2013 American opportunity credit using $3,000 of qualified education expenses instead of $7,000. Tax deductions for college students The refigured credit is $2,250. Tax deductions for college students The increase to your tax liability is also $250. Tax deductions for college students Include the difference of $250 as additional tax on your 2014 tax return. Tax deductions for college students See the instructions for your 2014 income tax return to determine where to include this tax. Tax deductions for college students If you pay qualified education expenses in 2014 for an academic period that begins in the first 3 months of 2014 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2014 instead of reducing your expenses for 2013. Tax deductions for college students Amounts that do not reduce qualified education expenses. Tax deductions for college students   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. Tax deductions for college students   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. Tax deductions for college students 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 as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Tax deductions for college students The use of the money is not restricted. Tax deductions for college students Example 1. Tax deductions for college students Joan paid $3,000 for tuition and $5,000 for room and board at University X. Tax deductions for college students The university did not require her to pay any fees in addition to her tuition in order to enroll in or attend classes. Tax deductions for college students To help pay these costs, she was awarded a $2,000 scholarship and a $4,000 student loan. Tax deductions for college students The terms of the scholarship state that it can be used to pay any of Joan's college expenses. Tax deductions for college students University X applies the $2,000 scholarship against Joan's $8,000 total bill, and Joan pays the $6,000 balance of her bill from University X with a combination of her student loan and her savings. Tax deductions for college students Joan does not report any portion of the scholarship as income on her tax return. Tax deductions for college students In figuring the amount of either education credit (American opportunity or lifetime learning), Joan must reduce her qualified education expenses by the amount of the scholarship ($2,000) because she excluded the entire scholarship from her income. Tax deductions for college students The student loan is not tax-free educational assistance, so she does not need to reduce her qualified expenses by any part of the loan proceeds. Tax deductions for college students Joan is treated as having paid $1,000 in qualified education expenses ($3,000 tuition – $2,000 scholarship). Tax deductions for college students Example 2. Tax deductions for college students The facts are the same as in Example 1, except that Joan reports her entire scholarship as income on her tax return. Tax deductions for college students Because Joan reported the entire $2,000 scholarship in her income, she does not need to reduce her qualified education expenses. Tax deductions for college students Joan is treated as having paid $3,000 in qualified education expenses. Tax deductions for college students Coordination with Pell grants and other scholarships. Tax deductions for college students   In some cases, you may be able to reduce your tax liability by including scholarships in income. Tax deductions for college students If you are claiming an education credit for a claimed dependent who received a scholarship, you may be able to reduce your tax liability if the student includes the scholarship in income. Tax deductions for college students The scholarship must be one that may (by its terms) be applied to expenses (such as room and board) other than qualified education expenses. Tax deductions for college students Example 1—No scholarship. Tax deductions for college students Bill Pass, age 28 and unmarried, enrolled full-time in 2013 as a first-year student at a local college to earn a degree in law enforcement. Tax deductions for college students This was his first year of postsecondary education. Tax deductions for college students During 2013, he paid $5,600 for his qualified education expenses and $4,400 for his room and board for the fall 2013 semester. Tax deductions for college students He and the college meet all the requirements for the American opportunity credit. Tax deductions for college students Bill's AGI and his MAGI, for purposes of figuring his credit, are $30,000. Tax deductions for college students Bill takes the standard deduction of $5,950 and personal exemption of $3,800, reducing his AGI to taxable income of $20,250. Tax deductions for college students His income tax liability, before credits, is $2,599 and Bill claims no credits other than the American opportunity credit. Tax deductions for college students He figures his American opportunity credit based on qualified education expenses of $4,000, which results in a credit of $2,500 and tax after credits of $99. Tax deductions for college students Example 2—Scholarship excluded from income. Tax deductions for college students The facts are the same as in Example 1—No scholarship, except that Bill was awarded a $5,600 scholarship. Tax deductions for college students Under the terms of his scholarship, it may be used to pay any educational expenses, including room and board. Tax deductions for college students If Bill excludes the scholarship from income, he will be deemed (for purposes of computing his education credit) to have used the scholarship to pay for tuition, required fees, and course materials. Tax deductions for college students His adjusted qualified education expenses will be zero and he will not have an education credit. Tax deductions for college students Therefore, Bill's tax after credits would be $2,599. Tax deductions for college students Example 3—Scholarship partially included in income. Tax deductions for college students The facts are the same as in Example 2—Scholarship excluded from income. Tax deductions for college students If, unlike Example 2, Bill includes $4,000 of the scholarship in income, he will be deemed to have used that amount to pay for room and board. Tax deductions for college students The remaining $1,600 of the $5,600 scholarship will reduce his qualified education expenses and his adjusted qualified education expenses will be $4,000. Tax deductions for college students Bill's AGI will increase to $34,000, his taxable income will increase to $24,250, and his tax before credits will increase to $3,199. Tax deductions for college students Based on his adjusted qualified education expenses of $4,000, Bill would be able to claim an American opportunity tax credit of $2,500 and his tax after credits would be $699. Tax deductions for college students 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. Tax deductions for college students This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. Tax deductions for college students Sports, games, hobbies, and noncredit courses. Tax deductions for college students   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. Tax deductions for college students However, if the course of instruction or other education is part of the student's degree program, these expenses can qualify. Tax deductions for college students Comprehensive or bundled fees. Tax deductions for college students   Some eligible educational institutions combine all of their fees for an academic period into one amount. Tax deductions for college students 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 earlier, contact the institution. Tax deductions for college students 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. Tax deductions for college students See Figuring the Credit , later, for more information about Form 1098-T. Tax deductions for college students Who Is an Eligible Student To claim the American opportunity credit, the student for whom you pay qualified education expenses must be an eligible student. Tax deductions for college students This is a student who meets all of the following requirements. Tax deductions for college students The student did not have expenses that were used to figure an American opportunity credit in any 4 earlier tax years. Tax deductions for college students This includes any tax year(s) in which you claimed the Hope Scholarship Credit for the same student. Tax deductions for college students The student had not completed the first 4 years of postsecondary education (generally, the freshman, sophomore, junior, and senior years of college) before 2013. Tax deductions for college students For at least one academic period beginning in 2013, the student was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. Tax deductions for college students The student has not been convicted of any federal or state felony for possessing or distributing a controlled substance as of the end of 2013. Tax deductions for college students These requirements are also shown in Figure 2-2, Who is an Eligible Student for the American Opportunity Credit , later. Tax deductions for college students Completion of first 4 years. Tax deductions for college students   A student has completed the first 4 years of postsecondary education if the institution at which the student is enrolled awards the student 4 years of academic credit at that institution for coursework completed by the student before 2013. Tax deductions for college students This student generally would not be an eligible student for purposes of the American opportunity credit. Tax deductions for college students Exception. Tax deductions for college students   Any academic credit awarded solely on the basis of the student's performance on proficiency examinations is disregarded in determining whether the student has completed 4 years of postsecondary education. Tax deductions for college students Enrolled at least half-time. Tax deductions for college students   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. Tax deductions for college students   The standard for what is half of the normal full-time work load is determined by each eligible educational institution. Tax deductions for college students However, the standard may not be lower than any of those established by the U. Tax deductions for college students S. Tax deductions for college students Department of Education under the Higher Education Act of 1965. Tax deductions for college students Please click here for the text description of the image. Tax deductions for college students Figure 2-2 Example 1. Tax deductions for college students Mack graduated from high school in June 2012. Tax deductions for college students In September, he enrolled in an undergraduate degree program at College U, and attended full-time for both the 2012 fall and 2013 spring semesters. Tax deductions for college students For the 2013 fall semester, Mack was enrolled less than half-time. Tax deductions for college students Because Mack was enrolled in an undergraduate degree program on at least a half-time basis for at least one academic period that began during 2012 and at least one academic period that began during 2013, he is an eligible student for tax years 2012 and 2013 (including the 2013 fall semester when he enrolled at College U on less than a half-time basis). Tax deductions for college students Example 2. Tax deductions for college students After taking classes at College V on a part-time basis for a few years, Shelly became a full-time student for the 2013 spring semester. Tax deductions for college students College V classified Shelly as a second-semester senior (fourth year) for the 2013 spring semester and as a first-semester graduate student (fifth year) for the 2013 fall semester. Tax deductions for college students Because College V did not classify Shelly as having completed the first 4 years of postsecondary education as of the beginning of 2013, Shelly is an eligible student for tax year 2013. Tax deductions for college students Therefore, the qualified education expenses paid for the 2013 spring semester and the 2013 fall semester are taken into account in calculating the American opportunity credit for 2013. Tax deductions for college students Example 3. Tax deductions for college students During the 2012 fall semester, Larry was a high school student who took classes on a half-time basis at College X. Tax deductions for college students Larry was not enrolled as part of a degree program at College X because College X only admits students to a degree program if they have a high school diploma or equivalent. Tax deductions for college students Because Larry was not enrolled in a degree program at College X during 2012, Larry was not an eligible student for tax year 2012. Tax deductions for college students Example 4. Tax deductions for college students The facts are the same as in Example 3. Tax deductions for college students During the 2013 spring semester, Larry again attended College X but not as part of a degree program. Tax deductions for college students Larry graduated from high school in June 2013. Tax deductions for college students For the 2013 fall semester, Larry enrolled as a full-time student in College X as part of a degree program, and College X awarded Larry credit for his prior coursework at College X. Tax deductions for college students Because Larry was enrolled in a degree program at College X for the 2013 fall term on at least a half-time basis, Larry is an eligible student for all of tax year 2013. Tax deductions for college students Therefore, the qualified education expenses paid for classes taken at College X during both the 2013 spring semester (during which Larry was not enrolled in a degree program) and the 2013 fall semester are taken into account in computing any American opportunity credit. Tax deductions for college students Example 5. Tax deductions for college students Dee graduated from high school in June 2012. Tax deductions for college students In January 2013, Dee enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a travel agent. Tax deductions for college students Dee completed the program in December 2013, and was awarded a certificate. Tax deductions