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2012 Freetaxusa

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2012 Freetaxusa

2012 freetaxusa 4. 2012 freetaxusa   Figuring Depreciation Under MACRS Table of Contents Introduction Useful Items - You may want to see: Which Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS?Rent-to-own dealer. 2012 freetaxusa Rent-to-own contract. 2012 freetaxusa What Is the Placed in Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies?Recovery Periods Under GDS Recovery Periods Under ADS Additions and Improvements Which Convention Applies? Which Depreciation Method Applies?Depreciation Methods for Farm Property Electing a Different Method How Is the Depreciation Deduction Figured?Using the MACRS Percentage Tables Figuring the Deduction Without Using the Tables Figuring the Deduction for Property Acquired in a Nontaxable Exchange Figuring the Deduction for a Short Tax Year How Do You Use General Asset Accounts?Grouping Property Figuring Depreciation for a GAA Disposing of GAA Property Terminating GAA Treatment Electing To Use a GAA When Do You Recapture MACRS Depreciation? Introduction The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. 2012 freetaxusa MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). 2012 freetaxusa Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. 2012 freetaxusa To be sure you can use MACRS to figure depreciation for your property, see What Method Can You Use To Depreciate Your Property in chapter 1. 2012 freetaxusa This chapter explains how to determine which MACRS depreciation system applies to your property. 2012 freetaxusa It also discusses other information you need to know before you can figure depreciation under MACRS. 2012 freetaxusa This information includes the property's recovery class, placed in service date, and basis, as well as the applicable recovery period, convention, and depreciation method. 2012 freetaxusa It explains how to use this information to figure your depreciation deduction and how to use a general asset account to depreciate a group of properties. 2012 freetaxusa Finally, it explains when and how to recapture MACRS depreciation. 2012 freetaxusa Useful Items - You may want to see: Publication 225 Farmer's Tax Guide 463 Travel, Entertainment, Gift, and Car  Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 587 Business Use of Your Home (Including Use by Daycare Providers) Form (and Instructions) 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 4562 Depreciation and Amortization See chapter 6 for information about getting publications and forms. 2012 freetaxusa Which Depreciation System (GDS or ADS) Applies? Your use of either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to depreciate property under MACRS determines what depreciation method and recovery period you use. 2012 freetaxusa You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. 2012 freetaxusa If you placed your property in service in 2013, complete Part III of Form 4562 to report depreciation using MACRS. 2012 freetaxusa Complete section B of Part III to report depreciation using GDS, and complete section C of Part III to report depreciation using ADS. 2012 freetaxusa If you placed your property in service before 2013 and are required to file Form 4562, report depreciation using either GDS or ADS on line 17 in Part III. 2012 freetaxusa Required use of ADS. 2012 freetaxusa   You must use ADS for the following property. 2012 freetaxusa Listed property used 50% or less in a qualified business use. 2012 freetaxusa See chapter 5 for information on listed property. 2012 freetaxusa Any tangible property used predominantly outside the United States during the year. 2012 freetaxusa Any tax-exempt use property. 2012 freetaxusa Any tax-exempt bond-financed property. 2012 freetaxusa All property used predominantly in a farming business and placed in service in any tax year during which an election not to apply the uniform capitalization rules to certain farming costs is in effect. 2012 freetaxusa Any property imported from a foreign country for which an Executive Order is in effect because the country maintains trade restrictions or engages in other discriminatory acts. 2012 freetaxusa If you are required to use ADS to depreciate your property, you cannot claim any special depreciation allowance (discussed in chapter 3) for the property. 2012 freetaxusa Electing ADS. 2012 freetaxusa   Although your property may qualify for GDS, you can elect to use ADS. 2012 freetaxusa The election generally must cover all property in the same property class that you placed in service during the year. 2012 freetaxusa However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. 2012 freetaxusa Once you make this election, you can never revoke it. 2012 freetaxusa   You make the election by completing line 20 in Part III of Form 4562. 2012 freetaxusa Which Property Class Applies Under GDS? The following is a list of the nine property classifications under GDS and examples of the types of property included in each class. 2012 freetaxusa These property classes are also listed under column (a) in section B, Part III, of Form 4562. 2012 freetaxusa For detailed information on property classes, see Appendix B, Table of Class Lives and Recovery Periods, in this publication. 2012 freetaxusa 3-year property. 2012 freetaxusa Tractor units for over-the-road use. 2012 freetaxusa Any race horse over 2 years old when placed in service. 2012 freetaxusa (All race horses placed in service after December 31, 2008, and before January 1, 2014, are deemed to be 3-year property, regardless of age. 2012 freetaxusa ) Any other horse (other than a race horse) over 12 years old when placed in service. 2012 freetaxusa Qualified rent-to-own property (defined later). 2012 freetaxusa 5-year property. 2012 freetaxusa Automobiles, taxis, buses, and trucks. 2012 freetaxusa Computers and peripheral equipment. 2012 freetaxusa Office machinery (such as typewriters, calculators, and copiers). 2012 freetaxusa Any property used in research and experimentation. 2012 freetaxusa Breeding cattle and dairy cattle. 2012 freetaxusa Appliances, carpets, furniture, etc. 2012 freetaxusa , used in a residential rental real estate activity. 2012 freetaxusa Certain geothermal, solar, and wind energy property. 2012 freetaxusa 7-year property. 2012 freetaxusa Office furniture and fixtures (such as desks, files, and safes). 2012 freetaxusa Agricultural machinery and equipment. 2012 freetaxusa Any property that does not have a class life and has not been designated by law as being in any other class. 2012 freetaxusa Certain motorsports entertainment complex property (defined later) placed in service before January 1, 2014. 2012 freetaxusa Any natural gas gathering line placed in service after April 11, 2005. 2012 freetaxusa See Natural gas gathering line and electric transmission property , later. 2012 freetaxusa 10-year property. 2012 freetaxusa Vessels, barges, tugs, and similar water transportation equipment. 2012 freetaxusa Any single purpose agricultural or horticultural structure. 2012 freetaxusa Any tree or vine bearing fruits or nuts. 2012 freetaxusa Qualified small electric meter and qualified smart electric grid system (defined later) placed in service on or after October 3, 2008. 2012 freetaxusa 15-year property. 2012 freetaxusa Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges). 2012 freetaxusa Any retail motor fuels outlet (defined later), such as a convenience store. 2012 freetaxusa Any municipal wastewater treatment plant. 2012 freetaxusa Any qualified leasehold improvement property (defined later) placed in service before January 1, 2014. 2012 freetaxusa Any qualified restaurant property (defined later) placed in service before January 1, 2014. 2012 freetaxusa Initial clearing and grading land improvements for gas utility property. 2012 freetaxusa Electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity placed in service after April 11, 2005. 2012 freetaxusa See Natural gas gathering line and electric transmission property , later. 2012 freetaxusa Any natural gas distribution line placed in service after April 11, 2005 and before January 1, 2011. 2012 freetaxusa Any qualified retail improvement property placed in service before January 1, 2014. 2012 freetaxusa 20-year property. 2012 freetaxusa Farm buildings (other than single purpose agricultural or horticultural structures). 2012 freetaxusa Municipal sewers not classified as 25-year property. 2012 freetaxusa Initial clearing and grading land improvements for electric utility transmission and distribution plants. 2012 freetaxusa 25-year property. 2012 freetaxusa This class is water utility property, which is either of the following. 2012 freetaxusa Property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to this provision, would be 20-year property. 2012 freetaxusa Municipal sewers other than property placed in service under a binding contract in effect at all times since June 9, 1996. 2012 freetaxusa Residential rental property. 2012 freetaxusa This is any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross rental income for the tax year is from dwelling units. 2012 freetaxusa A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. 2012 freetaxusa It does not include a unit in a hotel, motel, or other establishment where more than half the units are used on a transient basis. 2012 freetaxusa If you occupy any part of the building or structure for personal use, its gross rental income includes the fair rental value of the part you occupy. 2012 freetaxusa Nonresidential real property. 2012 freetaxusa This is section 1250 property, such as an office building, store, or warehouse, that is neither residential rental property nor property with a class life of less than 27. 2012 freetaxusa 5 years. 2012 freetaxusa Qualified rent-to-own property. 2012 freetaxusa   Qualified rent-to-own property is property held by a rent-to-own dealer for purposes of being subject to a rent-to-own contract. 2012 freetaxusa It is tangible personal property generally used in the home for personal use. 2012 freetaxusa It includes computers and peripheral equipment, televisions, videocassette recorders, stereos, camcorders, appliances, furniture, washing machines and dryers, refrigerators, and other similar consumer durable property. 2012 freetaxusa Consumer durable property does not include real property, aircraft, boats, motor vehicles, or trailers. 2012 freetaxusa   If some of the property you rent to others under a rent-to-own agreement is of a type that may be used by the renters for either personal or business purposes, you still can treat this property as qualified property as long as it does not represent a significant portion of your leasing property. 2012 freetaxusa However, if this dual-use property does represent a significant portion of your leasing property, you must prove that this property is qualified rent-to-own property. 2012 freetaxusa Rent-to-own dealer. 