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1040x 2012 Form

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1040x 2012 Form

1040x 2012 form 8. 1040x 2012 form   Qualified Tuition Program (QTP) Table of Contents Introduction What Is a Qualified Tuition ProgramDesignated beneficiary. 1040x 2012 form Half-time student. 1040x 2012 form How Much Can You Contribute Are Distributions TaxableFiguring the Taxable Portion of a Distribution Additional Tax on Taxable Distributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Introduction Qualified tuition programs (QTPs) are also called “529 plans. 1040x 2012 form ” States may establish and maintain programs that allow you to either prepay or contribute to an account for paying a student's qualified education expenses at a postsecondary institution. 1040x 2012 form Eligible educational institutions may establish and maintain programs that allow you to prepay a student's qualified education expenses. 1040x 2012 form If you prepay tuition, the student (designated beneficiary) will be entitled to a waiver or a payment of qualified education expenses. 1040x 2012 form You cannot deduct either payments or contributions to a QTP. 1040x 2012 form For information on a specific QTP, you will need to contact the state agency or eligible educational institution that established and maintains it. 1040x 2012 form What is the tax benefit of a QTP. 1040x 2012 form   No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses. 1040x 2012 form See Are Distributions Taxable , later, for more information. 1040x 2012 form    Even if a QTP is used to finance a student's education, the student or the student's parents still may be eligible to claim the American opportunity credit or the lifetime learning credit. 1040x 2012 form See Coordination With American Opportunity and Lifetime Learning Credits, later. 1040x 2012 form What Is a Qualified Tuition Program A qualified tuition program is a program set up to allow you to either prepay, or contribute to an account established for paying, a student's qualified education expenses at an eligible educational institution. 1040x 2012 form QTPs can be established and maintained by states (or agencies or instrumentalities of a state) and eligible educational institutions. 1040x 2012 form The program must meet certain requirements. 1040x 2012 form Your state government or the eligible educational institution in which you are interested can tell you whether or not they participate in a QTP. 1040x 2012 form Qualified education expenses. 1040x 2012 form   These are expenses related to enrollment or attendance at an Eligible educational institution (defined later). 1040x 2012 form As shown in the following list, to be qualified, some of the expenses must be required by the institution and some must be incurred by students who are enrolled at least half-time. 1040x 2012 form See Half-time student , later. 1040x 2012 form The following expenses must be required for enrollment or attendance of a Designated beneficiary (defined later) at an eligible educational institution. 1040x 2012 form Tuition and fees. 1040x 2012 form Books, supplies, and equipment. 1040x 2012 form Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible educational institution. 1040x 2012 form Expenses for room and board must be incurred by students who are enrolled at least half-time. 1040x 2012 form The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. 1040x 2012 form The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. 1040x 2012 form The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. 1040x 2012 form You will need to contact the eligible educational institution for qualified room and board costs. 1040x 2012 form    For tax years after 2010, the purchase of computer technology or equipment is only a qualified education expense if the computer technology or equipment is required for enrollment or attendance at an eligible institution. 1040x 2012 form Designated beneficiary. 1040x 2012 form   The designated beneficiary is generally the student (or future student) for whom the QTP is intended to provide benefits. 1040x 2012 form The designated beneficiary can be changed after participation in the QTP begins. 1040x 2012 form If a state or local government or certain tax-exempt organizations purchase an interest in a QTP as part of a scholarship program, the designated beneficiary is the person who receives the interest as a scholarship. 1040x 2012 form Half-time student. 1040x 2012 form   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic workload for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. 1040x 2012 form Eligible educational institution. 1040x 2012 form   For purposes of a QTP, this is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. 1040x 2012 form S. 1040x 2012 form Department of Education. 1040x 2012 form It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. 1040x 2012 form The educational institution should be able to tell you if it is an eligible educational institution. 1040x 2012 form   Certain educational institutions located outside the United States also participate in the U. 1040x 2012 form S. 1040x 2012 form Department of Education's Federal Student Aid (FSA) programs. 