for college students In January 2014, she enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a computer programmer. Tax deductions for college students Dee is an eligible student for both tax years 2013 and 2014 because she meets the degree requirement, the work load requirement, and the year of study requirement for those years. Tax deductions for college students Who Can Claim a Dependent's Expenses If there are qualified education expenses for your dependent during a tax year, either you or your dependent, but not both of you, can claim an American opportunity credit for your dependent's expenses for that year. Tax deductions for college students For you to claim an American opportunity credit for your dependent's expenses, you must also claim an exemption for your dependent. Tax deductions for college students You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c. Tax deductions for college students IF you. Tax deductions for college students . Tax deductions for college students . Tax deductions for college students THEN only. Tax deductions for college students . Tax deductions for college students . Tax deductions for college students claim an exemption on  your tax return for a  dependent who is an  eligible student you can claim the American opportunity credit based on that dependent's expenses. Tax deductions for college students The dependent cannot claim the credit. Tax deductions for college students do not claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption) the dependent can claim the American opportunity credit. Tax deductions for college students You cannot claim the credit based on this dependent's expenses. Tax deductions for college students Expenses paid by dependent. Tax deductions for college students   If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. Tax deductions for college students Include these expenses when figuring the amount of your American opportunity credit. Tax deductions for college students    Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are treated as paid by your dependent. Tax deductions for college students Expenses paid by you. Tax deductions for college students   If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the American opportunity credit. Tax deductions for college students If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring the American opportunity credit. Tax deductions for college students Expenses paid by others. Tax deductions for college students   Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. Tax deductions for college students In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. Tax deductions for college students If you claim an exemption on your tax return for the student, you are considered to have paid the expenses. Tax deductions for college students Example. Tax deductions for college students In 2013, Ms. Tax deductions for college students Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. Tax deductions for college students For purposes of claiming an American opportunity credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself. Tax deductions for college students Unless an exemption for Todd is claimed on someone else's 2013 tax return, only Todd can use the payment to claim an American opportunity credit. Tax deductions for college students If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2013 tax return, whoever claims the exemption may be able to use the expenses to claim an American opportunity credit. Tax deductions for college students If anyone else claims an exemption for Todd, Todd cannot claim an American opportunity credit. Tax deductions for college students Tuition reduction. Tax deductions for college students    When an eligible educational institution provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. Tax deductions for college students If it is taxable, the employee is treated as receiving a payment of that amount and, in turn, paying it to the educational institution on behalf of the student. Tax deductions for college students For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Tax deductions for college students Figuring the Credit The amount of the American opportunity credit (per eligible student) is the sum of: 100% of the first $2,000 of qualified education expenses you paid for the eligible student, and 25% of the next $2,000 of qualified education expenses you paid for that student. Tax deductions for college students The maximum amount of American opportunity credit you can claim in 2013 is $2,500 multiplied by the number of eligible students. Tax deductions for college students You can claim the full $2,500 for each eligible student for whom you paid at least $4,000 of adjusted qualified education expenses. Tax deductions for college students However, the credit may be reduced based on your MAGI. Tax deductions for college students See Effect of the Amount of Your Income on the Amount of Your Credit , later. Tax deductions for college students Example. Tax deductions for college students Jack and Kay Ford are married and file a joint tax return. Tax deductions for college students For 2013, they claim an exemption for their dependent daughter on their tax return. Tax deductions for college students Their MAGI is $70,000. Tax deductions for college students Their daughter is in her junior (third) year of studies at the local university. Tax deductions for college students Jack and Kay paid qualified education expenses of $4,300 in 2013. Tax deductions for college students Jack and Kay, their daughter, and the local university meet all of the requirements for the American opportunity credit. Tax deductions for college students Jack and Kay can claim a $2,500 American opportunity credit in 2013. Tax deductions for college students This is 100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000. Tax deductions for college students Form 1098-T. Tax deductions for college students   To help you figure your American opportunity credit, the student should receive Form 1098-T, Tuition Statement. Tax deductions for college students 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. Tax deductions for college students An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. Tax deductions for college students However, the amounts in boxes 1 and 2 of Form 1098-T might be different than what you paid. Tax deductions for college students When figuring the credit, use only the amounts you paid or are deemed to have paid in 2013 for qualified education expenses. Tax deductions for college students   In addition, Form 1098-T should give other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements or refunds, and whether the student was enrolled at least half-time or was a graduate student. Tax deductions for college students    The eligible educational institution may ask for a completed Form W-9S, Request for Student's or Borrower's Taxpayer Identification Number and Certification, or similar statement to obtain the student's name, address, and taxpayer identification number. Tax deductions for college students Effect of the Amount of Your Income on the Amount of Your Credit The amount of your American opportunity credit is phased out (gradually reduced) if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). Tax deductions for college students You cannot claim an American opportunity credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return). Tax deductions for college students Modified adjusted gross income (MAGI). Tax deductions for college students   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Tax deductions for college students MAGI when using Form 1040A. Tax deductions for college students   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Tax deductions for college students MAGI when using Form 1040. Tax deductions for college students   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Tax deductions for college students You can use Worksheet 2-1, next, to figure your MAGI. Tax deductions for college students    Worksheet 2-1. Tax deductions for college students MAGI for the American Opportunity Credit 1. Tax deductions for college students Enter your adjusted gross income  (Form 1040, line 38)   1. Tax deductions for college students   2. Tax deductions for college students Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Tax deductions for college students       3. Tax deductions for college students Enter your foreign housing deduction (Form 2555, line 50)   3. Tax deductions for college students       4. Tax deductions for college students Enter the amount of income from Puerto Rico you are excluding   4. Tax deductions for college students       5. Tax deductions for college students Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Tax deductions for college students       6. Tax deductions for college students Add the amounts on lines 2, 3, 4, and 5   6. Tax deductions for college students   7. Tax deductions for college students Add the amounts on lines 1 and 6. Tax deductions for college students  This is your modified adjusted  gross income. Tax deductions for college students Enter here and  on Form 8863, line 3   7. Tax deductions for college students   Phaseout. Tax deductions for college students   If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 2-7, of Form 8863, Part I. Tax deductions for college students The same method is shown in the following example. Tax deductions for college students Example. Tax deductions for college students You are filing a joint return and your MAGI is $165,000. Tax deductions for college students In 2013, you paid $5,000 of qualified education expenses. Tax deductions for college students You figure a tentative American opportunity credit of $2,500 (100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000 of qualified education expenses). Tax deductions for college students Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($2,500) by a fraction. Tax deductions for college students The numerator of the fraction is $180,000 (the upper limit for those filing a joint return) minus your MAGI. Tax deductions for college students The denominator is $20,000, the range of incomes for the phaseout ($160,000 to $180,000). Tax deductions for college students The result is the amount of your phased out (reduced) American opportunity credit ($1,875). Tax deductions for college students      $2,500 × $180,000 − $165,000  $20,000 = $1,875   Refundable Part of Credit Forty percent of the American opportunity credit is refundable for most taxpayers. Tax deductions for college students However, if you were under age 24 at the end of 2013 and the conditions listed below apply to you, you cannot claim any part of the American opportunity credit as a refundable credit on your tax return. Tax deductions for college students Instead, your allowed credit (figured on Form 8863, Part II) will be used to reduce your tax as a nonrefundable credit only. Tax deductions for college students You do not qualify for a refund if items 1 (a, b, or c), 2, and 3 below apply to you. Tax deductions for college students You were: Under age 18 at the end of 2013, or Age 18 at the end of 2013 and your earned income (defined below) was less than one-half of your support (defined below), or Over age 18 and under age 24 at the end of 2013 and a full-time student (defined below) and your earned income (defined below) was less than one-half of your support (defined below). Tax deductions for college students At least one of your parents was alive at the end of 2013. Tax deductions for college students You are filing a return as single, head of household, qualifying widow(er), or married filing separately for 2013. Tax deductions for college students Earned income. Tax deductions for college students   Earned income includes wages, salaries, professional fees, and other payments received for personal services actually performed. Tax deductions for college students Earned income includes the part of any scholarship or fellowship that represents payment for teaching, research, or other services performed by the student that are required as a condition for receiving the scholarship or fellowship. Tax deductions for college students Earned income does not include that part of the compensation for personal services rendered to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. Tax deductions for college students   If you are a sole proprietor or a partner in a trade or business in which both personal services and capital are material income-producing factors, earned income also includes a reasonable allowance for compensation for personal services, but not more than 30% of your share of the net profits from that trade or business (after subtracting the deduction for one-half of self-employment tax). Tax deductions for college students However, if capital is not an income-producing factor and your personal services produced the business income, the 30% limit does not apply. Tax deductions for college students Support. Tax deductions for college students   Your support includes food, shelter, clothing, medical and dental care, education, and the like. Tax deductions for college students Generally, the amount of the item of support will be the amount of expenses incurred by the one furnishing such item. Tax deductions for college students If the item of support is in the form of property or lodging, measure the amount of such item of support by its fair market value. Tax deductions for college students However, a scholarship received by you is not considered support if you are a full-time student. Tax deductions for college students See Publication 501 for details. Tax deductions for college students Full-time student. Tax deductions for college students   You are a full-time student for 2013 if during any part of any 5 calendar months during the year you were enrolled as a full-time student at an eligible educational institution (defined earlier), or took a full-time, on-farm training course given by such an institution or by a state, county, or local government agency. Tax deductions for college students Claiming the Credit You claim the American opportunity credit by completing Form 8863 and submitting it with your Form 1040 or 1040A. Tax deductions for college students Enter the nonrefundable part of the credit on Form 1040, line 49, or on Form 1040A, line 31. Tax deductions for college students Enter the refundable part of the credit on Form 1040, line 66, or on Form 1040A, line 40. Tax deductions for college students A filled-in Form 8863 is shown at the end of this publication. Tax deductions for college students Note. Tax deductions for college students In Appendix A. Tax deductions for college students at the end of this publication, there is an example illustrating the use of Form 8863 when both the American opportunity credit and the lifetime learning credit are claimed on the same tax return. Tax deductions for college students Prev  Up  Next   Home   More Online Publications