2012 freetaxusa   You are a rent-to-own dealer if you meet all the following requirements. 2012 freetaxusa You regularly enter into rent-to-own contracts (defined below) in the ordinary course of your business for the use of consumer property. 2012 freetaxusa A substantial portion of these contracts end with the customer returning the property before making all the payments required to transfer ownership. 2012 freetaxusa The property is tangible personal property of a type generally used within the home for personal use. 2012 freetaxusa Rent-to-own contract. 2012 freetaxusa   This is any lease for the use of consumer property between a rent-to-own dealer and a customer who is an individual which— Is titled “Rent-to-Own Agreement,” “Lease Agreement with Ownership Option,” or other similar language. 2012 freetaxusa Provides a beginning date and a maximum period of time, not to exceed 156 weeks or 36 months from the beginning date, for which the contract can be in effect (including renewals or options to extend). 2012 freetaxusa Provides for regular periodic (weekly or monthly) payments that can be either level or decreasing. 2012 freetaxusa If the payments are decreasing, no payment can be less than 40% of the largest payment. 2012 freetaxusa Provides for total payments that generally exceed the normal retail price of the property plus interest. 2012 freetaxusa Provides for total payments that do not exceed $10,000 for each item of property. 2012 freetaxusa Provides that the customer has no legal obligation to make all payments outlined in the contract and that, at the end of each weekly or monthly payment period, the customer can either continue to use the property by making the next payment or return the property in good working order with no further obligations and no entitlement to a return of any prior payments. 2012 freetaxusa Provides that legal title to the property remains with the rent-to-own dealer until the customer makes either all the required payments or the early purchase payments required under the contract to acquire legal title. 2012 freetaxusa Provides that the customer has no right to sell, sublease, mortgage, pawn, pledge, or otherwise dispose of the property until all contract payments have been made. 2012 freetaxusa Motorsports entertainment complex. 2012 freetaxusa   This is a racing track facility permanently situated on land that hosts one or more racing events for automobiles, trucks, or motorcycles during the 36-month period after the first day of the month in which the facility is placed in service. 2012 freetaxusa The events must be open to the public for the price of admission. 2012 freetaxusa Qualified smart electric grid system. 2012 freetaxusa   A qualified smart electric grid system means any smart grid property used as part of a system for electric distribution grid communications, monitoring, and management placed in service after October 3, 2008, by a taxpayer who is a supplier of electrical energy or a provider of electrical energy services. 2012 freetaxusa Smart grid property includes electronics and related equipment that is capable of: Sensing, collecting, and monitoring data of or from all portions of a utility's electric distribution grid, Providing real-time, two-way communications to monitor or to manage the grid, and Providing real-time analysis of an event prediction based on collected data that can be used to provide electric distribution system reliability, quality, and performance. 2012 freetaxusa Retail motor fuels outlet. 2012 freetaxusa   Real property is a retail motor fuels outlet if it is used to a substantial extent in the retail marketing of petroleum or petroleum products (whether or not it is also used to sell food or other convenience items) and meets any one of the following three tests. 2012 freetaxusa It is not larger than 1,400 square feet. 2012 freetaxusa 50% or more of the gross revenues generated from the property are derived from petroleum sales. 2012 freetaxusa 50% or more of the floor space in the property is devoted to petroleum marketing sales. 2012 freetaxusa A retail motor fuels outlet does not include any facility related to petroleum and natural gas trunk pipelines. 2012 freetaxusa Qualified leasehold improvement property. 2012 freetaxusa    Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2014) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met. 2012 freetaxusa   In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor's death or in any of the following types of transactions. 2012 freetaxusa A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or reacquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor's or distributor's basis in the property. 2012 freetaxusa Examples include the following. 2012 freetaxusa A complete liquidation of a subsidiary. 2012 freetaxusa A transfer to a corporation controlled by the transferor. 2012 freetaxusa An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. 2012 freetaxusa Qualified restaurant property. 2012 freetaxusa   Qualified restaurant property is any section 1250 property that is a building placed in service after December 31, 2008, and before January 1, 2014. 2012 freetaxusa Also, more than 50% of the building's square footage must be devoted to preparation of meals and seating for on-premises consumption of prepared meals. 2012 freetaxusa Qualified smart electric meter. 2012 freetaxusa   A qualified smart electric meter is any time-based meter and related communication equipment which is placed in service by a supplier of electric energy or a provider of electric energy services and which is capable of being used by you as part of a system that: Measures and records electricity usage data on a time-differentiated basis in at least 24 separate time segments per day; Provides for the exchange of information between the supplier or provider and the customer's smart electric meter in support of time-based rates or other forms of demand response; Provides data to the supplier or provider so that the supplier or provider can provide energy usage information to customers electronically, and Provides all commercial and residential customers of such supplier or provider with net metering. 2012 freetaxusa Net metering means allowing a customer a credit, if any, as complies with applicable federal and state laws and regulations for providing electricity to the supplier or provider. 2012 freetaxusa Natural gas gathering line and electric transmission property. 2012 freetaxusa   Any natural gas gathering line placed in service after April 11, 2005, is treated as 7-year property, and electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity and any natural gas distribution line placed in service after April 11, 2005, are treated as 15-year property, if the following requirements are met. 2012 freetaxusa The original use of the property must have begun with you after April 11, 2005. 2012 freetaxusa Original use means the first use to which the property is put, whether or not by you. 2012 freetaxusa Therefore, property used by any person before April 12, 2005, is not original use. 2012 freetaxusa Original use includes additional capital expenditures you incurred to recondition or rebuild your property. 2012 freetaxusa However, original use does not include the cost of reconditioned or rebuilt property you acquired. 2012 freetaxusa Property containing used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20% of the total cost of the property. 2012 freetaxusa The property must not be placed in service under a binding contract in effect before April 12, 2005. 2012 freetaxusa The property must not be self-constructed property (property you manufacture, construct, or produce for your own use), if you began the manufacture, construction, or production of the property before April 12, 2005. 2012 freetaxusa Property that is manufactured, constructed, or produced for your use by another person under a written binding contract entered into by you or a related party before the manufacture, construction, or production of the property is considered to be manufactured, constructed, or produced by you. 2012 freetaxusa What Is the Placed in Service Date? You begin to claim depreciation when your property is placed in service for either use in a trade or business or the production of income. 2012 freetaxusa The placed in service date for your property is the date the property is ready and available for a specific use. 2012 freetaxusa It is therefore not necessarily the date it is first used. 2012 freetaxusa If you converted property held for personal use to use in a trade or business or for the production of income, treat the property as being placed in service on the conversion date. 2012 freetaxusa See Placed in Service under When Does Depreciation Begin and End in chapter 1 for examples illustrating when property is placed in service. 2012 freetaxusa What Is the Basis for Depreciation? The basis for depreciation of MACRS property is the property's cost or other basis multiplied by the percentage of business/investment use. 2012 freetaxusa For a discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or Income-Producing Activity in chapter 1 . 2012 freetaxusa Reduce that amount by any credits and deductions allocable to the property. 2012 freetaxusa The following are examples of some credits and deductions that reduce basis. 2012 freetaxusa Any deduction for section 179 property. 2012 freetaxusa Any deduction under section 179B of the Internal Revenue Code for capital costs to comply with Environmental Protection Agency sulfur regulations. 2012 freetaxusa Any deduction under section 179C of the Internal Revenue Code for certain qualified refinery property placed in service after August 8, 2005, and before January 1, 2014. 2012 freetaxusa Any deduction under section 179D of the Internal Revenue Code for certain energy efficient commercial building property placed in service after December 31, 2005, and before January 1, 2014. 2012 freetaxusa Any deduction under section 179E of the Internal Revenue Code for qualified advanced mine safety equipment property placed in service after December 20, 2006, and before January 1, 2014 . 2012 freetaxusa Any deduction for removal of barriers to the disabled and the elderly. 2012 freetaxusa Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. 2012 freetaxusa Any special depreciation allowance. 2012 freetaxusa Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. 2012 freetaxusa For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. 2012 freetaxusa Enter the basis for depreciation under column (c) in Part III of Form 4562. 2012 freetaxusa For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property in chapter 1 . 2012 freetaxusa Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. 2012 freetaxusa It is determined based on the depreciation system (GDS or ADS) used. 2012 freetaxusa Recovery Periods Under GDS Under GDS, property that is not qualified Indian reservation property is depreciated over one of the following recovery periods. 