1040x 2012 form   How Much Can You Contribute Contributions to a QTP on behalf of any beneficiary cannot be more than the amount necessary to provide for the qualified education expenses of the beneficiary. 1040x 2012 form There are no income restrictions on the individual contributors. 1040x 2012 form You can contribute to both a QTP and a Coverdell ESA in the same year for the same designated beneficiary. 1040x 2012 form   Are Distributions Taxable The part of a distribution representing the amount paid or contributed to a QTP does not have to be included in income. 1040x 2012 form This is a return of the investment in the plan. 1040x 2012 form The designated beneficiary generally does not have to include in income any earnings distributed from a QTP if the total distribution is less than or equal to adjusted qualified education expenses (defined under Figuring the Taxable Portion of a Distribution , later). 1040x 2012 form Earnings and return of investment. 1040x 2012 form    You will receive a Form 1099-Q, from each of the programs from which you received a QTP distribution in 2013. 1040x 2012 form The amount of your gross distribution (box 1) shown on each form will be divided between your earnings (box 2) and your basis, or return of investment (box 3). 1040x 2012 form Form 1099-Q should be sent to you by January 31, 2014. 1040x 2012 form Figuring the Taxable Portion of a Distribution To determine if total distributions for the year are more or less than the amount of qualified education expenses, you must compare the total of all QTP distributions for the tax year to the adjusted qualified education expenses. 1040x 2012 form Adjusted qualified education expenses. 1040x 2012 form   This amount is the total qualified education expenses reduced by any tax-free educational assistance. 1040x 2012 form Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits 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), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. 1040x 2012 form Taxable earnings. 1040x 2012 form   Use the following steps to figure the taxable part. 1040x 2012 form Multiply the total distributed earnings shown in box 2 of Form 1099-Q by a fraction. 1040x 2012 form The numerator is the adjusted qualified education expenses paid during the year and the denominator is the total amount distributed during the year. 1040x 2012 form Subtract the amount figured in (1) from the total distributed earnings. 1040x 2012 form The result is the amount the beneficiary must include in income. 1040x 2012 form Report it on Form 1040 or Form 1040NR, line 21. 1040x 2012 form Example 1. 1040x 2012 form In 2007, Sara Clarke's parents opened a savings account for her with a QTP maintained by their state government. 1040x 2012 form Over the years they contributed $18,000 to the account. 1040x 2012 form The total balance in the account was $27,000 on the date the distribution was made. 1040x 2012 form In the summer of 2013, Sara enrolled in college and had $8,300 of qualified education expenses for the rest of the year. 1040x 2012 form She paid her college expenses from the following sources. 1040x 2012 form   Gift from parents $1,600     Partial tuition scholarship (tax-free) 3,100     QTP distribution 5,300           Before Sara can determine the taxable part of her QTP distribution, she must reduce her total qualified education expenses by any tax-free educational assistance. 1040x 2012 form   Total qualified education expenses $8,300     Minus: Tax-free educational assistance −3,100     Equals: Adjusted qualified  education expenses (AQEE) $5,200   Since the remaining expenses ($5,200) are less than the QTP distribution, part of the earnings will be taxable. 1040x 2012 form Sara's Form 1099-Q shows that $950 of the QTP distribution is earnings. 1040x 2012 form Sara figures the taxable part of the distributed earnings as follows. 1040x 2012 form   1. 1040x 2012 form $950 (earnings) × $5,200 AQEE  $5,300 distribution           =$932 (tax-free earnings)     2. 1040x 2012 form $950 (earnings)−$932 (tax-free earnings)     =$18 (taxable earnings)  Sara must include $18 in income (Form 1040, line 21) as distributed QTP earnings not used for adjusted qualified education expenses. 1040x 2012 form Coordination With American Opportunity and Lifetime Learning Credits An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. 1040x 2012 form This means that after the beneficiary reduces qualified education expenses by tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit. 1040x 2012 form Example 2. 1040x 2012 form Assume the same facts as in Example 1 , except that Sara's parents claimed an American opportunity credit of $2,500 (based on $4,000 expenses). 1040x 2012 form   Total qualified education expenses $8,300     Minus: Tax-free educational assistance −3,100     Minus: Expenses taken into account  in figuring American opportunity credit −4,000     Equals: Adjusted qualified  education expenses (AQEE) $1,200           The taxable part of the distribution is figured as follows. 1040x 2012 form   1. 1040x 2012 form $950 (earnings) × $1,200 AQEE  $5,300 distribution           =$215 (tax-free earnings)     2. 1040x 2012 form $950 (earnings)−$215 (tax-free earnings)     =$735 (taxable earnings)       Sara must include $735 in income (Form 1040, line 21). 