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The Tax Deductions For College Students

Tax deductions for college students Publication 523 - Main Content Table of Contents Main HomeVacant land. Tax deductions for college students Factors used to determine main home. Tax deductions for college students Figuring Gain or LossSelling Price Amount Realized Adjusted Basis Amount of Gain or Loss Dispositions Other Than Sales Determining BasisCost As Basis Basis Other Than Cost Adjusted Basis Excluding the GainMaximum Exclusion Ownership and Use Tests Reduced Maximum Exclusion Nonqualified Use Business Use or Rental of HomeUnrecaptured section 1250 gain. Tax deductions for college students Property Used Partly for Business or Rental Reporting the SaleSeller-financed mortgage. Tax deductions for college students Individual taxpayer identification number (ITIN). Tax deductions for college students More information. Tax deductions for college students Comprehensive Examples Special SituationsException for sales to related persons. Tax deductions for college students Deducting Taxes in the Year of SaleForm 1099-S. Tax deductions for college students More information. Tax deductions for college students Recapturing (Paying Back) a Federal Mortgage Subsidy Recapture of First-Time Homebuyer CreditExample. Tax deductions for college students Worksheets How To Get Tax HelpLow Income Taxpayer Clinics Main Home This section explains the term “main home. Tax deductions for college students ” Usually, the home you live in most of the time is your main home and can be a: House, Houseboat, Mobile home, Cooperative apartment, or Condominium. Tax deductions for college students To exclude gain under the rules in this publication, you in most cases must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Tax deductions for college students Land. Tax deductions for college students   If you sell the land on which your main home is located, but not the house itself, you cannot exclude any gain you have from the sale of the land. Tax deductions for college students Example. Tax deductions for college students You buy a piece of land and move your main home to it. Tax deductions for college students Then, you sell the land on which your main home was located. Tax deductions for college students This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land. Tax deductions for college students Vacant land. Tax deductions for college students   The sale of vacant land is not a sale of your main home unless: The vacant land is adjacent to land containing your home, You owned and used the vacant land as part of your main home, The separate sale of your home satisfies the requirements for exclusion and occurs within 2 years before or 2 years after the date of the sale of the vacant land, and The other requirements for excluding gain from the sale of a main home have been satisfied with respect to the vacant land. Tax deductions for college students If these requirements are met, the sale of the home and the sale of the vacant land are treated as one sale and only one maximum exclusion can be applied to any gain. Tax deductions for college students See Excluding the Gain , later. Tax deductions for college students The destruction of your home is treated as a sale of your home. Tax deductions for college students As a result, you may be able to meet these requirements if you sell vacant land used as a part of your main home within 2 years from the date of the destruction of your main home. Tax deductions for college students For information, see Publication 547. Tax deductions for college students More than one home. Tax deductions for college students   If you have more than one home, you can exclude gain only from the sale of your main home. Tax deductions for college students You must include in income the gain from the sale of any other home. Tax deductions for college students If you have two homes and live in each of them, your main home is ordinarily the one you live in most of the time during the year. Tax deductions for college students Example 1. Tax deductions for college students You own two homes, one in New York and one in Florida. Tax deductions for college students From 2009 through 2013, you live in the New York home for 7 months and in the Florida residence for 5 months of each year. Tax deductions for college students In the absence of facts and circumstances indicating otherwise, the New York home is your main home. Tax deductions for college students You would be eligible to exclude the gain from the sale of the New York home but not of the Florida home in 2013. Tax deductions for college students Example 2. Tax deductions for college students You own a house, but you live in another house that you rent. Tax deductions for college students The rented house is your main home. Tax deductions for college students Example 3. Tax deductions for college students You own two homes, one in Virginia and one in New Hampshire. Tax deductions for college students In 2009 and 2010, you lived in the Virginia home. Tax deductions for college students In 2011 and 2012, you lived in the New Hampshire home. Tax deductions for college students In 2013, you lived again in the Virginia home. Tax deductions for college students Your main home in 2009, 2010, and 2013 is the Virginia home. Tax deductions for college students Your main home in 2011 and 2012 is the New Hampshire home. Tax deductions for college students You would be eligible to exclude gain from the sale of either home (but not both) in 2013. Tax deductions for college students Factors used to determine main home. Tax deductions for college students   In addition to the amount of time you live in each home, other factors are relevant in determining which home is your main home. Tax deductions for college students Those factors include the following. Tax deductions for college students Your place of employment. Tax deductions for college students The location of your family members' main home. Tax deductions for college students Your mailing address for bills and correspondence. Tax deductions for college students The address listed on your: Federal and state tax returns, Driver's license, Car registration, and Voter registration card. Tax deductions for college students The location of the banks you use. Tax deductions for college students The location of recreational clubs and religious organizations of which you are a member. Tax deductions for college students Property used partly as your main home. Tax deductions for college students   If you use only part of the property as your main home, the rules discussed in this publication apply only to the gain or loss on the sale of that part of the property. Tax deductions for college students For details, see Business Use or Rental of Home , later. Tax deductions for college students Figuring Gain or Loss To figure the gain or loss on the sale of your main home, you must know the selling price, the amount realized, and the adjusted basis. Tax deductions for college students Subtract the adjusted basis from the amount realized to get your gain or loss. Tax deductions for college students     Selling price     − Selling expenses       Amount realized     − Adjusted basis       Gain or loss   Gain. Tax deductions for college students   Gain is the excess of the amount realized over the adjusted basis of the property. Tax deductions for college students Loss. Tax deductions for college students   Loss is the excess of the adjusted basis over the amount realized for the property. Tax deductions for college students Selling Price The selling price is the total amount you receive for your home. Tax deductions for college students It includes money and the fair market value of any other property or any other services you receive and all notes, mortgages or other debts assumed by the buyer as part of the sale. Tax deductions for college students Personal property. Tax deductions for college students   The selling price of your home does not include amounts you received for personal property sold with your home. Tax deductions for college students Personal property is property that is not a permanent part of the home. Tax deductions for college students Examples are furniture, draperies, rugs, a washer and dryer, and lawn equipment. Tax deductions for college students Separately stated amounts you received for these items should not be shown on Form 1099-S (discussed later). Tax deductions for college students Any gains from sales of personal property must be included in your income, but not as part of the sale of your home. Tax deductions for college students Payment by employer. Tax deductions for college students   You may have to sell your home because of a job transfer. Tax deductions for college students If your employer pays you for a loss on the sale or for your selling expenses, do not include the payment as part of the selling price. Tax deductions for college students Your employer will include it as wages in box 1 of your Form W-2 and you will include it in your income on Form 1040, line 7, or on Form 1040NR, line 8. Tax deductions for college students Option to buy. Tax deductions for college students   If you grant an option to buy your home and the option is exercised, add the amount you receive for the option to the selling price of your home. Tax deductions for college students If the option is not exercised, you must report the amount as ordinary income in the year the option expires. Tax deductions for college students Report this amount on Form 1040, line 21, or on Form 1040NR, line 21. Tax deductions for college students Form 1099-S. Tax deductions for college students   If you received Form 1099-S, box 2 (gross proceeds) should show the total amount you received for your home. Tax deductions for college students   However, box 2 will not include the fair market value of any services or property other than cash or notes you received or will receive. Tax deductions for college students Instead, box 4 will be checked to indicate your receipt or expected receipt of these items. Tax deductions for college students Amount Realized The amount realized is the selling price minus selling expenses. Tax deductions for college students Selling expenses. Tax deductions for college students   Selling expenses include: Commissions, Advertising fees, Legal fees, and Loan charges paid by the seller, such as loan placement fees or “points. Tax deductions for college students ” Adjusted Basis While you owned your home, you may have made adjustments (increases or decreases) to the basis. Tax deductions for college students This adjusted basis must be determined before you can figure gain or loss on the sale of your home. Tax deductions for college students For information on how to figure your home's adjusted basis, see Determining Basis , later. Tax deductions for college students Amount of Gain or Loss To figure the amount of gain or loss, compare the amount realized to the adjusted basis. Tax deductions for college students Gain on sale. Tax deductions for college students   If the amount realized is more than the adjusted basis, the difference is a gain and, except for any part you can exclude, generally is taxable. Tax deductions for college students Loss on sale. Tax deductions for college students   If the amount realized is less than the adjusted basis, the difference is a loss. Tax deductions for college students Generally, a loss on the sale of your main home cannot be deducted. Tax deductions for college students Jointly owned home. Tax deductions for college students   If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer. Tax deductions for college students Separate returns. Tax deductions for college students   If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. Tax deductions for college students Your ownership interest is generally determined by state law. Tax deductions for college students Joint owners not married. Tax deductions for college students   If you and a joint owner other than your spouse sell your jointly owned home, each of you must figure your own gain or loss according to your ownership interest in the home. Tax deductions for college students Each of you applies the rules discussed in this publication on an individual basis. Tax deductions for college students Dispositions Other Than Sales Some special rules apply to other dispositions of your main home. Tax deductions for college students Foreclosure or repossession. Tax deductions for college students   If your home was foreclosed on or repossessed, you have a disposition. Tax deductions for college students See Publication 4681 to determine if you have ordinary income, gain, or loss. Tax deductions for college students More information. Tax deductions for college students   If part of a home is used for business or rental purposes, see Foreclosures and Repossessions in chapter 1 of Publication 544 for more information. Tax deductions for college students Publication 544 has examples of how to figure gain or loss on a foreclosure or repossession. Tax deductions for college students Abandonment. Tax deductions for college students   If you abandon your home, see Publication 4681 to determine if you have ordinary income, gain, or loss. Tax deductions for college students Trading (exchanging) homes. Tax deductions for college students   If you trade your home for another home, treat the trade as a sale and a purchase. Tax deductions for college students Example. Tax deductions for college students You