2012 freetaxusa Property Class Recovery Period 3-year property   3 years 1   5-year property   5 years     7-year property   7 years     10-year property   10 years     15-year property   15 years 2   20-year property   20 years     25-year property   25 years 3   Residential rental property   27. 2012 freetaxusa 5 years     Nonresidential real property   39 years 4   15 years for qualified rent-to-own property placed in service before August 6, 1997. 2012 freetaxusa 239 years for property that is a retail motor fuels outlet placed in service before August 20, 1996 (31. 2012 freetaxusa 5 years if placed in service before May 13, 1993), unless you elected to depreciate it over 15 years. 2012 freetaxusa 320 years for property placed in service before June 13, 1996, or under a binding contract in effect before June 10, 1996. 2012 freetaxusa 431. 2012 freetaxusa 5 years for property placed in service before May 13, 1993 (or before January 1, 1994, if the purchase or construction of the property is under a binding contract in effect before May 13, 1993, or if construction began before May 13, 1993). 2012 freetaxusa The GDS recovery periods for property not listed above can be found in Appendix B, Table of Class Lives and Recovery Periods. 2012 freetaxusa Residential rental property and nonresidential real property are defined earlier under Which Depreciation System (GDS or ADS) Applies. 2012 freetaxusa Enter the appropriate recovery period on Form 4562 under column (d) in section B of Part III, unless already shown (for 25-year property, residential rental property, and nonresidential real property). 2012 freetaxusa Office in the home. 2012 freetaxusa   If your home is a personal-use single family residence and you begin to use part of your home as an office, depreciate that part of your home as nonresidential real property over 39 years (31. 2012 freetaxusa 5 years if you began using it for business before May 13, 1993). 2012 freetaxusa However, if your home is an apartment in an apartment building that you own and the building is residential rental property as defined earlier under Which Depreciation System (GDS or ADS) Applies , depreciate the part used as an office as residential rental property over 27. 2012 freetaxusa 5 years. 2012 freetaxusa See Publication 587 for a discussion of the tests you must meet to claim expenses, including depreciation, for the business use of your home. 2012 freetaxusa Home changed to rental use. 2012 freetaxusa   If you begin to rent a home that was your personal home before 1987, you depreciate it as residential rental property over 27. 2012 freetaxusa 5 years. 2012 freetaxusa Indian Reservation Property The recovery periods for qualified property you placed in service on an Indian reservation after 1993 and before 2014 are shorter than those listed earlier. 2012 freetaxusa The following table shows these shorter recovery periods. 2012 freetaxusa Property Class Recovery  Period 3-year property 2 years 5-year property 3 years 7-year property 4 years 10-year property 6 years 15-year property 9 years 20-year property 12 years Nonresidential real property 22 years Nonresidential real property is defined earlier under Which Property Class Applies Under GDS . 2012 freetaxusa Use this chart to find the correct percentage table to use for qualified Indian reservation property. 2012 freetaxusa IF your recovery period is: THEN use the following table in Appendix A: 2 years A-21 3 years A-1, A-2, A-3, A-4, or A-5 4 years A-22 6 years A-23 9 years A-14, A-15, A-16, A-17, or A-18 12 years A-14, A-15, A-16, A-17, or A-18 22 years A-24 Qualified property. 2012 freetaxusa   Property eligible for the shorter recovery periods are 3-, 5-, 7-, 10-, 15-, and 20-year property and nonresidential real property. 2012 freetaxusa You must use this property predominantly in the active conduct of a trade or business within an Indian reservation. 2012 freetaxusa The rental of real property that is located on an Indian reservation is treated as the active conduct of a trade or business within an Indian reservation. 2012 freetaxusa   The following property is not qualified property. 2012 freetaxusa Property used or located outside an Indian reservation on a regular basis, other than qualified infrastructure property. 2012 freetaxusa Property acquired directly or indirectly from a related person. 2012 freetaxusa Property placed in service for purposes of conducting or housing class I, II, or III gaming activities. 2012 freetaxusa These activities are defined in section 4 of the Indian Regulatory Act (25 U. 2012 freetaxusa S. 2012 freetaxusa C. 2012 freetaxusa 2703). 2012 freetaxusa Any property you must depreciate under ADS. 2012 freetaxusa Determine whether property is qualified without regard to the election to use ADS and after applying the special rules for listed property not used predominantly for qualified business use (discussed in chapter 5). 2012 freetaxusa Qualified infrastructure property. 2012 freetaxusa   Item (1) above does not apply to qualified infrastructure property located outside the reservation that is used to connect with qualified infrastructure property within the reservation. 2012 freetaxusa Qualified infrastructure property is property that meets all the following rules. 2012 freetaxusa It is qualified property, as defined earlier, except that it is outside the reservation. 2012 freetaxusa It benefits the tribal infrastructure. 2012 freetaxusa It is available to the general public. 2012 freetaxusa It is placed in service in connection with the active conduct of a trade or business within a reservation. 2012 freetaxusa Infrastructure property includes, but is not limited to, roads, power lines, water systems, railroad spurs, and communications facilities. 2012 freetaxusa Related person. 2012 freetaxusa   For purposes of item (2) above, see Related persons in the discussion on property owned or used in 1986 under What Method Can You Use To Depreciate Your Property in chapter 1 for a description of related persons. 2012 freetaxusa Indian reservation. 2012 freetaxusa   The term Indian reservation means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 (25 U. 2012 freetaxusa S. 2012 freetaxusa C. 2012 freetaxusa 1452(d)) or section 4(10) of the Indian Child Welfare Act of 1978 (25 U. 2012 freetaxusa S. 2012 freetaxusa C. 2012 freetaxusa 1903(10)). 2012 freetaxusa Section 3(d) of the Indian Financing Act of 1974 defines reservation to include former Indian reservations in Oklahoma. 2012 freetaxusa For a definition of the term “former Indian reservations in Oklahoma,” see Notice 98-45 in Internal Revenue Bulletin 1998-35. 2012 freetaxusa Recovery Periods Under ADS The recovery periods for most property generally are longer under ADS than they are under GDS. 2012 freetaxusa The following table shows some of the ADS recovery periods. 2012 freetaxusa Property Recovery  Period Rent-to-own property 4 years Automobiles and light duty trucks 5 years Computers and peripheral equipment 5 years High technology telephone station equipment installed on customer premises 5 years High technology medical equipment 5 years Personal property with no class life 12 years Natural gas gathering lines 14 years Single purpose agricultural and horticultural structures 15 years Any tree or vine bearing fruit or nuts 20 years Initial clearing and grading land  improvements for gas utility property 20 years Initial clearing and grading land  improvements for electric utility  transmission and distribution plants 25 years Electric transmission property used in the transmission at 69 or more kilovolts of electricity 30 years Natural gas distribution lines 35 years Any qualified leasehold improvement property 39 years Any qualified restaurant property 39 years Nonresidential real property 40 years Residential rental property 40 years Section 1245 real property not listed in Appendix B 40 years Railroad grading and tunnel bore 50 years The ADS recovery periods for property not listed above can be found in the tables in Appendix B. 2012 freetaxusa Rent-to-own property, qualified leasehold improvement property, qualified restaurant property, residential rental property, and nonresidential real property are defined earlier under Which Property Class Applies Under GDS . 2012 freetaxusa Tax-exempt use property subject to a lease. 2012 freetaxusa   The ADS recovery period for any property leased under a lease agreement to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership) cannot be less than 125% of the lease term. 2012 freetaxusa Additions and Improvements An addition or improvement you make to depreciable property is treated as separate depreciable property. 2012 freetaxusa See How Do You Treat Repairs and Improvements in chapter 1 for a definition of improvements. 2012 freetaxusa Its property class and recovery period are the same as those that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. 2012 freetaxusa The recovery period begins on the later of the following dates. 2012 freetaxusa The date you place the addition or improvement in service. 2012 freetaxusa The date you place in service the property to which you made the addition or improvement. 2012 freetaxusa If the improvement you make is qualified leasehold improvement property, qualified restaurant property, or qualified retail improvement property, the GDS recovery period is 15 years (39 years under ADS). 2012 freetaxusa Example. 2012 freetaxusa You own a rental home that you have been renting out since 1981. 2012 freetaxusa If you put an addition on the home and place the addition in service this year, you would use MACRS to figure your depreciation deduction for the addition. 2012 freetaxusa Under GDS, the property class for the addition is residential rental property and its recovery period is 27. 2012 freetaxusa 5 years because the home to which the addition is made would be residential rental property if you had placed it in service this year. 2012 freetaxusa Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. 2012 freetaxusa The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property. 2012 freetaxusa The mid-month convention. 2012 freetaxusa   Use this convention for nonresidential real property, residential rental property, and any railroad grading or tunnel bore. 2012 freetaxusa   Under this convention, you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. 2012 freetaxusa This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of. 2012 freetaxusa   Your use of the mid-month convention is indicated by the “MM” already shown under column (e) in Part III of Form 4562. 2012 freetaxusa The mid-quarter convention. 