1040x 2012 form This represents distributed earnings not used for adjusted qualified education expenses. 1040x 2012 form Coordination With Coverdell ESA Distributions If a designated beneficiary receives distributions from both a QTP and a Coverdell ESA in the same year, and the total of these distributions is more than the beneficiary's adjusted qualified higher education expenses, the expenses must be allocated between the distributions. 1040x 2012 form For purposes of this allocation, disregard any qualified elementary and secondary education expenses. 1040x 2012 form Example 3. 1040x 2012 form Assume the same facts as in Example 2 , except that instead of receiving a $5,300 distribution from her QTP, Sara received $4,600 from that account and $700 from her Coverdell ESA. 1040x 2012 form In this case, Sara must allocate her $1,200 of adjusted qualified higher education expenses (AQHEE) between the two distributions. 1040x 2012 form   $1,200 AQHEE × $700 ESA distribution  $5,300 total distribution = $158 AQHEE (ESA)     $1,200 AQHEE × $4,600 QTP distribution  $5,300 total distribution = $1,042 AQHEE (QTP)   Sara then figures the taxable portion of her Coverdell ESA distribution based on qualified higher education expenses of $158, and the taxable portion of her QTP distribution based on the other $1,042. 1040x 2012 form Note. 1040x 2012 form If you are required to allocate your expenses between Coverdell ESA and QTP distributions, and you have adjusted qualified elementary and secondary education expenses, see the examples in chapter 7, Coverdell Education Savings Account under Coordination With Qualified Tuition Program (QTP) Distributions . 1040x 2012 form Coordination With Tuition and Fees Deduction. 1040x 2012 form   A tuition and fees deduction can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. 1040x 2012 form Losses on QTP Investments If you have a loss on your investment in a QTP account, you may be able to take the loss on your income tax return. 1040x 2012 form You can take the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. 1040x 2012 form Your basis is the total amount of contributions to that QTP account. 1040x 2012 form You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. 1040x 2012 form If you have distributions from more than one QTP account during a year, you must combine the information (amount of distribution, basis, etc. 1040x 2012 form ) from all such accounts in order to determine your taxable earnings for the year. 1040x 2012 form By doing this, the loss from one QTP account reduces the distributed earnings (if any) from any other QTP accounts. 1040x 2012 form Example 1. 1040x 2012 form In 2013, Taylor received a final distribution of $1,000 from QTP #1. 1040x 2012 form His unrecovered basis in that account before the distribution was $3,000. 1040x 2012 form If Taylor itemizes his deductions, he can claim the $2,000 loss on Schedule A (Form 1040). 1040x 2012 form Example 2. 1040x 2012 form Assume the same facts as in Example 1 , except that Taylor also had a distribution of $9,000 from QTP #2, giving him total distributions for 2013 of $10,000. 1040x 2012 form His total basis in these distributions was $4,500 ($3,000 for QTP #1 and $1,500 for QTP #2). 1040x 2012 form Taylor's adjusted qualified education expenses for 2013 totaled $6,000. 1040x 2012 form In order to figure his taxable earnings, Taylor combines the two accounts and determines his taxable earnings as follows. 1040x 2012 form   1. 1040x 2012 form $10,000 (total distribution)−$4,500 (basis portion of distribution)     = $5,500 (earnings included in distribution)   2. 1040x 2012 form $5,500 (earnings) x $6,000 AQEE  $10,000 distribution           =$3,300 (tax-free earnings)     3. 1040x 2012 form $5,500 (earnings)−$3,300 (tax-free earnings)     =$2,200 (taxable earnings)                 Taylor must include $2,200 in income on Form 1040, line 21. 1040x 2012 form Because Taylor's accounts must be combined, he cannot deduct his $2,000 loss (QTP #1) on Schedule A (Form 1040). 1040x 2012 form Instead, the $2,000 loss reduces the total earnings that were distributed, thereby reducing his taxable earnings. 1040x 2012 form Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. 1040x 2012 form Exceptions. 1040x 2012 form   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. 1040x 2012 form Made because the designated beneficiary is disabled. 1040x 2012 form A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. 1040x 2012 form A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. 1040x 2012 form Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. 1040x 2012 form Made on account of the attendance of the designated beneficiary at a U. 1040x 2012 form S. 1040x 2012 form military academy (such as the USNA at Annapolis). 1040x 2012 form This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. 1040x 2012 form S. 1040x 2012 form Code) attributable to such attendance. 1040x 2012 form Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier. 1040x 2012 form ) Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. 1040x 2012 form Figuring the additional tax. 1040x 2012 form    Use Part II of Form 5329, to figure any additional tax. 1040x 2012 form Report the amount on Form 1040, line 58, or Form 1040NR, line 56. 