owned and lived in a home with an adjusted basis of $41,000. Tax deductions for college students A real estate dealer accepted your old home as a trade-in and allowed you $50,000 toward a new home priced at $80,000. Tax deductions for college students This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 − $41,000). Tax deductions for college students If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, your sales price would still be $50,000 (the $27,000 trade-in allowed plus the $23,000 mortgage assumed). Tax deductions for college students Transfer to spouse. Tax deductions for college students   If you transfer your home to your spouse or you transfer it to your former spouse incident to your divorce, you in most cases have no gain or loss (unless the Exception, discussed next, applies). Tax deductions for college students This is true even if you receive cash or other consideration for the home. Tax deductions for college students As a result, the rules explained in this publication do not apply. Tax deductions for college students   If you owned your home jointly with your spouse and transfer your interest in the home to your spouse, or to your former spouse incident to your divorce, the same rule applies. Tax deductions for college students You have no gain or loss. Tax deductions for college students Exception. Tax deductions for college students   These transfer rules do not apply if your spouse or former spouse is a nonresident alien. Tax deductions for college students In that case, you generally will have a gain or loss. Tax deductions for college students More information. Tax deductions for college students    See Property Settlements in Publication 504, Divorced or Separated Individuals, for more information. Tax deductions for college students Involuntary conversion. Tax deductions for college students   You have a disposition when your home is destroyed or condemned and you receive other property or money in payment, such as insurance or a condemnation award. Tax deductions for college students This is treated as a sale and you may be able to exclude all or part of any gain from the destruction or condemnation of your home, as explained later under Special Situations (see Home destroyed or condemned ). Tax deductions for college students Determining Basis You need to know your basis in your home to figure any gain or loss when you sell it. Tax deductions for college students Your basis in your home is determined by how you got the home. Tax deductions for college students Generally, your basis is its cost if you bought it or built it. Tax deductions for college students If you got it in some other way (inheritance, gift, etc. Tax deductions for college students ), your basis is generally either its fair market value when you received it or the adjusted basis of the previous owner. Tax deductions for college students While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. Tax deductions for college students The result of these adjustments is your home's adjusted basis, which is used to figure gain or loss on the sale of your home. Tax deductions for college students To figure your adjusted basis, you can use Worksheet 1, near the end of this publication. Tax deductions for college students Filled-in examples of that worksheet are included in the Comprehensive Examples , later. Tax deductions for college students Cost As Basis The cost of property is the amount you paid for it in cash, debt obligations, other property, or services. Tax deductions for college students Purchase. Tax deductions for college students   If you bought your home, your basis is its cost to you. Tax deductions for college students This includes the purchase price and certain settlement or closing costs. Tax deductions for college students In most cases, your purchase price includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller in payment for the home. Tax deductions for college students If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed later. Tax deductions for college students Seller-paid points. Tax deductions for college students   If the person who sold you your home paid points on your loan, you may have to reduce your home's basis by the amount of the points, as shown in the following chart. Tax deductions for college students    IF you bought your home. Tax deductions for college students . Tax deductions for college students . Tax deductions for college students THEN reduce your home's basis by the seller-paid points. Tax deductions for college students . Tax deductions for college students . Tax deductions for college students after 1990 but before April 4, 1994 only if you deducted them as home mortgage interest in the year paid. Tax deductions for college students after April 3, 1994 even if you did not deduct them. Tax deductions for college students Settlement fees or closing costs. Tax deductions for college students   When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. Tax deductions for college students You can include in your basis some of the settlement fees and closing costs you paid for buying the home, but not the fees and costs for getting a mortgage loan. Tax deductions for college students A fee paid for buying the home is any fee you would have had to pay even if you paid cash for the home (that is, without the need for financing). Tax deductions for college students   Settlement fees do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Tax deductions for college students   Some of the settlement fees or closing costs that you can include in your basis are: Abstract fees (abstract of title fees), Charges for installing utility services, Legal fees (including fees for the title search and preparing the sales contract and deed), Recording fees, Survey fees, Transfer or stamp taxes, Owner's title insurance, and Any amounts the seller owes that you agree to pay, such as: Certain real estate taxes (discussed later), Back interest, Recording or mortgage fees, Charges for improvements or repairs, and Sales commissions. Tax deductions for college students   Some settlement fees and closing costs you cannot include in your basis are: Fire insurance premiums, Rent for occupancy of the house before closing, Charges for utilities or other services related to occupancy of the house before closing, Any fee or cost that you deducted as a moving expense (allowed for certain fees and costs before 1994), Charges connected with getting a mortgage loan, such as: Mortgage insurance premiums (including funding fees connected with loans guaranteed by the Department of Veterans Affairs), Loan assumption fees, Cost of a credit report, Fee for an appraisal required by a lender, and Fees for refinancing a mortgage. Tax deductions for college students Real estate taxes. Tax deductions for college students   Real estate taxes for the year you bought your home may affect your basis, as shown in the following chart. Tax deductions for college students    IF. Tax deductions for college students . Tax deductions for college students . Tax deductions for college students AND. Tax deductions for college students . Tax deductions for college students . Tax deductions for college students THEN the taxes. Tax deductions for college students . Tax deductions for college students . Tax deductions for college students you pay taxes that the seller owed on the home up to the date of sale the seller does not reimburse you are added to the basis of your home. Tax deductions for college students the seller reimburses you do not affect the basis of your home. Tax deductions for college students the seller pays taxes for you (taxes owed beginning on the date of sale) you do not reimburse the seller are subtracted from the basis of your home. Tax deductions for college students you reimburse the seller do not affect the basis of your home. Tax deductions for college students Construction. Tax deductions for college students   If you contracted to have your house built on land you own, your basis is: The cost of the land, plus The amount it cost you to complete the house, including: The cost of labor and materials, Any amounts paid to a contractor, Any architect's fees, Building permit charges, Utility meter and connection charges, and Legal fees directly connected with building the house. Tax deductions for college students   Your cost includes your down payment and any debt such as a first or second mortgage or notes you gave the seller or builder. Tax deductions for college students It also includes certain settlement or closing costs. Tax deductions for college students You may have to reduce your basis by points the seller paid for you. Tax deductions for college students For more information, see Seller-paid points and Settlement fees or closing costs , earlier. Tax deductions for college students Built by you. Tax deductions for college students   If you built all or part of your house yourself, its basis is the total amount it cost you to complete it. Tax deductions for college students Do not include in the cost of the house: The value of your own labor, or The value of any other labor you did not pay for. Tax deductions for college students Temporary housing. Tax deductions for college students   If a builder gave you temporary housing while your home was being finished, you must reduce your basis by the part of the contract price that was for the temporary housing. Tax deductions for college students To figure the amount of the reduction, multiply the contract price by a fraction. Tax deductions for college students The numerator is the value of the temporary housing, and the denominator is the sum of the value of the temporary housing plus the value of the new home. Tax deductions for college students Cooperative apartment. Tax deductions for college students   If you are a tenant-stockholder in a cooperative housing corporation, your basis in the cooperative apartment used as your home is usually the cost of your stock in the corporation. Tax deductions for college students This may include your share of a mortgage on the apartment building. Tax deductions for college students Condominium. Tax deductions for college students   To determine your basis in a condominium apartment used as your home, use the same rules as for any other home. Tax deductions for college students Basis Other Than Cost You must use a basis other than cost, such as adjusted basis or fair market value, if you received your home as a gift, inheritance, a trade, or from your spouse. Tax deductions for college students These situations are discussed in the following pages. Tax deductions for college students Also, the instructions for Worksheet 1 (near the end of the publication) address each of these issues. Tax deductions for college students Other special rules may apply in certain situations. Tax deductions for college students If you converted the property, or some part of it, to business or rental use, see Property Changed to Business or Rental Use, in Publication 551. Tax deductions for college students Home received as gift. Tax deductions for college students   Use the following chart to find the basis of a home you received as a gift. Tax deductions for college students IF the donor's adjusted basis at the time of the gift was. Tax deductions for college students . Tax deductions for college students . Tax deductions for college students THEN your basis is. Tax deductions for college students . Tax deductions for college students . Tax deductions for college students more than the fair market value of the home at that time the same as the donor's adjusted basis at the time of the gift. Tax deductions for college students   Exception: If using the donor's adjusted basis results in a loss when you sell the home, you must use the fair market value of the home at the time of the gift as your basis. Tax deductions for college students If using the fair market value results in a gain, you have neither gain nor loss. Tax deductions for college students equal to or less than the fair market value at that time, and you received the gift before 1977 the smaller of the: • donor's adjusted basis, plus  any federal gift tax paid on  the gift, or • the home's fair market value  at the time of the gift. Tax deductions for college students equal to or less than the fair market value at that time, and you received the gift after 1976 the same as the donor's adjusted basis, plus the part of any federal gift tax paid that is due to the net increase in value of the home (explained next). Tax deductions for college students Fair market value. Tax deductions for college students   The fair market value of property at the time of the gift is the value of the property as appraised for purposes of the federal gift tax. Tax deductions for college students If the gift was not subject to the federal gift tax, the fair market value is the value as appraised for the purposes of a state gift tax. Tax deductions for college students Part of federal gift tax due to net increase in value. Tax deductions for college students   Figure the part of the federal gift tax paid that is due to the net increase in value of the home by multiplying the total federal gift tax paid by a fraction. Tax deductions for college students The numerator of the fraction is the net increase in the value of the home, and the denominator is the value of the home for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Tax deductions for college students The net increase in the value of the home is its fair market value minus the donor's adjusted basis immediately before the gift. Tax deductions for college students Home acquired from a decedent who died before or after 2010. Tax deductions for college students   If you inherited your home from a decedent who died before or after 2010, your basis is the fair market value of the property on the date of the decedent's death (or the later alternate valuation date chosen by the personal representative of the estate). Tax deductions for college students If an estate tax return was filed or required to be filed, the value of the property listed on the estate tax return is your basis. Tax deductions for college students If a federal estate tax return did not have to be filed, your basis in the home is the same