2012 freetaxusa   Use this convention if the mid-month convention does not apply and the total depreciable bases of MACRS property you placed in service during the last 3 months of the tax year (excluding nonresidential real property, residential rental property, any railroad grading or tunnel bore, property placed in service and disposed of in the same year, and property that is being depreciated under a method other than MACRS) are more than 40% of the total depreciable bases of all MACRS property you placed in service during the entire year. 2012 freetaxusa   Under this convention, you treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed of at the midpoint of that quarter. 2012 freetaxusa This means that 1½ months of depreciation is allowed for the quarter the property is placed in service or disposed of. 2012 freetaxusa   If you use this convention, enter “MQ” under column (e) in Part III of Form 4562. 2012 freetaxusa    For purposes of determining whether the mid-quarter convention applies, the depreciable basis of property you placed in service during the tax year reflects the reduction in basis for amounts expensed under section 179 and the part of the basis of property attributable to personal use. 2012 freetaxusa However, it does not reflect any reduction in basis for any special depreciation allowance. 2012 freetaxusa The half-year convention. 2012 freetaxusa   Use this convention if neither the mid-quarter convention nor the mid-month convention applies. 2012 freetaxusa   Under this convention, you treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the midpoint of the year. 2012 freetaxusa This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of. 2012 freetaxusa   If you use this convention, enter “HY” under column (e) in Part III of Form 4562. 2012 freetaxusa Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. 2012 freetaxusa The 200% declining balance method over a GDS recovery period. 2012 freetaxusa The 150% declining balance method over a GDS recovery period. 2012 freetaxusa The straight line method over a GDS recovery period. 2012 freetaxusa The straight line method over an ADS recovery period. 2012 freetaxusa For property placed in service before 1999, you could have elected the 150% declining balance method using the ADS recovery periods for certain property classes. 2012 freetaxusa If you made this election, continue to use the same method and recovery period for that property. 2012 freetaxusa Table 4–1 lists the types of property you can depreciate under each method. 2012 freetaxusa It also gives a brief explanation of the method, including any benefits that may apply. 2012 freetaxusa Depreciation Methods for Farm Property If you place personal property in service in a farming business after 1988, you generally must depreciate it under GDS using the 150% declining balance method unless you are a farmer who must depreciate the property under ADS using the straight line method or you elect to depreciate the property under GDS or ADS using the straight line method. 2012 freetaxusa You can depreciate real property using the straight line method under either GDS or ADS. 2012 freetaxusa Fruit or nut trees and vines. 2012 freetaxusa   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a recovery period of 10 years. 2012 freetaxusa ADS required for some farmers. 2012 freetaxusa   If you elect not to apply the uniform capitalization rules to any plant produced in your farming business, you must use ADS. 2012 freetaxusa You must use ADS for all property you place in service in any year the election is in effect. 2012 freetaxusa See the regulations under section 263A of the Internal Revenue Code for information on the uniform capitalization rules that apply to farm property. 2012 freetaxusa Electing a Different Method As shown in Table 4–1 , you can elect a different method for depreciation for certain types of property. 2012 freetaxusa You must make the election by the due date of the return (including extensions) for the year you placed the property in service. 2012 freetaxusa However, if you timely filed your return for the year without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 2012 freetaxusa Attach the election to the amended return and write “Filed pursuant to section 301. 2012 freetaxusa 9100-2” on the election statement. 2012 freetaxusa File the amended return at the same address you filed the original return. 2012 freetaxusa Once you make the election, you cannot change it. 2012 freetaxusa If you elect to use a different method for one item in a property class, you must apply the same method to all property in that class placed in service during the year of the election. 2012 freetaxusa However, you can make the election on a property-by-property basis for nonresidential real and residential rental property. 2012 freetaxusa 150% election. 2012 freetaxusa   Instead of using the 200% declining balance method over the GDS recovery period for nonfarm property in the 3-, 5-, 7-, and 10-year property classes, you can elect to use the 150% declining balance method. 2012 freetaxusa Make the election by entering “150 DB” under column (f) in Part III of Form 4562. 2012 freetaxusa Straight line election. 2012 freetaxusa   Instead of using either the 200% or 150% declining balance methods over the GDS recovery period, you can elect to use the straight line method over the GDS recovery period. 2012 freetaxusa Make the election by entering  “S/L” under column (f) in Part III of Form 4562. 2012 freetaxusa Election of ADS. 2012 freetaxusa   As explained earlier under Which Depreciation System (GDS or ADS) Applies , you can elect to use ADS even though your property may come under GDS. 2012 freetaxusa ADS uses the straight line method of depreciation over fixed ADS recovery periods. 2012 freetaxusa Most ADS recovery periods are listed in Appendix B, or see the table under Recovery Periods Under ADS , earlier. 2012 freetaxusa   Make the election by completing line 20 in Part III of Form 4562. 2012 freetaxusa Farm property. 2012 freetaxusa   Instead of using the 150% declining balance method over a GDS recovery period for property you use in a farming business (other than real property), you can elect to depreciate it using either of the following methods. 2012 freetaxusa The straight line method over a GDS recovery period. 2012 freetaxusa The straight line method over an ADS recovery period. 2012 freetaxusa Table 4-1. 2012 freetaxusa Depreciation Methods Note. 2012 freetaxusa The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. 2012 freetaxusa Method Type of Property Benefit GDS using 200% DB • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction GDS using 150% DB • All farm property (except real property) • All 15- and 20-year property (except qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property placed in service before January 1, 2014) • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction1 GDS using SL • Nonresidential real property • Qualified leasehold improvement property placed in service before January 1, 2014 • Qualified restaurant property placed in service before January 1, 2014 • Qualified retail improvement property placed in service before January 1, 2014 • Residential rental property • Trees or vines bearing fruit or nuts • Water utility property • All 3-, 5-, 7-, 10-, 15-, and 20-year property2 • Property for which you elected section 168(k)(4) • Provides for equal yearly deductions (except for the first and last years) ADS using SL • Listed property used 50% or less for business • Property used predominantly outside the U. 2012 freetaxusa S. 2012 freetaxusa  • Tax-exempt property • Tax-exempt bond-financed property • Farm property used when an election not to apply the uniform capitalization rules is in effect • Imported property3 • Any property for which you elect to use this method4 • Provides for equal yearly deductions (except for the first and last years) 1The MACRS percentage tables in Appendix A have the switch to the straight line method built into their rates 2See section 168(b)(5) of the Internal Revenue Code. 2012 freetaxusa 3See section 168(g)(6) of the Internal Revenue Code 4See section 168(g)(7) of the Internal Revenue Code How Is the Depreciation Deduction Figured? To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed in service date, basis amount, recovery period, convention, and depreciation method that applies to your property. 2012 freetaxusa Then, you are ready to figure your depreciation deduction. 2012 freetaxusa You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table. 2012 freetaxusa Using the MACRS Percentage Tables To help you figure your deduction under MACRS, the IRS has established percentage tables that incorporate the applicable convention and depreciation method. 2012 freetaxusa These percentage tables are in Appendix A near the end of this publication. 2012 freetaxusa Which table to use. 2012 freetaxusa    Appendix A contains the MACRS Percentage Table Guide, which is designed to help you locate the correct percentage table to use for depreciating your property. 2012 freetaxusa The percentage tables immediately follow the guide. 2012 freetaxusa Rules Covering the Use of the Tables The following rules cover the use of the percentage tables. 2012 freetaxusa You must apply the rates in the percentage tables to your property's unadjusted basis. 2012 freetaxusa You cannot use the percentage tables for a short tax year. 2012 freetaxusa See Figuring the Deduction for a Short Tax Year, later, for information on the short tax year rules. 2012 freetaxusa Once you start using the percentage tables for any item of property, you generally must continue to use them for the entire recovery period of the property. 2012 freetaxusa You must stop using the tables if you adjust the basis of the property for any reason other than— Depreciation allowed or allowable, or An addition or improvement to that property that is depreciated as a separate item of property. 2012 freetaxusa Basis adjustments other than those made due to the items listed in (4) include an increase in basis for the recapture of a clean-fuel deduction or credit and a reduction in basis for a casualty loss. 2012 freetaxusa Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. 2012 freetaxusa   If you increase the basis of your property because of the recapture of part or all of a deduction for clean-fuel vehicles or the credit for clean-fuel vehicle refueling property placed in service before January 1, 2006, you cannot continue to use the percentage tables. 2012 freetaxusa For the year of the adjustment and the remaining recovery period, you must figure the depreciation deduction yourself using the property's adjusted basis at the end of the year. 2012 freetaxusa See Figuring the Deduction Without Using the Tables, later. 2012 freetaxusa Basis adjustment due to casualty loss. 2012 freetaxusa   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. 2012 freetaxusa For the year of the adjustment and the remaining recovery period, you must figure the depreciation yourself using the property's adjusted basis at the end of the year. 2012 freetaxusa See Figuring the Deduction Without Using the Tables, later. 2012 freetaxusa Example. 2012 freetaxusa On October 26, 2012, Sandra Elm, a calendar year taxpayer, bought and placed in service in her business a new item of 7-year property. 