1040x 2012 form Rollovers and Other Transfers Assets can be rolled over or transferred from one QTP to another. 1040x 2012 form In addition, the designated beneficiary can be changed without transferring accounts. 1040x 2012 form Rollovers Any amount distributed from a QTP is not taxable if it is rolled over to another QTP for the benefit of the same beneficiary or for the benefit of a member of the beneficiary's family (including the beneficiary's spouse). 1040x 2012 form An amount is rolled over if it is paid to another QTP within 60 days after the date of the distribution. 1040x 2012 form Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. 1040x 2012 form These are not taxable distributions. 1040x 2012 form Members of the beneficiary's family. 1040x 2012 form   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. 1040x 2012 form Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. 1040x 2012 form Brother, sister, stepbrother, or stepsister. 1040x 2012 form Father or mother or ancestor of either. 1040x 2012 form Stepfather or stepmother. 1040x 2012 form Son or daughter of a brother or sister. 1040x 2012 form Brother or sister of father or mother. 1040x 2012 form Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. 1040x 2012 form The spouse of any individual listed above. 1040x 2012 form First cousin. 1040x 2012 form Example. 1040x 2012 form When Aaron graduated from college last year he had $5,000 left in his QTP. 1040x 2012 form He wanted to give this money to his younger brother, who was in junior high school. 1040x 2012 form In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his brother's QTP within 60 days of the distribution. 1040x 2012 form If the rollover is to another QTP for the same beneficiary, only one rollover is allowed within 12 months of a previous transfer to any QTP for that designated beneficiary. 1040x 2012 form Changing the Designated Beneficiary There are no income tax consequences if the designated beneficiary of an account is changed to a member of the beneficiary's family. 1040x 2012 form See Members of the beneficiary's family , earlier. 1040x 2012 form Example. 1040x 2012 form Assume the same situation as in the last example. 1040x 2012 form Instead of closing his QTP and paying the distribution into his brother's QTP, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his brother. 1040x 2012 form Prev  Up  Next   Home   More Online Publications
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The 1040x 2012 Form

1040x 2012 form 5. 1040x 2012 form   Soil and Water Conservation Expenses Table of Contents Introduction Topics - This chapter discusses: Business of Farming Plan Certification Conservation ExpensesWater well. 1040x 2012 form Assessment by Conservation DistrictAssessment for Depreciable Property 25% Limit on DeductionNet operating loss. 1040x 2012 form When to Deduct or Capitalize Sale of a Farm Introduction If you are in the business of farming, you can choose to deduct certain expenses for: Soil or water conservation, Prevention of erosion of land used in farming, or Endangered species recovery. 1040x 2012 form Otherwise, these are capital expenses that must be added to the basis of the land. 1040x 2012 form (See chapter 6 for information on determining basis. 1040x 2012 form ) Conservation expenses for land in a foreign country do not qualify for this special treatment. 1040x 2012 form The deduction for conservation expenses cannot be more than 25% of your gross income from farming. 1040x 2012 form See 25% Limit on Deduction , later. 1040x 2012 form Although some expenses are not deductible as soil and water conservation expenses, they may be deductible as ordinary and necessary farm expenses. 1040x 2012 form These include interest and taxes, the cost of periodically clearing brush from productive land, the regular removal of sediment from a drainage ditch, and expenses paid or incurred primarily to produce an agricultural crop that may also conserve soil. 1040x 2012 form You must include in income most government payments for approved conservation practices. 1040x 2012 form However, you can exclude some payments you receive under certain cost-sharing conservation programs. 1040x 2012 form For more information, see Agricultural Program Payments in chapter 3. 1040x 2012 form To get the full deduction to which you are entitled, you should maintain your records to clearly distinguish between your ordinary and necessary farm business expenses and your soil and water conservation expenses. 1040x 2012 form Topics - This chapter discusses: Business of farming Plan certification Conservation expenses Assessment by conservation district 25% limit on deduction When to deduct or capitalize Sale of a farm Business of Farming For purposes of soil and water conservation expenses, you are in the business of farming if you cultivate, operate, or manage a farm for profit, either as an owner or a tenant. 1040x 2012 form You are not in the business of farming if you cultivate or operate a farm for recreation or pleasure, rather than for profit. 1040x 2012 form You are not farming if you are engaged only in forestry or the growing of timber. 