as its appraised value at the date of death, for purposes of state inheritance or transmission taxes. Tax deductions for college students Surviving spouse. Tax deductions for college students   If you are a surviving spouse and you owned your home jointly, your basis in the home will change. Tax deductions for college students The new basis for the interest your spouse owned will be its fair market value on the date of death (or alternate valuation date). Tax deductions for college students The basis in your interest will remain the same. Tax deductions for college students Your new basis in the home is the total of these two amounts. Tax deductions for college students   If you and your spouse owned the home either as tenants by the entirety or as joint tenants with right of survivorship, you will each be considered to have owned one-half of the home. Tax deductions for college students Example. Tax deductions for college students Your jointly owned home (owned as joint tenants with right of survivorship) had an adjusted basis of $50,000 on the date of your spouse's death, and the fair market value on that date was $100,000. Tax deductions for college students Your new basis in the home is $75,000 ($25,000 for one-half of the adjusted basis plus $50,000 for one-half of the fair market value). Tax deductions for college students Community property. Tax deductions for college students   In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), each spouse is usually considered to own half of the community property. Tax deductions for college students When either spouse dies, the total fair market value of the community property becomes the basis of the entire property, including the part belonging to the surviving spouse. Tax deductions for college students For this to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. Tax deductions for college students   For more information about community property, see Publication 555, Community Property. Tax deductions for college students    If you are selling a home in which you acquired an interest from a decedent who died in 2010, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to determine your basis. Tax deductions for college students Home received as trade. Tax deductions for college students   If you acquired your home as a trade for other property, in most cases, the basis of your home is the fair market value (at the time of the trade) of the property you gave up. Tax deductions for college students If you traded one home for another, you have made a sale and purchase. Tax deductions for college students In that case, you may have a gain. Tax deductions for college students See Trading (exchanging) homes under Dispositions Other Than Sales, earlier, for an example of figuring the gain. Tax deductions for college students Home received from spouse. Tax deductions for college students   If you received your home from your spouse or from your former spouse incident to your divorce, your basis in the home depends on the date of the transfer. Tax deductions for college students Transfers after July 18, 1984. Tax deductions for college students   If you received the home after July 18, 1984, there was no gain or loss on the transfer. Tax deductions for college students In most cases, your basis in this home is the same as your spouse's (or former spouse's) adjusted basis just before you received it. Tax deductions for college students This rule applies even if you received the home in exchange for cash, the release of marital rights, the assumption of liabilities, or other considerations. Tax deductions for college students   If you owned a home jointly with your spouse and your spouse transferred his or her interest in the home to you, in most cases, your basis in the half interest received from your spouse is the same as your spouse's adjusted basis just before the transfer. Tax deductions for college students This also applies if your former spouse transferred his or her interest in the home to you incident to your divorce. Tax deductions for college students Your basis in the half interest you already owned does not change. Tax deductions for college students Your new basis in the home is the total of these two amounts. Tax deductions for college students Transfers before July 19, 1984. Tax deductions for college students   If you received your home before July 19, 1984, in exchange for your release of marital rights, in most cases, your basis in the home is generally its fair market value at the time you received it. Tax deductions for college students More information. Tax deductions for college students   For more information on property received from a spouse or former spouse, see Property Settlements in Publication 504. Tax deductions for college students Involuntary conversion. Tax deductions for college students   If your home is destroyed or condemned, you may receive insurance proceeds or a condemnation award. Tax deductions for college students If you acquired a replacement home with these proceeds, the basis is its cost decreased by any gain not recognized on the conversion under the rules explained in: Publication 547, in the case of a home that was destroyed, or Chapter 1 of Publication 544, in the case of a home that was condemned. Tax deductions for college students Example. Tax deductions for college students A fire destroyed your home that you owned and used for only 6 months. Tax deductions for college students The home had an adjusted basis of $80,000 and the insurance company paid you $130,000 for the loss. Tax deductions for college students Your gain is $50,000 ($130,000 − $80,000). Tax deductions for college students You bought a replacement home for $100,000. Tax deductions for college students The part of your gain that is taxable is $30,000 ($130,000 − $100,000), the unspent part of the payment from the insurance company. Tax deductions for college students The rest of the gain ($20,000) is not taxable, so that amount reduces your basis in the new home. Tax deductions for college students The basis of the new home is figured as follows. Tax deductions for college students Cost of replacement home $100,000 Minus: Gain not recognized 20,000 Basis of the replacement home $80,000 More information. Tax deductions for college students   For more information about basis, see Publication 551. Tax deductions for college students Adjusted Basis Adjusted basis is your cost or other basis increased or decreased by certain amounts. Tax deductions for college students To figure your adjusted basis, you can use Worksheet 1, found toward the end of this publication. Tax deductions for college students Filled-in examples of that worksheet are included in Comprehensive Examples , later. Tax deductions for college students Recordkeeping. Tax deductions for college students You should keep records to prove your home's adjusted basis. Tax deductions for college students Ordinarily, you must keep records for 3 years after the due date for filing your return for the tax year in which you sold your home. Tax deductions for college students But if you sold a home before May 7, 1997, and postponed tax on any gain, the basis of that home affects the basis of the new home you bought. Tax deductions for college students Keep records proving the basis of both homes as long as they are needed for tax purposes. Tax deductions for college students The records you should keep include: Proof of the home's purchase price and purchase expenses; Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis; Any worksheets or other computations you used to figure the adjusted basis of the home you sold, the gain or loss on the sale, the exclusion, and the taxable gain; Any Form 982 you filed to exclude any discharge of qualified principal residence indebtedness; Any Form 2119, Sale of Your Home, you filed to postpone gain from the sale of a previous home before May 7, 1997; and Any worksheets you used to prepare Form 2119, such as the Adjusted Basis of Home Sold Worksheet or the Capital Improvements Worksheet from the Form 2119 instructions, or other source of computations. Tax deductions for college students Increases to Basis These include the following. Tax deductions for college students Additions and other improvements that have a useful life of more than 1 year. Tax deductions for college students Special assessments for local improvements. Tax deductions for college students Amounts you spent after a casualty to restore damaged property. Tax deductions for college students Improvements. Tax deductions for college students   These add to the value of your home, prolong its useful life, or adapt it to new uses. Tax deductions for college students You add the cost of additions and other improvements to the basis of your property. Tax deductions for college students   The following chart lists some other examples of improvements. Tax deductions for college students Examples of Improvements That Increase Basis Additions Bedroom Bathroom Deck Garage Porch Patio Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Lawn & Grounds Landscaping Driveway Walkway Fence  Retaining wall Sprinkler system Swimming pool  Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system  Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances  Kitchen modernization  Flooring Wall-to-wall carpeting  Insulation Attic Walls Floors Pipes and duct work Improvements no longer part of home. Tax deductions for college students   Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home. Tax deductions for college students Example. Tax deductions for college students You put wall-to-wall carpeting in your home 15 years ago. Tax deductions for college students Later, you replaced that carpeting with new wall-to-wall carpeting. Tax deductions for college students The cost of the old carpeting you replaced is no longer part of your home's adjusted basis. Tax deductions for college students Repairs. Tax deductions for college students   These maintain your home in good condition but do not add to its value or prolong its life. Tax deductions for college students You do not add their cost to the basis of your property. Tax deductions for college students Examples. Tax deductions for college students Repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes are examples of repairs. Tax deductions for college students Exception. Tax deductions for college students   The entire job is considered an improvement if items that would otherwise be considered repairs are done as part of an extensive remodeling or restoration of your home. Tax deductions for college students For example, if you have a casualty and your home is damaged, increase your basis by the amount you spend on repairs that restore the property to its pre-casualty condition. Tax deductions for college students Decreases to Basis These include the following. Tax deductions for college students Discharge of qualified principal residence indebtedness that was excluded from income (but not below zero). Tax deductions for college students For details, see Publication 4681. Tax deductions for college students Some or all of the cancellation of debt income that was excluded due to your bankruptcy or insolvency. Tax deductions for college students For details, see Publication 4681. Tax deductions for college students Gain you postponed from the sale of a previous home before May 7, 1997. Tax deductions for college students Deductible casualty losses. Tax deductions for college students Insurance payments you received or expect to receive for casualty losses. Tax deductions for college students Payments you received for granting an easement or right-of-way. Tax deductions for college students Depreciation allowed or allowable if you used your home for business or rental purposes. Tax deductions for college students Energy-related credits allowed for expenditures made on the residence. Tax deductions for college students (Reduce the increase in basis otherwise allowable for expenditures on the residence by the amount of credit allowed for those expenditures. Tax deductions for college students ) Adoption credit you claimed for improvements added to the basis of your home. Tax deductions for college students Nontaxable payments from an adoption assistance program of your employer you used for improvements you added to the basis of your home. Tax deductions for college students Energy conservation subsidy excluded from your gross income because you received it (directly or indirectly) from a public utility after 1992 to buy or install any energy conservation measure. Tax deductions for college students An energy conservation measure is an installation or modification primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home. Tax deductions for college students District of Columbia first-time homebuyer credit allowed on the purchase of a principal residence in the District of Columbia. Tax deductions for college students General sales taxes claimed as an itemized deduction on Schedule A (Form 1040) that were imposed on the purchase of personal property, such as a houseboat used as your home or a mobile home. Tax deductions for college students Discharges of qualified principal residence indebtedness. Tax deductions for college students   You may be able to exclude from gross income a discharge of qualified principal residence indebtedness. Tax deductions for college students This exclusion applies to discharges made after 2006 and before 2014. Tax deductions for college students If you choose to exclude this income, you must reduce (but not below zero) the basis of your principal residence by the amount excluded from gross income. Tax deductions for college students   File Form 982 with your tax return. Tax deductions for college students See the form's instructions for detailed information. Tax deductions for college students    A decrease in basis due to a discharge of qualified principal residence indebtedness that is excluded from income occurs only if you retain ownership of the principal residence after a discharge. Tax deductions for college students In most cases, this would occur in a refinancing or a restructuring of the mortgage. Tax deductions for college students Excluding the Gain You may qualify to exclude from