2012 freetaxusa It cost $39,000 and she elected a section 179 deduction of $24,000. 2012 freetaxusa She also took a special depreciation allowance of $7,500 [50% of $15,000 ($39,000 − $24,000)]. 2012 freetaxusa Her unadjusted basis after the section 179 deduction and special depreciation allowance was $7,500 ($15,000 − $7,500). 2012 freetaxusa She figured her MACRS depreciation deduction using the percentage tables. 2012 freetaxusa For 2012, her MACRS depreciation deduction was $268. 2012 freetaxusa In July 2013, the property was vandalized and Sandra had a deductible casualty loss of $3,000. 2012 freetaxusa She must adjust the property's basis for the casualty loss, so she can no longer use the percentage tables. 2012 freetaxusa Her adjusted basis at the end of 2013, before figuring her 2013 depreciation, is $4,232. 2012 freetaxusa She figures that amount by subtracting the 2012 MACRS depreciation of $268 and the casualty loss of $3,000 from the unadjusted basis of $7,500. 2012 freetaxusa She must now figure her depreciation for 2013 without using the percentage tables. 2012 freetaxusa Figuring the Unadjusted Basis of Your Property You must apply the table rates to your property's unadjusted basis each year of the recovery period. 2012 freetaxusa Unadjusted basis is the same basis amount you would use to figure gain on a sale, but you figure it without reducing your original basis by any MACRS depreciation taken in earlier years. 2012 freetaxusa However, you do reduce your original basis by other amounts, including the following. 2012 freetaxusa Any amortization taken on the property. 2012 freetaxusa Any section 179 deduction claimed. 2012 freetaxusa Any special depreciation allowance taken on the property. 2012 freetaxusa For business property you purchase during the year, the unadjusted basis is its cost minus these and other applicable adjustments. 2012 freetaxusa If you trade property, your unadjusted basis in the property received is the cash paid plus the adjusted basis of the property traded minus these adjustments. 2012 freetaxusa MACRS Worksheet You can use this worksheet to help you figure your depreciation deduction using the percentage tables. 2012 freetaxusa Use a separate worksheet for each item of property. 2012 freetaxusa Then, use the information from this worksheet to prepare Form 4562. 2012 freetaxusa Do not use this worksheet for automobiles. 2012 freetaxusa Use the Depreciation Worksheet for Passenger Automobiles in chapter 5. 2012 freetaxusa MACRS Worksheet Part I   1. 2012 freetaxusa MACRS system (GDS or ADS)   2. 2012 freetaxusa Property class   3. 2012 freetaxusa Date placed in service   4. 2012 freetaxusa Recovery period   5. 2012 freetaxusa Method and convention   6. 2012 freetaxusa Depreciation rate (from tables)   Part II   7. 2012 freetaxusa Cost or other basis* $     8. 2012 freetaxusa Business/investment use   %   9. 2012 freetaxusa Multiply line 7 by line 8   $ 10. 2012 freetaxusa Total claimed for section 179 deduction and other items   $ 11. 2012 freetaxusa Subtract line 10 from line 9. 2012 freetaxusa This is your tentative basis for depreciation   $ 12. 2012 freetaxusa Multiply line 11 by . 2012 freetaxusa 50 if the 50% special depreciation allowance applies. 2012 freetaxusa This is your special depreciation allowance. 2012 freetaxusa Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   $ 13. 2012 freetaxusa Subtract line 12 from line 11. 2012 freetaxusa This is your basis for depreciation     14. 2012 freetaxusa Depreciation rate (from line 6)     15. 2012 freetaxusa Multiply line 13 by line 14. 2012 freetaxusa This is your MACRS depreciation deduction   $ *If real estate, do not include cost (basis) of land. 2012 freetaxusa The following example shows how to figure your MACRS depreciation deduction using the percentage tables and the MACRS worksheet. 2012 freetaxusa Example. 2012 freetaxusa You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2013. 2012 freetaxusa You use the furniture only for business. 2012 freetaxusa This is the only property you placed in service this year. 2012 freetaxusa You did not elect a section 179 deduction and the property is not qualified property for purposes of claiming a special depreciation allowance so your property's unadjusted basis is its cost, $10,000. 2012 freetaxusa You use GDS and the half-year convention to figure your depreciation. 2012 freetaxusa You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. 2012 freetaxusa Multiply your property's unadjusted basis each year by the percentage for 7-year property given in Table A-1. 2012 freetaxusa You figure your depreciation deduction using the MACRS worksheet as follows. 2012 freetaxusa MACRS Worksheet Part I 1. 2012 freetaxusa MACRS system (GDS or ADS) GDS 2. 2012 freetaxusa Property class 7-year 3. 2012 freetaxusa Date placed in service 8/11/13 4. 2012 freetaxusa Recovery period 7-Year 5. 2012 freetaxusa Method and convention 200%DB/Half-Year 6. 2012 freetaxusa Depreciation rate (from tables) . 2012 freetaxusa 1429 Part II 7. 2012 freetaxusa Cost or other basis* $10,000     8. 2012 freetaxusa Business/investment use 100 %   9. 2012 freetaxusa Multiply line 7 by line 8   $10,000 10. 2012 freetaxusa Total claimed for section 179 deduction and other items   -0- 11. 2012 freetaxusa Subtract line 10 from line 9. 2012 freetaxusa This is your tentative basis for depreciation   $10,000 12. 2012 freetaxusa Multiply line 11 by . 2012 freetaxusa 50 if the 50% special depreciation allowance applies. 2012 freetaxusa This is your special depreciation allowance. 2012 freetaxusa Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   -0- 13. 2012 freetaxusa Subtract line 12 from line 11. 2012 freetaxusa This is your basis for depreciation   $10,000 14. 2012 freetaxusa Depreciation rate (from line 6)   . 2012 freetaxusa 1429 15. 2012 freetaxusa Multiply line 13 by line 14. 2012 freetaxusa This is your MACRS depreciation deduction   $1,429 *If real estate, do not include cost (basis) of land. 2012 freetaxusa If there are no adjustments to the basis of the property other than depreciation, your depreciation deduction for each subsequent year of the recovery period will be as follows. 2012 freetaxusa Year   Basis Percentage Deduction 2014 $ 10,000 24. 2012 freetaxusa 49%   $2,449   2015   10,000 17. 2012 freetaxusa 49   1,749   2016   10,000 12. 2012 freetaxusa 49   1,249   2017   10,000 8. 2012 freetaxusa 93   893   2018   10,000 8. 2012 freetaxusa 92   892   2019   10,000 8. 2012 freetaxusa 93   893   2020   10,000 4. 2012 freetaxusa 46   446   Examples The following examples are provided to show you how to use the percentage tables. 2012 freetaxusa In both examples, assume the following. 2012 freetaxusa You use the property only for business. 2012 freetaxusa You use the calendar year as your tax year. 2012 freetaxusa You use GDS for all the properties. 2012 freetaxusa Example 1. 2012 freetaxusa You bought a building and land for $120,000 and placed it in service on March 8. 2012 freetaxusa The sales contract showed that the building cost $100,000 and the land cost $20,000. 2012 freetaxusa It is nonresidential real property. 2012 freetaxusa The building's unadjusted basis is its original cost, $100,000. 2012 freetaxusa You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. 2012 freetaxusa March is the third month of your tax year, so multiply the building's unadjusted basis, $100,000, by the percentages for the third month in Table A-7a. 2012 freetaxusa Your depreciation deduction for each of the first 3 years is as follows: Year   Basis Percentage Deduction 1st $ 100,000 2. 2012 freetaxusa 033%   $2,033   2nd   100,000 2. 2012 freetaxusa 564   2,564   3rd   100,000 2. 2012 freetaxusa 564   2,564   Example 2. 2012 freetaxusa During the year, you bought a machine (7-year property) for $4,000, office furniture (7-year property) for $1,000, and a computer (5-year property) for $5,000. 2012 freetaxusa You placed the machine in service in January, the furniture in September, and the computer in October. 2012 freetaxusa You do not elect a section 179 deduction and none of these items is qualified property for purposes of claiming a special depreciation allowance. 2012 freetaxusa You placed property in service during the last 3 months of the year, so you must first determine if you have to use the mid-quarter convention. 2012 freetaxusa The total bases of all property you placed in service during the year is $10,000. 2012 freetaxusa The $5,000 basis of the computer, which you placed in service during the last 3 months (the fourth quarter) of your tax year, is more than 40% of the total bases of all property ($10,000) you placed in service during the year. 2012 freetaxusa Therefore, you must use the mid-quarter convention for all three items. 2012 freetaxusa You refer to the MACRS Percentage Table Guide in Appendix A to determine which table you should use under the mid-quarter convention. 2012 freetaxusa The machine is 7-year property placed in service in the first quarter, so you use Table A-2. 2012 freetaxusa The furniture is 7-year property placed in service in the third quarter, so you use Table A-4. 2012 freetaxusa Finally, because the computer is 5-year property placed in service in the fourth quarter, you use Table A-6. 2012 freetaxusa Knowing what table to use for each property, you figure the depreciation for the first 2 years as follows. 2012 freetaxusa Year Property Basis Percentage Deduction 1st Machine $4,000 25. 2012 freetaxusa 00 $1,000   2nd Machine 4,000 21. 2012 freetaxusa 43 857   1st Furniture 1,000 10. 2012 freetaxusa 71 107   2nd Furniture 1,000 25. 2012 freetaxusa 51 255   1st Computer 5,000 5. 2012 freetaxusa 00 250   2nd Computer 5,000 38. 2012 freetaxusa 00 1,900   Sale or Other Disposition Before the Recovery Period Ends If you sell or otherwise dispose of your property before the end of its recovery period, your depreciation deduction for the year of the disposition will be only part of the depreciation amount for the full year. 2012 freetaxusa You have disposed of your property if you have permanently withdrawn it from use in your business or income-producing activity because of its sale, exchange, retirement, abandonment, involuntary conversion, or destruction. 2012 freetaxusa After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property. 2012 freetaxusa Half-year convention used. 2012 freetaxusa   For property for which you used a half-year convention, the depreciation deduction for the year of the disposition is half the depreciation determined for the full year. 2012 freetaxusa Mid-quarter convention used. 2012 freetaxusa   For property for which you used the mid-quarter convention, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter in which you disposed of the property. 2012 freetaxusa Quarter Percentage First 12. 2012 freetaxusa 5% Second 37. 2012 freetaxusa 5 Third 62. 2012 freetaxusa 5 Fourth 87. 2012 freetaxusa 5 Example. 