1040x 2012 form Farm defined. 1040x 2012 form   A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. 1040x 2012 form It also includes plantations, ranches, ranges, and orchards. 1040x 2012 form A fish farm is an area where fish and other marine animals are grown or raised and artificially fed, protected, etc. 1040x 2012 form It does not include an area where they are merely caught or harvested. 1040x 2012 form A plant nursery is a farm for purposes of deducting soil and water conservation expenses. 1040x 2012 form Farm rental. 1040x 2012 form   If you own a farm and receive farm rental payments based on farm production, either in cash or crop shares, you are in the business of farming. 1040x 2012 form If you get cash rental for a farm you own that is not used in farm production, you cannot deduct soil and water conservation expenses for that farm. 1040x 2012 form   If you receive a fixed rental payment that is not based on farm production, you are in the business of farming only if you materially participate in operating or managing the farm. 1040x 2012 form Example. 1040x 2012 form You own a farm in Iowa and live in California. 1040x 2012 form You rent the farm for $175 in cash per acre and do not materially participate in producing or managing production of the crops grown on the farm. 1040x 2012 form You cannot deduct your soil conservation expenses for this farm. 1040x 2012 form You must capitalize the expenses and add them to the basis of the land. 1040x 2012 form     For more information, see Material participation for landlords under Landlord Participation in Farming in chapter 12. 1040x 2012 form Plan Certification You can deduct soil and water conservation expenses only if they are consistent with a plan approved by the Natural Resources Conservation Service (NRCS) of the Department of Agriculture. 1040x 2012 form If no such plan exists, the expenses must be consistent with a soil conservation plan of a comparable state agency. 1040x 2012 form Keep a copy of the plan with your books and records to support your deductions. 1040x 2012 form Conservation plan. 1040x 2012 form   A conservation plan includes the farming conservation practices approved for the area where your farmland is located. 1040x 2012 form There are three types of approved plans. 1040x 2012 form NRCS individual site plans. 1040x 2012 form These plans are issued individually to farmers who request assistance from NRCS to develop a conservation plan designed specifically for their farmland. 1040x 2012 form NRCS county plans. 1040x 2012 form These plans include a listing of farm conservation practices approved for the county where the farmland is located. 1040x 2012 form You can deduct expenses for conservation practices not included on the NRCS county plans only if the practice is a part of an individual site plan. 1040x 2012 form Comparable state agency plans. 1040x 2012 form These plans are approved by state agencies and can be approved individual site plans or county plans. 1040x 2012 form   A list of NRCS conservation programs is available at www. 1040x 2012 form nrcs. 1040x 2012 form usda. 1040x 2012 form gov/programs. 1040x 2012 form Individual site plans can be obtained from NRCS offices and the comparable state agencies. 1040x 2012 form Conservation Expenses You can deduct conservation expenses only for land you or your tenant are using, or have used in the past, for farming. 1040x 2012 form These expenses include, but are not limited to, the following. 1040x 2012 form The treatment or movement of earth, such as: Leveling, Conditioning, Grading, Terracing, Contour furrowing, and Restoration of soil fertility. 1040x 2012 form The construction, control, and protection of: Diversion channels, Drainage ditches, Irrigation ditches, Earthen dams, and Watercourses, outlets, and ponds. 1040x 2012 form The eradication of brush. 1040x 2012 form The planting of windbreaks. 1040x 2012 form You cannot deduct expenses to drain or fill wetlands, or to prepare land for center pivot irrigation systems, as soil and water conservation expenses. 1040x 2012 form These expenses are added to the basis of the land. 1040x 2012 form If you choose to deduct soil and water conservation expenses, you cannot exclude from gross income any cost-sharing payments you receive for those expenses. 1040x 2012 form See chapter 3 for information about payments eligible for the cost-sharing exclusion. 1040x 2012 form New farm or farmland. 1040x 2012 form   If you acquire a new farm or new farmland from someone who was using it in farming immediately before you acquired the land, soil and water conservation expenses you incur on it will be treated as made on land used in farming at the time the expenses were paid or incurred. 1040x 2012 form You can deduct soil and water conservation expenses for this land if your use of it is substantially a continuation of its use in farming. 1040x 2012 form The new farming activity does not have to be the same as the old farming activity. 1040x 2012 form For example, if you buy land that was used for grazing cattle and then prepare it for use as an apple orchard, you can deduct your conservation expenses. 1040x 2012 form Land not used for farming. 