your income all or part of any gain from the sale of your main home. Tax deductions for college students This means that, if you qualify, you will not have to pay tax on the gain up to the limit described under Maximum Exclusion , next. Tax deductions for college students To qualify, you must meet the ownership and use tests described later. Tax deductions for college students You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale. Tax deductions for college students This choice can be made (or revoked) at any time before the expiration of a 3-year period beginning on the due date of your return (not including extensions) for the year of the sale. Tax deductions for college students You can use Worksheet 2 (near the end of this publication) to figure the amount of your exclusion and your taxable gain, if any. Tax deductions for college students If you have any taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. Tax deductions for college students See Publication 505, Tax Withholding and Estimated Tax. Tax deductions for college students Maximum Exclusion You can exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true. Tax deductions for college students You meet the ownership test. Tax deductions for college students You meet the use test. Tax deductions for college students During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home. Tax deductions for college students For details on gain allocated to periods of nonqualified use, see Nonqualified Use , later. Tax deductions for college students If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions just listed. Tax deductions for college students You may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons . Tax deductions for college students Ownership and Use Tests To claim the exclusion, you must meet the ownership and use tests. Tax deductions for college students This means that during the 5-year period ending on the date of the sale, you must have: Owned the home for at least 2 years (the ownership test), and Lived in the home as your main home for at least 2 years (the use test). Tax deductions for college students Exception. Tax deductions for college students   If you owned and lived in the property as your main home for less than 2 years, you can still claim an exclusion in some cases. Tax deductions for college students However, the maximum amount you may be able to exclude will be reduced. Tax deductions for college students See Reduced Maximum Exclusion , later. Tax deductions for college students Example 1—home owned and occupied for at least 2 years. Tax deductions for college students Mya bought and moved into her main home in September 2011. Tax deductions for college students She sold the home at a gain in October 2013. Tax deductions for college students During the 5-year period ending on the date of sale in October 2013, she owned and lived in the home for more than 2 years. Tax deductions for college students She meets the ownership and use tests. Tax deductions for college students Example 2—ownership test met but use test not met. Tax deductions for college students Ayden bought a home, lived in it for 6 months, moved out, and never occupied the home again. Tax deductions for college students He later sold the home for a gain in June 2013. Tax deductions for college students He owned the home during the entire 5-year period ending on the date of sale. Tax deductions for college students He meets the ownership test but not the use test. Tax deductions for college students He cannot exclude any part of his gain on the sale unless he qualified for a reduced maximum exclusion (explained later). Tax deductions for college students Period of Ownership and Use The required 2 years of ownership and use during the 5-year period ending on the date of the sale do not have to be continuous nor do they both have to occur at the same time. Tax deductions for college students You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days (365 × 2) during the 5-year period ending on the date of sale. Tax deductions for college students Example. Tax deductions for college students Naomi bought and moved into a house in July 2009. Tax deductions for college students She lived there for 13 months and then moved in with a friend. Tax deductions for college students She later moved back into her house and lived there for 12 months until she sold it in August 2013. Tax deductions for college students Naomi meets the ownership and use tests because, during the 5-year period ending on the date of sale, she owned the house for more than 2 years and lived in it for a total of 25 (13 + 12) months. Tax deductions for college students Temporary absence. Tax deductions for college students   Short temporary absences for vacations or other seasonal absences, even if you rent out the property during the absences, are counted as periods of use. Tax deductions for college students The following examples assume that the reduced maximum exclusion (discussed later) does not apply to the sales. Tax deductions for college students Example 1. Tax deductions for college students David Johnson, who is single, bought and moved into his home on February 1, 2011. Tax deductions for college students Each year during 2011 and 2012, David left his home for a 2-month summer vacation. Tax deductions for college students David sold the house on March 1, 2013. Tax deductions for college students Although the total time David lived in his home is less than 2 years (21 months), he meets the use requirement and may exclude gain. Tax deductions for college students The 2-month vacations are short temporary absences and are counted as periods of use in determining whether David used the home for the required 2 years. Tax deductions for college students Example 2. Tax deductions for college students Professor Paul Beard, who is single, bought and moved into a house in December 2010, went abroad for a 1-year sabbatical leave in January 2012, returned to the house in January 2013, and sold it at a gain in February 2013. Tax deductions for college students Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test. Tax deductions for college students He cannot exclude any part of his gain because he did not use the residence for the required 2 years. Tax deductions for college students Ownership and use tests met at different times. Tax deductions for college students   You can meet the ownership and use tests during different 2-year periods. Tax deductions for college students However, you must meet both tests during the 5-year period ending on the date of the sale. Tax deductions for college students Example. Tax deductions for college students Beginning in 2002, Helen Jones lived in a rented apartment. Tax deductions for college students The apartment building was later converted to condominiums, and she bought her same apartment on December 3, 2010. Tax deductions for college students In 2011, Helen became ill and on April 14 of that year she moved to her daughter's home. Tax deductions for college students On July 12, 2013, while still living in her daughter's home, she sold her condominium. Tax deductions for college students Helen can exclude gain on the sale of her condominium because she met the ownership and use tests during the 5-year period from July 13, 2008, to July 12, 2013, the date she sold the condominium. Tax deductions for college students She owned her condominium from December 3, 2010, to July 12, 2013 (more than 2 years). Tax deductions for college students She lived in the property from July 13, 2008 (the beginning of the 5-year period), to April 14, 2011 (more than 2 years). Tax deductions for college students The time Helen lived in her daughter's home during the 5-year period can be counted toward her period of ownership, and the time she lived in her rented apartment during the 5-year period can be counted toward her period of use. Tax deductions for college students Cooperative apartment. Tax deductions for college students   If you sold stock as a tenant-shareholder in a cooperative housing corporation, the ownership and use tests are met if, during the 5-year period ending on the date of sale, you: Owned the stock for at least 2 years, and Lived in the house or apartment that the stock entitled you to occupy as your main home for at least 2 years. Tax deductions for college students Exceptions to Ownership and Use Tests The following sections contain exceptions to the ownership and use tests for certain taxpayers. Tax deductions for college students Exception for individuals with a disability. Tax deductions for college students   There is an exception to the use test if: You become physically or mentally unable to care for yourself, and You owned and lived in your home as your main home for a total of at least 1 year during the 5-year period before the sale of your home. Tax deductions for college students Under this exception, you are considered to live in your home during any time within the 5-year period that you own the home and live in a facility (including a nursing home) licensed by a state or political subdivision to care for persons in your condition. Tax deductions for college students   If you meet this exception to the use test, you still have to meet the 2-out-of-5-year ownership test to claim the exclusion. Tax deductions for college students Previous home destroyed or condemned. Tax deductions for college students   For the ownership and use tests, you add the time you owned and lived in a previous home that was destroyed or condemned to the time you owned and lived in the replacement home on whose sale you wish to exclude gain. Tax deductions for college students This rule applies if any part of the basis of the home you sold depended on the basis of the destroyed or condemned home (see Involuntary Conversions in Publication 551). Tax deductions for college students Otherwise, you must have owned and lived in the same home for 2 of the 5 years before the sale to qualify for the exclusion. Tax deductions for college students Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps. Tax deductions for college students   You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on qualified official extended duty (defined later) as a member of the uniformed services or Foreign Service of the United States, or as an employee of the intelligence community. Tax deductions for college students You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve outside the United States either as an employee of the Peace Corps on qualified official extended duty (defined later) or as an enrolled volunteer or volunteer leader of the Peace Corps. Tax deductions for college students This means that you may be able to meet the 2-year use test even if, because of your service, you did not actually live in your home for at least the required 2 years during the 5-year period ending on the date of sale. Tax deductions for college students   If this helps you qualify to exclude gain, you can choose to have the 5-year test period suspended by filing a return for the year of sale that does not include the gain. Tax deductions for college students Example. Tax deductions for college students John bought and moved into a home in 2005. Tax deductions for college students He lived in it as his main home for 2½ years. Tax deductions for college students For the next 6 years, he did not live in it because he was on qualified official extended duty with the Army. Tax deductions for college students He then sold the home at a gain in 2013. Tax deductions for college students To meet the use test, John chooses to suspend the 5-year test period for the 6 years he was on qualified official extended duty. Tax deductions for college students This means he can disregard those 6 years. Tax deductions for college students Therefore, John's 5-year test period consists of the 5 years before he went on qualified official extended duty. Tax deductions for college students He meets the ownership and use tests because he owned and lived in the home for 2½ years during this test period. Tax deductions for college students Period of suspension. Tax deductions for college students   The period of suspension cannot last more than 10 years. Tax deductions for college students Together, the 10-year suspension period and the 5-year test period can be as long as, but no more than, 15 years. Tax deductions for college students You cannot suspend the 5-year period for more than one property at a time. Tax deductions for college students You can revoke your choice to suspend the 5-year period at any time. Tax deductions for college students Example. Tax deductions for college students Mary bought a home on April 1, 1997. Tax deductions for college students She used it as her main home until August 31, 2000. Tax deductions for college students On September 1, 2000, she went on qualified official extended duty with the Navy. Tax deductions for college students She did not live in the house again before selling it on July 31, 2013. Tax deductions for college students Mary chooses to use the entire 10-year suspension period. Tax deductions for college students Therefore, the suspension period would extend back from July 31, 2013, to August 1, 2003, and the 5-year test period would extend back to August 1, 1998. Tax deductions for college students During that period, Mary owned the house all 5 years and lived in it as her main home from August 1, 1998, until August 31, 2000, a period of more than 24 months. Tax deductions for college students She meets the ownership and use tests because she owned and lived in the home for at least 2 years during this test period. Tax deductions for college students Uniformed services. Tax deductions for college students   The uniformed services are: The Armed Forces (the Army, Navy, Air Force, Marine Corps, and Coast Guard), The commissioned corps of the National Oceanic and Atmospheric Administration, and The commissioned corps of the Public Health Service. Tax deductions for college students Foreign Service member. Tax deductions for college students   For purposes of the choice to suspend the 5-year test period for ownership and use, you are a member of the Foreign Service if you are any of the following. Tax deductions for college students