2012 freetaxusa On December 2, 2010, you placed in service an item of 5-year property costing $10,000. 2012 freetaxusa You did not claim a section 179 deduction and the property does not qualify for a special depreciation allowance. 2012 freetaxusa Your unadjusted basis for the property was $10,000. 2012 freetaxusa You used the mid-quarter convention because this was the only item of business property you placed in service in 2010 and it was placed in service during the last 3 months of your tax year. 2012 freetaxusa Your property is in the 5-year property class, so you used Table A-5 to figure your depreciation deduction. 2012 freetaxusa Your deductions for 2010, 2011, and 2012 were $500 (5% of $10,000), $3,800 (38% of $10,000), and $2,280 (22. 2012 freetaxusa 80% of $10,000). 2012 freetaxusa You disposed of the property on April 6, 2013. 2012 freetaxusa To determine your depreciation deduction for 2013, first figure the deduction for the full year. 2012 freetaxusa This is $1,368 (13. 2012 freetaxusa 68% of $10,000). 2012 freetaxusa April is in the second quarter of the year, so you multiply $1,368 by 37. 2012 freetaxusa 5% to get your depreciation deduction of $513 for 2013. 2012 freetaxusa Mid-month convention used. 2012 freetaxusa   If you dispose of residential rental or nonresidential real property, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by a fraction. 2012 freetaxusa The numerator of the fraction is the number of months (including partial months) in the year that the property is considered in service. 2012 freetaxusa The denominator is 12. 2012 freetaxusa Example. 2012 freetaxusa On July 2, 2011, you purchased and placed in service residential rental property. 2012 freetaxusa The property cost $100,000, not including the cost of land. 2012 freetaxusa You used Table A-6 to figure your MACRS depreciation for this property. 2012 freetaxusa You sold the property on March 2, 2013. 2012 freetaxusa You file your tax return based on the calendar year. 2012 freetaxusa A full year of depreciation for 2013 is $3,636. 2012 freetaxusa This is $100,000 multiplied by . 2012 freetaxusa 03636 (the percentage for the seventh month of the third recovery year) from Table A-6 . 2012 freetaxusa You then apply the mid-month convention for the 2½ months of use in 2013. 2012 freetaxusa Treat the month of disposition as one-half month of use. 2012 freetaxusa Multiply $3,636 by the fraction, 2. 2012 freetaxusa 5 over 12, to get your 2013 depreciation deduction of $757. 2012 freetaxusa 50. 2012 freetaxusa Figuring the Deduction Without Using the Tables Instead of using the rates in the percentage tables to figure your depreciation deduction, you can figure it yourself. 2012 freetaxusa Before making the computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year. 2012 freetaxusa Figuring MACRS deductions without using the tables generally will result in a slightly different amount than using the tables. 2012 freetaxusa Declining Balance Method When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property. 2012 freetaxusa You must use the applicable convention for the first tax year and you must switch to the straight line method beginning in the first year for which it will give an equal or greater deduction. 2012 freetaxusa The straight line method is explained later. 2012 freetaxusa You figure depreciation for the year you place property in service as follows. 2012 freetaxusa Multiply your adjusted basis in the property by the declining balance rate. 2012 freetaxusa Apply the applicable convention. 2012 freetaxusa You figure depreciation for all other years (before the year you switch to the straight line method) as follows. 2012 freetaxusa Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years. 2012 freetaxusa Multiply this new adjusted basis by the same declining balance rate used in earlier years. 2012 freetaxusa If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to figure depreciation for the year you dispose of it. 2012 freetaxusa Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1 , later, under Examples. 2012 freetaxusa Declining balance rate. 2012 freetaxusa   You figure your declining balance rate by dividing the specified declining balance percentage (150% or 200% changed to a decimal) by the number of years in the property's recovery period. 2012 freetaxusa For example, for 3-year property depreciated using the 200% declining balance method, divide 2. 2012 freetaxusa 00 (200%) by 3 to get 0. 2012 freetaxusa 6667, or a 66. 2012 freetaxusa 67% declining balance rate. 2012 freetaxusa For 15-year property depreciated using the 150% declining balance method, divide 1. 2012 freetaxusa 50 (150%) by 15 to get 0. 2012 freetaxusa 10, or a 10% declining balance rate. 2012 freetaxusa   The following table shows the declining balance rate for each property class and the first year for which the straight line method gives an equal or greater deduction. 2012 freetaxusa Property Class Method Declining Balance Rate Year 3-year 200% DB 66. 2012 freetaxusa 667% 3rd 5-year 200% DB 40. 2012 freetaxusa 0 4th 7-year 200% DB 28. 2012 freetaxusa 571 5th 10-year 200% DB 20. 2012 freetaxusa 0 7th 15-year 150% DB 10. 2012 freetaxusa 0 7th 20-year 150% DB 7. 2012 freetaxusa 5 9th Straight Line Method When using the straight line method, you apply a different depreciation rate each year to the adjusted basis of your property. 2012 freetaxusa You must use the applicable convention in the year you place the property in service and the year you dispose of the property. 2012 freetaxusa You figure depreciation for the year you place property in service as follows. 2012 freetaxusa Multiply your adjusted basis in the property by the straight line rate. 2012 freetaxusa Apply the applicable convention. 2012 freetaxusa You figure depreciation for all other years (including the year you switch from the declining balance method to the straight line method) as follows. 2012 freetaxusa Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method). 2012 freetaxusa Determine the depreciation rate for the year. 2012 freetaxusa Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2). 2012 freetaxusa If you dispose of property before the end of its recovery period, see Using the Applicable Convention , later, for information on how to figure depreciation for the year you dispose of it. 2012 freetaxusa Straight line rate. 2012 freetaxusa   You determine the straight line depreciation rate for any tax year by dividing the number 1 by the years remaining in the recovery period at the beginning of that year. 2012 freetaxusa When figuring the number of years remaining, you must take into account the convention used in the year you placed the property in service. 2012 freetaxusa If the number of years remaining is less than 1, the depreciation rate for that tax year is 1. 2012 freetaxusa 0 (100%). 2012 freetaxusa Using the Applicable Convention The applicable convention (discussed earlier under Which Convention Applies ) affects how you figure your depreciation deduction for the year you place your property in service and for the year you dispose of it. 2012 freetaxusa It determines how much of the recovery period remains at the beginning of each year, so it also affects the depreciation rate for property you depreciate under the straight line method. 2012 freetaxusa See Straight line rate in the previous discussion. 2012 freetaxusa Use the applicable convention as explained in the following discussions. 2012 freetaxusa Half-year convention. 2012 freetaxusa   If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate the property. 2012 freetaxusa You deduct a full year of depreciation for any other year during the recovery period. 2012 freetaxusa   Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for a full year by 2. 2012 freetaxusa If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. 2012 freetaxusa If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final 6 months of the recovery period is the amount of your unrecovered basis in the property. 2012 freetaxusa Mid-quarter convention. 2012 freetaxusa   If this convention applies, the depreciation you can deduct for the first year you depreciate the property depends on the quarter in which you place the property in service. 2012 freetaxusa   A quarter of a full 12-month tax year is a period of 3 months. 2012 freetaxusa The first quarter in a year begins on the first day of the tax year. 2012 freetaxusa The second quarter begins on the first day of the fourth month of the tax year. 2012 freetaxusa The third quarter begins on the first day of the seventh month of the tax year. 2012 freetaxusa The fourth quarter begins on the first day of the tenth month of the tax year. 2012 freetaxusa A calendar year is divided into the following quarters. 2012 freetaxusa Quarter Months First January, February, March Second April, May, June Third July, August, September Fourth October, November, December   Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by the percentage listed below for the quarter you place the property in service. 2012 freetaxusa Quarter Percentage First 87. 2012 freetaxusa 5% Second 62. 2012 freetaxusa 5 Third 37. 2012 freetaxusa 5 Fourth 12. 2012 freetaxusa 5   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter you dispose of the property. 2012 freetaxusa Quarter Percentage First 12. 2012 freetaxusa 5% Second 37. 2012 freetaxusa 5 Third 62. 2012 freetaxusa 5 Fourth 87. 2012 freetaxusa 5   If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final quarter of the recovery period is the amount of your unrecovered basis in the property. 2012 freetaxusa Mid-month convention. 2012 freetaxusa   If this convention applies, the depreciation you can deduct for the first year that you depreciate the property depends on the month in which you place the property in service. 2012 freetaxusa Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by a fraction. 2012 freetaxusa The numerator of the fraction is the number of full months in the year that the property is in service plus ½ (or 0. 2012 freetaxusa 5). 2012 freetaxusa The denominator is 12. 2012 freetaxusa   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. 2012 freetaxusa If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final month of the recovery period is the amount of your unrecovered basis in the property. 2012 freetaxusa Example. 2012 freetaxusa You use the calendar year and place nonresidential real property in service in August. 2012 freetaxusa The property is in service 4 full months (September, October, November, and December). 2012 freetaxusa Your numerator is 4. 2012 freetaxusa 5 (4 full months plus 0. 2012 freetaxusa 5). 2012 freetaxusa You multiply the depreciation for a full year by 4. 2012 freetaxusa 5/12, or 0. 2012 freetaxusa 375. 2012 freetaxusa Examples The following examples show how to figure depreciation under MACRS without using the percentage tables. 2012 freetaxusa Figures are rounded for purposes of the examples. 