1040x 2012 form   If your conservation expenses benefit both land that does not qualify as land used for farming and land that does qualify, you must allocate the expenses between the two types of land. 1040x 2012 form For example, if the expenses benefit 200 acres of your land, but only 120 acres of this land are used for farming, then you can deduct 60% (120 ÷ 200) of the expenses. 1040x 2012 form You can use another method to allocate these expenses if you can clearly show that your method is more reasonable. 1040x 2012 form Depreciable conservation assets. 1040x 2012 form   You generally cannot deduct your expenses for depreciable conservation assets. 1040x 2012 form However, you can deduct certain amounts you pay or incur for an assessment for depreciable property that a soil and water conservation or drainage district levies against your farm. 1040x 2012 form See Assessment for Depreciable Property , later. 1040x 2012 form   You must capitalize expenses to buy, build, install, or improve depreciable structures or facilities. 1040x 2012 form These expenses include those for materials, supplies, wages, fuel, hauling, and moving dirt when making structures such as tanks, reservoirs, pipes, culverts, canals, dams, wells, or pumps composed of masonry, concrete, tile, metal, or wood. 1040x 2012 form You recover your capital investment through annual allowances for depreciation. 1040x 2012 form   You can deduct soil and water conservation expenses for nondepreciable earthen items. 1040x 2012 form Nondepreciable earthen items include certain dams, ponds, and terraces described under Property Having a Determinable Useful Life in chapter 7. 1040x 2012 form Water well. 1040x 2012 form   You cannot deduct the cost of drilling a water well for irrigation and other agricultural purposes as a soil and water conservation expense. 1040x 2012 form It is a capital expense. 1040x 2012 form You recover your cost through depreciation. 1040x 2012 form You also must capitalize your cost for drilling a test hole. 1040x 2012 form If the test hole produces no water and you continue drilling, the cost of the test hole is added to the cost of the producing well. 1040x 2012 form You can recover the total cost through depreciation deductions. 1040x 2012 form   If a test hole, dry hole, or dried-up well (resulting from prolonged lack of rain, for instance) is abandoned, you can deduct your unrecovered cost in the year of abandonment. 1040x 2012 form Abandonment means that all economic benefits from the well are terminated. 1040x 2012 form For example, filling or sealing a well excavation or casing so that all economic benefits from the well are terminated constitutes an abandonment. 1040x 2012 form Endangered species recovery expenses. 1040x 2012 form   If you are in the business of farming and meet other specific requirements, you can choose to deduct the conservation expenses discussed earlier as endangered species recovery expenses. 1040x 2012 form Otherwise, these are capital expenses that must be added to the basis of the land. 1040x 2012 form   The expenses must be paid or incurred for the purpose of achieving site-specific management actions recommended in a recovery plan approved under section 4(f) of the Endangered Species Act of 1973. 1040x 2012 form See Internal Revenue Code section 175 for more information. 1040x 2012 form Assessment by Conservation District In some localities, a soil or water conservation or drainage district incurs expenses for soil or water conservation and levies an assessment against the farmers who benefit from the expenses. 1040x 2012 form You can deduct as a conservation expense amounts you pay or incur for the part of an assessment that: Covers expenses you could deduct if you had paid them directly, or Covers expenses for depreciable property used in the district's business. 1040x 2012 form Assessment for Depreciable Property You generally can deduct as a conservation expense amounts you pay or incur for the part of a conservation or drainage district assessment that covers expenses for depreciable property. 1040x 2012 form This includes items such as pumps, locks, concrete structures (including dams and weir gates), draglines, and similar equipment. 1040x 2012 form The depreciable property must be used in the district's soil and water conservation activities. 1040x 2012 form However, the following limits apply to these assessments. 1040x 2012 form The total assessment limit. 1040x 2012 form The yearly assessment limit. 1040x 2012 form After you apply these limits, the amount you can deduct is added to your other conservation expenses for the year. 1040x 2012 form The total for these expenses is then subject to the 25% of gross income from farming limit on the deduction, discussed later. 1040x 2012 form See Table 5-1 for a brief summary of these limits. 1040x 2012 form Table 5-1. 1040x 2012 form Limits on Deducting an Assessment by a Conservation District for Depreciable Property Total Limit on Deduction for Assessment for Depreciable Property Yearly Limit on Deduction for Assessment for Depreciable Property Yearly Limit for All Conservation Expenses 10% of: $500 + 10% of: 25% of: Total assessment against all members of the district for the property. 1040x 2012 form Your deductible share of the cost to the district for the property. 