A Chief of mission. Tax deductions for college students An Ambassador at large. Tax deductions for college students A member of the Senior Foreign Service. Tax deductions for college students A Foreign Service officer. Tax deductions for college students Part of the Foreign Service personnel. Tax deductions for college students Employee of the intelligence community. Tax deductions for college students   For purposes of the choice to suspend the 5-year test period for ownership and use, you are an employee of the intelligence community if you are an employee of any of the following. Tax deductions for college students The Office of the Director of National Intelligence. Tax deductions for college students The Central Intelligence Agency. Tax deductions for college students The National Security Agency. Tax deductions for college students The Defense Intelligence Agency. Tax deductions for college students The National Geospatial-Intelligence Agency. Tax deductions for college students The National Reconnaissance Office and any other office within the Department of Defense for the collection of specialized national intelligence through reconnaissance programs. Tax deductions for college students Any of the intelligence elements of the Army, the Navy, the Air Force, the Marine Corps, the Federal Bureau of Investigation, the Department of Treasury, the Department of Energy, and the Coast Guard. Tax deductions for college students The Bureau of Intelligence and Research of the Department of State. Tax deductions for college students Any of the elements of the Department of Homeland Security concerned with the analyses of foreign intelligence information. Tax deductions for college students Qualified official extended duty. Tax deductions for college students   You are on qualified official extended duty if you are on extended duty while: Serving at a duty station at least 50 miles from your main home, or Living in Government quarters under Government orders. Tax deductions for college students   You are on extended duty when you are called or ordered to active duty for a period of more than 90 days or for an indefinite period. Tax deductions for college students Married Persons If you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use tests, you can exclude up to $250,000 of the gain. Tax deductions for college students (But see Special rules for joint returns, next. Tax deductions for college students ) Special rules for joint returns. Tax deductions for college students   You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true. Tax deductions for college students You are married and file a joint return for the year. Tax deductions for college students Either you or your spouse meets the ownership test. Tax deductions for college students Both you and your spouse meet the use test. Tax deductions for college students During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home. Tax deductions for college students If either spouse does not satisfy all these requirements, the maximum exclusion that can be claimed by the couple is the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured separately. Tax deductions for college students For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. Tax deductions for college students Example 1—one spouse sells a home. Tax deductions for college students Emily sells her home in June 2013 for a gain of $300,000. Tax deductions for college students She marries Jamie later in the year. Tax deductions for college students She meets the ownership and use tests, but Jamie does not. Tax deductions for college students Emily can exclude up to $250,000 of gain on a separate or joint return for 2013. Tax deductions for college students The $500,000 maximum exclusion for certain joint returns does not apply because Jamie does not meet the use test. Tax deductions for college students Example 2—each spouse sells a home. Tax deductions for college students The facts are the same as in Example 1 except that Jamie also sells a home in 2013 for a gain of $200,000 before he marries Emily. Tax deductions for college students He meets the ownership and use tests on his home, but Emily does not. Tax deductions for college students Emily can exclude $250,000 of gain and Jamie can exclude $200,000 of gain on the respective sales of their individual homes. Tax deductions for college students However, Emily cannot use Jamie's unused exclusion to exclude more than $250,000 of gain. Tax deductions for college students Therefore, Emily and Jamie must recognize $50,000 of gain on the sale of Emily's home. Tax deductions for college students The $500,000 maximum exclusion for certain joint returns does not apply because Emily and Jamie do not both meet the use test for the same home. Tax deductions for college students Sale of main home by surviving spouse. Tax deductions for college students   If your spouse died and you did not remarry before the date of sale, you are considered to have owned and lived in the property as your main home during any period of time when your spouse owned and lived in it as a main home. Tax deductions for college students   If you meet all of the following requirements, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home. Tax deductions for college students The sale or exchange took place after 2008. Tax deductions for college students The sale or exchange took place no more than 2 years after the date of death of your spouse. Tax deductions for college students You have not remarried. Tax deductions for college students You and your spouse met the use test at the time of your spouse's death. Tax deductions for college students You or your spouse met the ownership test at the time of your spouse's death. Tax deductions for college students Neither you nor your spouse excluded gain from the sale of another home during the last 2 years before the date of death. Tax deductions for college students The ownership and use tests were described earlier. Tax deductions for college students Example. Tax deductions for college students Harry owned and used a house as his main home since 2009. Tax deductions for college students Harry and Wilma married on July 1, 2013, and from that date they used Harry's house as their main home. Tax deductions for college students Harry died on August 15, 2013, and Wilma inherited the property. Tax deductions for college students Wilma sold the property on September 1, 2013, at which time she had not remarried. Tax deductions for college students Although Wilma owned and used the house for less than 2 years, Wilma is considered to have satisfied the ownership and use tests because her period of ownership and use includes the period that Harry owned and used the property before death. Tax deductions for college students Home transferred from spouse. Tax deductions for college students   If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it. Tax deductions for college students Use of home after divorce. Tax deductions for college students   You are considered to have used property as your main home during any period when: You owned it, and Your spouse or former spouse is allowed to live in it under a divorce or separation instrument and uses it as his or her main home. Tax deductions for college students Reduced Maximum Exclusion If you fail to meet the requirements to qualify for the $250,000 or $500,000 exclusion, you may still qualify for a reduced exclusion. Tax deductions for college students This applies to those who: Fail to meet the ownership and use tests, or Have used the exclusion within 2 years of selling their current home. Tax deductions for college students In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons. Tax deductions for college students A change in place of employment. Tax deductions for college students Health. Tax deductions for college students Unforeseen circumstances. Tax deductions for college students Qualified individual. Tax deductions for college students   For purposes of the reduced maximum exclusion, a qualified individual is any of the following. Tax deductions for college students You. Tax deductions for college students Your spouse. Tax deductions for college students A co-owner of the home. Tax deductions for college students A person whose main home is the same as yours. Tax deductions for college students Primary reason for sale. Tax deductions for college students   One of the three reasons above will be considered to be the primary reason you sold your home if either (1) or (2) is true. Tax deductions for college students You qualify under a “safe harbor. Tax deductions for college students ” This is a specific set of facts and circumstances that, if applicable, qualifies you to claim a reduced maximum exclusion. Tax deductions for college students Safe harbors corresponding to the reasons listed above are described later. Tax deductions for college students A safe harbor does not apply, but you can establish, based on facts and circumstances, that the primary reason for the sale is a change in place of employment, health, or unforeseen circumstances. Tax deductions for college students  Factors that may be relevant in determining your primary reason for sale include whether: Your sale and the circumstances causing it were close in time, The circumstances causing your sale occurred during the time you owned and used the property as your main home, The circumstances causing your sale were not reasonably foreseeable when you began using the property as your main home, Your financial ability to maintain the property became materially impaired, The suitability of the property as your main home materially changed, and During the time you owned the property, you used it as your home. Tax deductions for college students Change in Place of Employment You may qualify for a reduced exclusion if the primary reason for the sale of your main home is a change in the location of employment of a qualified individual. Tax deductions for college students Employment. Tax deductions for college students   For this purpose, employment includes the start of work with a new employer or continuation of work with the same employer. Tax deductions for college students It also includes the start or continuation of self-employment. Tax deductions for college students Distance safe harbor. Tax deductions for college students   A change in place of employment is considered to be the reason you sold your home if: The change occurred during the period you owned and used the property as your main home, and The new place of employment is at least 50 miles farther from the home you sold than was the former place of employment (or, if there was no former place of employment, the distance between your new place of employment and the home sold is at least 50 miles). Tax deductions for college students Example. Tax deductions for college students Justin was unemployed and living in a townhouse in Florida he had owned and used as his main home since 2012. Tax deductions for college students He got a job in North Carolina and sold his townhouse in 2013. Tax deductions for college students Because the distance between Justin's new place of employment and the home he sold is at least 50 miles, the sale satisfies the conditions of the distance safe harbor. Tax deductions for college students Justin's sale of his home is considered to be because of a change in place of employment, and he is entitled to claim a reduced maximum exclusion of gain from the sale. Tax deductions for college students Health The sale of your main home is because of health if your primary reason for the sale is: To obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury of a qualified individual, or To obtain or provide medical or personal care for a qualified individual suffering from a disease, illness, or injury. Tax deductions for college students The sale of your home is not because of health if the sale merely benefits a qualified individual's general health or well-being. Tax deductions for college students For purposes of this reason, a qualified individual includes, in addition to the individuals listed earlier under Qualified individual , any of the following family members of these individuals. Tax deductions for college students Parent, grandparent, stepmother, stepfather. Tax deductions for college students Child, grandchild, stepchild, adopted child, eligible foster child. Tax deductions for college students Brother, sister, stepbrother, stepsister, half-brother, half-sister. Tax deductions for college students Mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, or daughter-in-law. Tax deductions for college students Uncle, aunt, nephew, niece, or cousin. Tax deductions for college students Example. Tax deductions for college students In 2012, Chase and Lauren, spouses, bought a house that they used as their main home. Tax deductions for college students Lauren's father has a chronic disease and is unable to care for himself. Tax deductions for college students In 2013, Chase and Lauren sold their home in order to move into Lauren's father's house to provide care for him. Tax deductions for college students Because the primary reason for the sale of their home was to provide care for Lauren's father, Chase and Lauren are entitled to a reduced maximum exclusion. Tax deductions for college students Doctor's recommendation safe harbor. Tax deductions for college students   Health is considered to be the reason you sold your home if, for one or more of the reasons listed at the beginning of this discussion, a doctor recommends a change of residence. Tax deductions for college students Unforeseen Circumstances The sale of your main home is because of an unforeseen circumstance if your primary reason for the sale is the occurrence of an event that you could not reasonably have anticipated before buying and occupying that home. Tax deductions for college students You are not considered to have an unforeseen circumstance if the primary reason you sold your home was that you preferred to get a different home or because your finances improved. Tax deductions for college students Specific event safe harbors. Tax deductions for college students   Unforeseen circumstances are considered to be the reason for