2012 freetaxusa Assume for all the examples that you use a calendar year as your tax year. 2012 freetaxusa Example 1—200% DB method and half-year convention. 2012 freetaxusa In February, you placed in service depreciable property with a 5-year recovery period and a basis of $1,000. 2012 freetaxusa You do not elect to take the section 179 deduction and the property does not qualify for a special depreciation allowance. 2012 freetaxusa You use GDS and the 200% declining balance (DB) method to figure your depreciation. 2012 freetaxusa When the straight line (SL) method results in an equal or larger deduction, you switch to the SL method. 2012 freetaxusa You did not place any property in service in the last 3 months of the year, so you must use the half-year convention. 2012 freetaxusa First year. 2012 freetaxusa You figure the depreciation rate under the 200% DB method by dividing 2 (200%) by 5 (the number of years in the recovery period). 2012 freetaxusa The result is 40%. 2012 freetaxusa You multiply the adjusted basis of the property ($1,000) by the 40% DB rate. 2012 freetaxusa You apply the half-year convention by dividing the result ($400) by 2. 2012 freetaxusa Depreciation for the first year under the 200% DB method is $200. 2012 freetaxusa You figure the depreciation rate under the straight line (SL) method by dividing 1 by 5, the number of years in the recovery period. 2012 freetaxusa The result is 20%. 2012 freetaxusa You multiply the adjusted basis of the property ($1,000) by the 20% SL rate. 2012 freetaxusa You apply the half-year convention by dividing the result ($200) by 2. 2012 freetaxusa Depreciation for the first year under the SL method is $100. 2012 freetaxusa The DB method provides a larger deduction, so you deduct the $200 figured under the 200% DB method. 2012 freetaxusa Second year. 2012 freetaxusa You reduce the adjusted basis ($1,000) by the depreciation claimed in the first year ($200). 2012 freetaxusa You multiply the result ($800) by the DB rate (40%). 2012 freetaxusa Depreciation for the second year under the 200% DB method is $320. 2012 freetaxusa You figure the SL depreciation rate by dividing 1 by 4. 2012 freetaxusa 5, the number of years remaining in the recovery period. 2012 freetaxusa (Based on the half-year convention, you used only half a year of the recovery period in the first year. 2012 freetaxusa ) You multiply the reduced adjusted basis ($800) by the result (22. 2012 freetaxusa 22%). 2012 freetaxusa Depreciation under the SL method for the second year is $178. 2012 freetaxusa The DB method provides a larger deduction, so you deduct the $320 figured under the 200% DB method. 2012 freetaxusa Third year. 2012 freetaxusa You reduce the adjusted basis ($800) by the depreciation claimed in the second year ($320). 2012 freetaxusa You multiply the result ($480) by the DB rate (40%). 2012 freetaxusa Depreciation for the third year under the 200% DB method is $192. 2012 freetaxusa You figure the SL depreciation rate by dividing 1 by 3. 2012 freetaxusa 5. 2012 freetaxusa You multiply the reduced adjusted basis ($480) by the result (28. 2012 freetaxusa 57%). 2012 freetaxusa Depreciation under the SL method for the third year is $137. 2012 freetaxusa The DB method provides a larger deduction, so you deduct the $192 figured under the 200% DB method. 2012 freetaxusa Fourth year. 2012 freetaxusa You reduce the adjusted basis ($480) by the de
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The 2012 Freetaxusa

2012 freetaxusa 3. 2012 freetaxusa   Credit for Withholding and Estimated Tax for 2013 Table of Contents Introduction Topics - This chapter discusses: WithholdingForm W-2 Form W-2G The 1099 Series Form Not Correct Form Received After Filing Separate Returns Fiscal Years (FY) Estimated TaxSeparate Returns Divorced Taxpayers Excess Social Security or Railroad Retirement Tax WithholdingJoint returns. 2012 freetaxusa Worksheet for Nonrailroad Employees Worksheets for Railroad Employees Introduction When you file your 2013 income tax return, take credit for all the income tax and excess social security or railroad retirement tax withheld from your salary, wages, pensions, etc. 2012 freetaxusa Also take credit for the estimated tax you paid for 2013. 2012 freetaxusa These credits are subtracted from your total tax. 2012 freetaxusa Because these credits are refundable, you should file a return and claim these credits, even if you do not owe tax. 2012 freetaxusa If the total of your withholding and your estimated tax payments for any payment period is less than the amount you needed to pay by the due date for that period, you may be charged a penalty, even if the total of these credits is more than your tax for the year. 2012 freetaxusa Topics - This chapter discusses: How to take credit for withholding, How to take credit for estimated taxes you paid, and How to take credit for excess social security, Medicare, or railroad retirement tax withholding. 2012 freetaxusa Withholding If you had income tax withheld during 2013, you generally should be sent a statement by January 31, 2014, showing your income and the tax withheld. 2012 freetaxusa Depending on the source of your income, you will receive: Form W-2, Wage and Tax Statement, Form W-2G, Certain Gambling Winnings, or A form in the 1099 series. 2012 freetaxusa Form W-2 Your employer is required to provide or send Form W-2 to you no later than January 31, 2014. 2012 freetaxusa You should receive a separate Form W-2 from each employer you worked for. 2012 freetaxusa If you stopped working before the end of 2013, your employer could have given you your Form W-2 at any time after you stopped working. 2012 freetaxusa However, your employer must provide or send it to you by January 31, 2014. 2012 freetaxusa If you ask for the form, your employer must send it to you within 30 days after receiving your written request or within 30 days after your final wage payment, whichever is later. 2012 freetaxusa If you have not received your Form W-2 by January 31, contact your employer or payer to request a copy. 2012 freetaxusa If you still do not get the form by February 15, the IRS can help you by requesting the form from your employer. 2012 freetaxusa The phone number for the IRS is listed in chapter 5. 2012 freetaxusa You will be asked for the following information. 2012 freetaxusa Your name, address, city and state, zip code, and social security number. 2012 freetaxusa Your employer's name, address, city, state, zip code, and the employer's identification number (if known). 2012 freetaxusa An estimate of the wages you earned, the federal income tax withheld, and the period you worked for that employer. 2012 freetaxusa The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible. 2012 freetaxusa Form W-2 shows your total pay and other compensation and the income tax, social security tax, and Medicare tax that was withheld during the year. 2012 freetaxusa Total the federal income tax withheld (shown in box 2 of all Forms W-2 received) and enter that amount on the appropriate line of your tax return. 2012 freetaxusa In addition, Form W-2 is used to report any taxable sick pay you received and any income tax withheld from your sick pay. 2012 freetaxusa Your sick pay may be combined with other wages in one Form W-2 or you may receive a separate Form W-2 for sick pay. 2012 freetaxusa If you file a paper tax return, attach Copy B of Form W-2 to your return. 2012 freetaxusa Form W-2G If you had gambling winnings in 2013, the payer may have withheld income tax. 2012 freetaxusa If tax was withheld, the payer will give you a Form W-2G showing the amount you won and the amount of tax withheld. 2012 freetaxusa Report the amounts you won on line 21 of Form 1040. 2012 freetaxusa Take credit for the tax withheld on line 62 of Form 1040. 2012 freetaxusa If you had gambling winnings, you must use Form 1040; you cannot use Form 1040A or Form 1040EZ. 2012 freetaxusa Gambling losses can be deducted on Schedule A (Form 1040) as a miscellaneous itemized deduction. 2012 freetaxusa However, you cannot deduct more than the gambling winnings you report on Form 1040. 2012 freetaxusa File Form W-2G with your income tax return only if it shows any federal income tax withheld in box 2. 2012 freetaxusa The 1099 Series Most forms in the 1099 series are not filed with your return. 2012 freetaxusa In general, these forms should be furnished to you by January 31, 2014. 2012 freetaxusa Unless instructed to file any of these forms with your return, keep them for your records. 2012 freetaxusa There are several different forms in this series, including: Form 1099-B, Proceeds From Broker and Barter Exchange Transactions; Form 1099-C, Cancellation of Debt; Form 1099-DIV, Dividends and Distributions; Form 1099-G, Certain Government Payments; Form 1099-INT, Interest Income; Form 1099-K, Payment Card and Third-Party Network Transactions; Form 1099-MISC, Miscellaneous Income; Form 1099-OID, Original Issue Discount; Form 1099-PATR, Taxable Distributions Received From Cooperatives; Form 1099-Q, Payments From Qualified Education Programs (Under Sections 529 and 530); Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. 2012 freetaxusa ; Form SSA-1099, Social Security Benefit Statement; and Form RRB-1099, Payments by the Railroad Retirement Board. 2012 freetaxusa If you received the types of income reported on some forms in the 1099 series, you may not be able to use Form 1040A or Form 1040EZ. 2012 freetaxusa See the instructions to these forms for details. 2012 freetaxusa Reporting your withholding. 2012 freetaxusa   Report on your tax return all federal income tax withholding shown on your Form 1099, Form SSA-1099, and/or Form RRB-1099. 2012 freetaxusa Include the amount withheld in the total on line 62 of Form 1040, line 36 of Form 1040A, or line 7 of Form 1040EZ. 2012 freetaxusa Form 1099-R. 2012 freetaxusa   Attach Form 1099-R to your paper return if federal income tax withholding is shown in box 4. 2012 freetaxusa Do not attach any other Form 1099. 2012 freetaxusa Form Not Correct If you receive a form with incorrect information, you should ask the payer for a corrected form. 2012 freetaxusa Call the telephone number or write to the address given for the payer on the form. 2012 freetaxusa The corrected Form W-2G or Form 1099 you receive will have an “X” in the “CORRECTED” box at the top of the form. 2012 freetaxusa A special form, Form W-2c, Corrected Wage and Tax Statement, is used to correct a Form W-2. 2012 freetaxusa In certain situations, you will receive two forms in place of the original incorrect form. 2012 freetaxusa This will happen when your taxpayer identification number is wrong or missing, your name and address are wrong, or you received the wrong type of form (for example, a Form 1099-DIV instead of a Form 1099-INT). 2012 freetaxusa One new form you receive will be the same incorrect form or have the same incorrect information, but all money amounts will be zero. 2012 freetaxusa This form will have an “X” in the “CORRECTED” box at the top of the form. 2012 freetaxusa The second new form should have all the correct information, prepared as though it is the original (the “CORRECTED” box will not be checked). 