1040x 2012 form Your gross income from farming. 1040x 2012 form No one taxpayer can deduct more than 10% of the total assessment. 1040x 2012 form Any amount over 10% is a capital expense and is added to the basis of your land. 1040x 2012 form If an assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. 1040x 2012 form If the amount you pay or incur for any year is more than the limit, you can deduct for that year only 10% of your deductible share of the cost. 1040x 2012 form You can deduct the remainder in equal amounts over the next 9 tax years. 1040x 2012 form Limit for all conservation expenses, including assessments for depreciable property. 1040x 2012 form Amounts greater than 25% can be carried to the following year and added to that year's expenses. 1040x 2012 form The total is then subject to the 25% of gross income from farming limit in that year. 1040x 2012 form To ensure your deduction is within the deduction limits, keep records to show the following. 1040x 2012 form The total assessment against all members of the district for the depreciable property. 1040x 2012 form Your deductible share of the cost to the district for the depreciable property. 1040x 2012 form Your gross income from farming. 1040x 2012 form Total assessment limit. 1040x 2012 form   You cannot deduct more than 10% of the total amount assessed to all members of the conservation or drainage district for the depreciable property. 1040x 2012 form This applies whether you pay the assessment in one payment or in installments. 1040x 2012 form If your assessment is more than 10% of the total amount assessed, both the following rules apply. 1040x 2012 form The amount over 10% is a capital expense and is added to the basis of your land. 1040x 2012 form If the assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. 1040x 2012 form Yearly assessment limit. 1040x 2012 form   The maximum amount you can deduct in any one year is the total of 10% of your deductible share of the cost as explained earlier, plus $500. 1040x 2012 form If the amount you pay or incur is equal to or less than the maximum amount, you can deduct it in the year it is paid or incurred. 1040x 2012 form If the amount you pay or incur is more, you can deduct in that year only 10% of your deductible share of the cost. 1040x 2012 form You can deduct the remainder in equal amounts over the next 9 tax years. 1040x 2012 form Your total conservation expense deduction for each year is also subject to the 25% of gross income from farming limit on the deduction, discussed later. 1040x 2012 form Example 1. 1040x 2012 form This year, the soil conservation district levies and you pay an assessment of $2,400 against your farm. 1040x 2012 form Of the assessment, $1,500 is for digging drainage ditches. 1040x 2012 form You can deduct this part as a soil or conservation expense as if you had paid it directly. 1040x 2012 form The remaining $900 is for depreciable equipment to be used in the district's irrigation activities. 1040x 2012 form The total amount assessed by the district against all its members for the depreciable equipment is $7,000. 1040x 2012 form The total amount you can deduct for the depreciable equipment is limited to 10% of the total amount assessed by the district against all its members for depreciable equipment, or $700. 1040x 2012 form The $200 excess ($900 − $700) is a capital expense you must add to the basis of your farm. 1040x 2012 form To figure the maximum amount you can deduct for the depreciable equipment this year, multiply your deductible share of the total assessment ($700) by 10%. 1040x 2012 form Add $500 to the result for a total of $570. 1040x 2012 form Your deductible share, $700, is greater than the maximum amount deductible in one year, so you can deduct only $70 of the amount you paid or incurred for depreciable property this year (10% of $700). 1040x 2012 form You can deduct the balance at the rate of $70 a year over the next 9 years. 1040x 2012 form You add $70 to the $1,500 portion of the assessment for drainage ditches. 1040x 2012 form You can deduct $1,570 of the $2,400 assessment as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on the deduction, discussed later. 1040x 2012 form Example 2. 1040x 2012 form Assume the same facts in Example 1 except that $1,850 of the $2,400 assessment is for digging drainage ditches and $550 is for depreciable equipment. 1040x 2012 form The total amount assessed by the district against all its members for depreciable equipment is $5,500. 1040x 2012 form The total amount you can deduct for the depreciable equipment is limited to 10% of this amount, or $550. 1040x 2012 form The maximum amount you can deduct this year for the depreciable equipment is $555 (10% of your deductible share of the total assessment, $55, plus $500). 1040x 2012 form Since your deductible share is less than the maximum amount deductible in one year, you can deduct the entire $550 this year. 1040x 2012 form You can deduct the entire assessment, $2,400, as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on the deduction, discussed below. 1040x 2012 form Sale or other disposal of land during 9-year period. 