selling your home if any of the following events occurred while you owned and used the property as your main home. Tax deductions for college students An involuntary conversion of your home, such as when your home is destroyed or condemned. Tax deductions for college students Natural or man-made disasters or acts of war or terrorism resulting in a casualty to your home, whether or not your loss is deductible. Tax deductions for college students In the case of qualified individuals (listed earlier under Qualified individual ): Death, Unemployment (if the individual is eligible for unemployment compensation), A change in employment or self-employment status that results in the individual's inability to pay reasonable basic living expenses (listed under Reasonable basic living expenses , later) for his or her household, Divorce or legal separation under a decree of divorce or separate maintenance, or Multiple births resulting from the same pregnancy. Tax deductions for college students An event the IRS determined to be an unforeseen circumstance in published guidance of general applicability. Tax deductions for college students For example, the IRS determined the September 11, 2001, terrorist attacks to be an unforeseen circumstance. Tax deductions for college students Reasonable basic living expenses. Tax deductions for college students   Reasonable basic living expenses for your household include the following. Tax deductions for college students Amounts spent for food. Tax deductions for college students Amounts spent for clothing. Tax deductions for college students Housing and related expenses. Tax deductions for college students Medical expenses. Tax deductions for college students Transportation expenses. Tax deductions for college students Tax payments. Tax deductions for college students Court-ordered payments. Tax deductions for college students Expenses reasonably necessary to produce income. Tax deductions for college students   Any of these amounts spent to maintain an affluent or luxurious standard of living are not reasonable basic living expenses. Tax deductions for college students Nonqualified Use Gain from the sale or exchange of the main home is not excludable from income if it is allocable to periods of nonqualified use. Tax deductions for college students Nonqualified use means any period after 2008 where neither you nor your spouse (or your former spouse) used the property as a main home, with certain exceptions (see next). Tax deductions for college students Exceptions. Tax deductions for college students   A period of nonqualified use does not include: Any portion of the 5-year period ending on the date of the sale or exchange after the last date you (or your spouse) use the property as a main home; Any period (not to exceed an aggregate period of 10 years) during which you (or your spouse) are serving on qualified official extended duty: As a member of the uniformed services; As a member of the Foreign Service of the United States; or As an employee of the intelligence community; and Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS. Tax deductions for college students Calculation. Tax deductions for college students   To figure the portion of the gain allocated to the period of nonqualified use, multiply the gain (net of any depreciation allowed or allowable on the property for periods after May 6, 1997) by the following fraction:   Total nonqualified use during the period of ownership after 2008     Total period of ownership     This calculation can be found in Worksheet 2, line 10, later in this publication. Tax deductions for college students   For examples of this calculation, see Business Use or Rental of Home , next. Tax deductions for college students Business Use or Rental of Home You may be able to exclude gain from the sale of a home you have used for business or to produce rental income if you meet the ownership and use tests. Tax deductions for college students Example 1. Tax deductions for college students On May 23, 2007, Amy, who is unmarried for all years in this example, bought a house. Tax deductions for college students She moved in on that date and lived in it until May 31, 2009, when she moved out of the house and put it up for rent. Tax deductions for college students The house was rented from June 1, 2009, to March 31, 2011. Tax deductions for college students Amy claimed depreciation deductions in 2009 through 2011 totaling $10,000. Tax deductions for college students Amy moved back into the house on April 1, 2011, and lived there until she sold it on January 31, 2013, for a gain of $200,000. Tax deductions for college students During the 5-year period ending on the date of the sale (January 31, 2008–January 31, 2013), Amy owned and lived in the house for more than 2 years as shown in the following table. Tax deductions for college students Five-Year Period Used as Home Used as Rental 1/31/08 – 5/31/09 16 months   6/01/09 – 3/31/11   22 months 4/01/11 – 1/31/13 22 months     38 months 22 months       During the period Amy owned the house (2,080 days), her period of nonqualified use was 668 days. Tax deductions for college students Because the gain attributable to periods of nonqualified use is $60,990, Amy can exclude $129,010 of her gain, as shown on Worksheet 2. Tax deductions for college students Example 2. Tax deductions for college students William owned and used a house as his main home from 2007 through 2010. Tax deductions for college students On January 1, 2011, he moved to another state. Tax deductions for college students He rented his house from that date until April 30, 2013, when he sold it. Tax deductions for college students During the 5-year period ending on the date of sale (May 1, 2008-April 30, 2013), William owned and lived in the house for more than 2 years. Tax deductions for college students Because it was rental property at the time of the sale, he must report the sale on Form 4797. Tax deductions for college students Because the period of nonqualified use does not include any part of the 5-year period after the last date William lived in the house, he has no period of nonqualified use. Tax deductions for college students Because he met the ownership and use tests, he can exclude gain up to $250,000. Tax deductions for college students However, he cannot exclude the part of the gain equal to the depreciation he claimed or could have claimed for renting the house, as explained next. Tax deductions for college students Depreciation after May 6, 1997. Tax deductions for college students   If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. Tax deductions for college students If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, then you may limit the amount of gain recognized to the depreciation allowed. Tax deductions for college students Unrecaptured section 1250 gain. Tax deductions for college students   This is the part of any long-term capital gain from the sale of your home that is due to depreciation and cannot be excluded. Tax deductions for college students To figure the amount of unrecaptured section 1250 gain to be reported on Schedule D (Form 1040), you must also take into account certain gains or losses from the sale of property other than your home. Tax deductions for college students Use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions for this purpose. Tax deductions for college students Worksheet 2. Tax deductions for college students Taxable Gain on Sale of Home—Completed Example 1 for Amy Part 1. Tax deductions for college students Gain or (Loss) on Sale       1. Tax deductions for college students   Selling price of home 1. Tax deductions for college students     2. Tax deductions for college students   Selling expenses (including commissions, advertising and legal fees, and seller-paid loan charges) 2. Tax deductions for college students     3. Tax deductions for college students   Subtract line 2 from line 1. Tax deductions for college students This is the amount realized 3. Tax deductions for college students     4. Tax deductions for college students   Adjusted basis of home sold (from Worksheet 1, line 13) 4. Tax deductions for college students     5. Tax deductions for college students   Gain or (loss) on the sale. Tax deductions for college students Subtract line 4 from line 3. Tax deductions for college students If this is a loss, stop here 5. Tax deductions for college students 200,000   Part 2. Tax deductions for college students Exclusion and Taxable Gain       6. Tax deductions for college students   Enter any depreciation allowed or allowable on the property for periods after May 6, 1997. Tax deductions for college students If none, enter -0- 6. Tax deductions for college students 10,000   7. Tax deductions for college students   Subtract line 6 from line 5. Tax deductions for college students If the result is less than zero, enter -0- 7. Tax deductions for college students 190,000   8. Tax deductions for college students   Aggregate number of days of nonqualified use after 2008. Tax deductions for college students If none, enter -0-. Tax deductions for college students  If line 8 is equal to zero, skip to line 12 and enter the amount from line 7 on line 12 8. Tax deductions for college students 668   9. Tax deductions for college students   Number of days taxpayer owned the property 9. Tax deductions for college students 2,080   10. Tax deductions for college students   Divide the amount on line 8 by the amount on line 9. Tax deductions for college students Enter the result as a decimal (rounded to at least 3 places). Tax deductions for college students But do not enter an amount greater than 1. Tax deductions for college students 00 10. Tax deductions for college students 0. Tax deductions for college students 321   11. Tax deductions for college students   Gain allocated to nonqualified use. Tax deductions for college students (Line 7 multiplied by line 10) 11. Tax deductions for college students 60,990   12. Tax deductions for college students   Gain eligible for exclusion. Tax deductions for college students Subtract line 11 from line 7 12. Tax deductions for college students 129,010   13. Tax deductions for college students   If you qualify to exclude gain on the sale, enter your maximum exclusion (see Maximum Exclusion ). Tax deductions for college students  If you qualify for a reduced maximum exclusion, enter the amount from Worksheet 3, line 7. Tax deductions for college students If you do  not qualify to exclude gain, enter -0- 13. Tax deductions for college students 250,000   14. Tax deductions for college students   Exclusion. Tax deductions for college students Enter the smaller of line 12 or line 13 14. Tax deductions for college students 129,010   15. Tax deductions for college students   Taxable gain. Tax deductions for college students Subtract line 14 from line 5. Tax deductions for college students Report your taxable gain as described under Reporting the Sale . Tax deductions for college students If the amount on line 6 is more than zero, complete line 16 15. Tax deductions for college students 70,990   16. Tax deductions for college students   Enter the smaller of line 6 or line 15. Tax deductions for college students Enter this amount on line 12 of the Unrecaptured Section 1250 Gain  Worksheet in the instructions for Schedule D (Form 1040) 16. Tax deductions for college students 10,000 Property Used Partly for Business or Rental If you use property partly as a home and partly for business or to produce rental income, the treatment of any gain on the sale depends partly on whether the business or rental part of the property is part of your home or separate from it. Tax deductions for college students Part of Home Used for Business or Rental If the part of your property used for business or to produce rental income is within your home, such as a room used as a home office for a business, you do not need to allocate gain on the sale of the property between the business part of the property and the part used as a home. Tax deductions for college students In addition, you do not need to report the sale of the business or rental part on Form 4797. Tax deductions for college students This is true whether or not you were entitled to claim any depreciation. Tax deductions for college students However, you cannot exclude the part of any gain equal to any depreciation allowed or allowable after May 6, 1997. Tax deductions for college students See Depreciation after May 6, 1997, earlier. Tax deductions for college students Example 1. Tax deductions for college students Ray sold his main home in 2013 at a $30,000 gain. Tax deductions for college students He has no gains or losses from the sale of property other than the gain from the sale of his home. Tax deductions for college students He meets the ownership and use tests to exclude the gain from his income. Tax deductions for college students However, he used part of the home as a business office in 2012 and claimed $500 depreciation. Tax deductions for college students Because the business office was part of his home (not separate from it), he does not have to allocate the gain on the sale between the business part of the property and the part used as a home. Tax deductions for college students In addition, he does not have to report any part of the gain on Form 4797. Tax deductions for college students Because Ray was entitled to take a depreciation deduction, he must recognize $500 of the gain as unrecaptured section 1250 gain. Tax deductions for college students He reports his gain, exclusion, and the taxable gain of $500 on Form 8949 and Schedule D (Form 1040). Tax deductions for college students Example 2. Tax deductions for college students The facts are the same as in Example 1 except that Ray was not entitled to claim depreciation for the business use of his home. Tax deductions for college students Since Ray did not claim any depreciation, he can exclude the entire $30,000 gain. Tax deductions for college students Separate Part of Property Used for Business or Rental You may have used part of your property as your home and a separate part of it for business or to produce rental income. Tax deductions for college students Examples are: A working farm on which your house was located, A duplex in w