1040x 2012 form   If you dispose of the land during the 9-year period for deducting conservation expenses subject to the yearly limit, any amounts you have not yet deducted because of this limit are added to the basis of the property. 1040x 2012 form Death of farmer during 9-year period. 1040x 2012 form   If a farmer dies during the 9-year period, any remaining amounts not yet deducted are deducted in the year of death. 1040x 2012 form 25% Limit on Deduction The total deduction for conservation expenses in any tax year is limited to 25% of your gross income from farming for the year. 1040x 2012 form Gross income from farming. 1040x 2012 form   Gross income from farming is the income you derive in the business of farming from the production of crops, fish, fruits, other agricultural products, or livestock. 1040x 2012 form Gains from sales of draft, breeding, or dairy livestock are included. 1040x 2012 form Gains from sales of assets such as farm machinery, or from the disposition of land, are not included. 1040x 2012 form Carryover of deduction. 1040x 2012 form   If your deductible conservation expenses in any year are more than 25% of your gross income from farming for that year, you can carry the unused deduction over to later years. 1040x 2012 form However, the deduction in any later year is limited to 25% of the gross income from farming for that year as well. 1040x 2012 form Example. 1040x 2012 form In 2012, you have gross income of $32,000 from two farms. 1040x 2012 form During the year, you incurred $10,000 of deductible soil and water conservation expenses for one of the farms. 1040x 2012 form However, your deduction is limited to 25% of $32,000, or $8,000. 1040x 2012 form The $2,000 excess ($10,000 − $8,000) is carried over to 2013 and added to deductible soil and water conservation expenses made in that year. 1040x 2012 form The total of the 2012 carryover plus 2013 expenses is deductible in 2013, subject to the limit of 25% of your gross income from farming in 2013. 1040x 2012 form Any expenses over the limit in that year are carried to 2014 and later years. 1040x 2012 form Net operating loss. 1040x 2012 form   The deduction for soil and water conservation expenses, after applying the 25% limit, is included when figuring a net operating loss (NOL) for the year. 1040x 2012 form If the NOL is carried to another year, the soil and water conservation deduction included in the NOL is not subject to the 25% limit in the year to which it is carried. 1040x 2012 form When to Deduct or Capitalize If you choose to deduct soil and water conservation expenses, you must deduct the total allowable amount on your tax return for the first year you pay or incur these expenses. 1040x 2012 form If you do not choose to deduct the expenses, you must capitalize them. 1040x 2012 form Change of method. 1040x 2012 form   If you want to change your method for the treatment of soil and water conservation expenses, or you want to treat the expenses for a particular project or a single farm in a different manner, you must get the approval of the IRS. 1040x 2012 form To get this approval, submit a written request by the due date of your return for the first tax year you want the new method to apply. 1040x 2012 form You or your authorized representative must sign the request. 1040x 2012 form   The request must include the following information. 1040x 2012 form Your name and address. 1040x 2012 form The first tax year the method or change of method is to apply. 1040x 2012 form Whether the method or change of method applies to all your soil and water conservation expenses or only to those for a particular project or farm. 1040x 2012 form If the method or change of method does not apply to all your expenses, identify the project or farm to which the expenses apply. 1040x 2012 form The total expenses you paid or incurred in the first tax year the method or change of method is to apply. 1040x 2012 form A statement that you will account separately in your books for the expenses to which this method or change of method relates. 1040x 2012 form Send your request to the following  address. 1040x 2012 form  Department of the Treasury Internal Revenue Service Center Cincinnati, OH 45999  For more information, see Change in  Accounting Method in chapter 2. 1040x 2012 form Sale of a Farm If you sell your farm, you cannot adjust the basis of the land at the time of the sale for any unused carryover of soil and water conservation expenses (except for deductions of assessments for depreciable property, discussed earlier). 1040x 2012 form However, if you acquire another farm and return to the business of farming, you can start taking deductions again for the unused carryovers. 1040x 2012 form Gain on sale of farmland. 1040x 2012 form   If you held the land 5 years or less before you sold it, gain on the sale of the land is treated as ordinary income up to the amount you previously deducted for soil and water conservation expenses. 1040x 2012 form If you held the land less than 10 but more than 5 years, the gain is treated as ordinary income up to a specified percentage of the previous deductions. 1040x 2012 form See Section 1252 property under Other Gains in chapter 9. 1040x 2012 form Prev  Up  Next   Home   More Online 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