2012 freetaxusa Form Received After Filing If you file your return and you later receive a form for income that you did not include on your return, report the income and take credit for any income tax withheld by filing Form 1040X, Amended U. 2012 freetaxusa S. 2012 freetaxusa Individual Income Tax Return. 2012 freetaxusa Separate Returns If you are married but file a separate return, you can take credit only for the tax withheld from your own income. 2012 freetaxusa Do not include any amount withheld from your spouse's income. 2012 freetaxusa However, different rules may apply if you live in a community property state. 2012 freetaxusa Community property states. 2012 freetaxusa   The following are community property states. 2012 freetaxusa Arizona. 2012 freetaxusa California. 2012 freetaxusa Idaho. 2012 freetaxusa Louisiana. 2012 freetaxusa Nevada. 2012 freetaxusa New Mexico. 2012 freetaxusa Texas. 2012 freetaxusa Washington. 2012 freetaxusa Wisconsin. 2012 freetaxusa Generally, if you live in a community property state and file a separate return, you and your spouse each must report half of all community income in addition to your own separate income. 2012 freetaxusa If you are required to report half of all community income, you are entitled to take credit for half of all taxes withheld on the community income. 2012 freetaxusa If you were divorced during the year, each of you generally must report half the community income and can take credit for half the withholding on that community income for the period before the divorce. 2012 freetaxusa   For more information on these rules, and some exceptions, see Publication 555, Community Property. 2012 freetaxusa Fiscal Years (FY) If you file your tax return on the basis of a fiscal year (a 12-month period ending on the last day of any month except December), you must follow special rules, described below, to determine your credit for federal income tax withholding. 2012 freetaxusa Fiscal year withholding. 2012 freetaxusa    You can claim credit on your tax return only for the tax withheld during the calendar year (CY) ending within your fiscal year. 2012 freetaxusa You cannot claim credit for any of the tax withheld during the calendar year beginning in your fiscal year. 2012 freetaxusa You will be able to claim credit for that withholding on your return for your next fiscal year. 2012 freetaxusa   The Form W-2 or 1099 you receive for the calendar year that ends during your fiscal year will show the tax withheld and the income you received during that calendar year. 2012 freetaxusa   Although you take credit for all the withheld tax shown on the form, report only the part of the income shown on the form that you received during your fiscal year. 2012 freetaxusa Add to that the income you received during the rest of your fiscal year. 2012 freetaxusa Example. 2012 freetaxusa Miles Hanson files his return for a fiscal year ending June 30, 2013. 2012 freetaxusa In January 2013, he received a Form W-2 that showed that his wages for 2012 were $31,200 and that his income tax withheld was $3,380. 2012 freetaxusa His records show that he had received $15,000 of the wages by June 30, 2012, and $16,200 from July 1 through December 31, 2012. 2012 freetaxusa See Table 3-1 . 2012 freetaxusa On his return for the fiscal year ending June 30, 2013, Miles will report the $16,200 he was paid in July through December of 2012, plus the $18,850 he was paid during the rest of the fiscal year, January 1, 2013, through June 30, 2013. 2012 freetaxusa However, he takes credit for all $3,380 that was withheld during 2012. 2012 freetaxusa On his return for the fiscal year ending June 30, 2012, he reported the $15,000 he was paid in January through June 2012, but took no credit for the tax withheld during that time. 2012 freetaxusa On his return for the fiscal year ending June 30, 2014, he will take the credit for any tax withheld during 2013 but not for any tax withheld during 2014. 2012 freetaxusa Table 3-1. 2012 freetaxusa Example for Fiscal Year Ending June 30, 2013—Miles Hanson Date Form W-2 Miles' records Tax return for FY ending 6/30/20121 Tax return for FY ending 6/30/2013 Wages With- holding Wages With- holding Wages With- holding Wages With- holding CY 20122 $31,200 $3,380             1/1/2012 –  6/30/2012     $15,000 $1,600 $15,000       7/1/2012 –  12/31/2012     $16,200 $1,780     $16,200 $3,380 CY 2013 $37,700 $4,316 3             1/1/2013 –  6/30/2013     $18,850 $2,158     $18,850   7/1/2013 –  12/31/2013     $18,850 4 $2,158         1Miles' tax return for FY ending 6/30/2012 also included his wages for 7/1–12/31/2011 and the withholding shown on his 2011 Form W-2. 2012 freetaxusa  2Calendar year (January 1 – December 31). 2012 freetaxusa   3Withholding shown on 2013 Form W-2 ($4,316) will be included in Miles' tax return for FY ending 6/30/2014, the fiscal year in which calendar year 2013 ends. 2012 freetaxusa   4Wages for 7/1–12/31/2013 ($18,850) will be included in Miles' tax return for FY ending 6/30/2014, the fiscal year in which the wages were received. 2012 freetaxusa Backup withholding. 2012 freetaxusa   If income tax has been withheld under the backup withholding rule, take credit for it on your tax return for the fiscal year in which you received the income. 2012 freetaxusa Example. 2012 freetaxusa Emily Smith's records show that she received income in November 2013 and February 2014 from which there was backup withholding ($100 and $50, respectively). 2012 freetaxusa Emily takes credit for the entire $150 of backup withholding on her tax return for the fiscal year ending September 30, 2014. 2012 freetaxusa Estimated Tax Take credit for all your estimated tax payments for 2013 on line 63 of Form 1040 or line 37 of Form 1040A. 2012 freetaxusa Include any overpayment from 2012 that you had credited to your 2013 estimated tax. 2012 freetaxusa You must use Form 1040 or Form 1040A if you paid estimated tax. 2012 freetaxusa You cannot file Form 1040EZ. 2012 freetaxusa If you were a beneficiary of an estate or trust, you should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. 2012 freetaxusa , from the fiduciary. 2012 freetaxusa If you have estimated taxes credited to you from the estate or trust (from Schedule K-1 (Form 1041)), you must report the estimated taxes on Schedule E (Form 1040). 2012 freetaxusa On the dotted line next to the entry space for line 37 of Schedule E (Form 1040), enter “ES payment claimed” and the amount. 2012 freetaxusa However, do not include this amount in the total on line 37. 2012 freetaxusa Instead, enter the amount on Form 1040, line 63. 2012 freetaxusa This estimated tax payment for 2013 is treated as being made by you on January 15, 2014. 2012 freetaxusa Name changed. 2012 freetaxusa   If you changed your name, and you made estimated tax payments using your former name, attach a statement to the front of your paper tax return indicating: When you made the payments, The amount of each payment, Your name when you made the payments, and The social security number under which you made the payments. 2012 freetaxusa  The statement should cover payments you made jointly with your spouse as well as any you made separately. 2012 freetaxusa   Be sure to report the change to your local Social Security Administration office before filing your 2014 tax return. 2012 freetaxusa This prevents delays in processing your return and issuing refunds. 2012 freetaxusa It also safeguards your future social security benefits. 2012 freetaxusa For more information, call the Social Security Administration at 1-800-772-1213. 2012 freetaxusa Separate Returns If you and your spouse made separate estimated tax payments for 2013 and you file separate returns, you can take credit only for your own payments. 2012 freetaxusa If you made joint estimated tax payments, you must decide how to divide the payments between your returns. 2012 freetaxusa One of you can claim all of the estimated tax paid and the other none, or you can divide it in any other way you agree on. 2012 freetaxusa If you cannot agree, you must divide the payments in proportion to each spouse's individual tax as shown on your separate returns for 2013. 2012 freetaxusa Example. 2012 freetaxusa James and Evelyn Brown made joint estimated tax payments for 2013 totaling $3,000. 2012 freetaxusa They file separate 2013 Forms 1040. 2012 freetaxusa James' tax is $4,000 and Evelyn's is $1,000. 2012 freetaxusa If they do not agree on how to divide the $3,000, they must divide it proportionately between their returns. 2012 freetaxusa Because James' tax ($4,000) is 80% of the total tax ($5,000), his share of the estimated tax is $2,400 (80% of $3,000). 2012 freetaxusa The balance, $600 (20% of $3,000), is Evelyn's share. 2012 freetaxusa Divorced Taxpayers If you made joint estimated tax payments for 2013 and you were divorced during the year, either you or your former spouse can claim all of the joint payments, or you each can claim part of them. 2012 freetaxusa If you cannot agree on how to divide the payments, you must divide them in proportion to each spouse's individual tax as shown on your separate returns for 2013. 2012 freetaxusa See Example earlier under Separate Returns. 2012 freetaxusa If you claim any of the joint payments on your tax return, enter your former spouse's social security number (SSN) in the space provided at the top of page 1 of Form 1040 or Form 1040A. 2012 freetaxusa If you divorced and remarried in 2013, enter your present spouse's SSN in that space. 2012 freetaxusa Enter your former spouse's SSN, followed by “DIV,” under Payments to the left of Form 1040, line 63, or in the blank space to the left of Form 1040A, line 37. 2012 freetaxusa Excess Social Security or Railroad Retirement Tax Withholding Most employers must withhold social security tax from your wages. 2012 freetaxusa In some cases, however, the federal government and state and local governments do not have to withhold social security tax from their employees' wages. 2012 freetaxusa If you work for a railroad employer, that employer must withhold tier 1 railroad retirement (RRTA) tax and tier 2 RRTA tax. 2012 freetaxusa Two or more employers. 2012 freetaxusa   If you worked for two or more employers in 2013, too much social security tax or tier 1 RRTA tax may have been withheld from your pay. 2012 freetaxusa You may be able to claim the excess as a credit against your income tax when you file your return. 2012 freetaxusa Table 3-2 shows the maximum amount that should have been withheld for any of these taxes for 2013. 2012 freetaxusa Figure the excess withholding on the appropriate worksheet. 2012 freetaxusa    Table 3-2. 2012 freetaxusa Maximum Social Security and RRTA Withholding for 2013 Type of tax Maximum wages subject to tax Tax rate Maximum tax to be withheld Social security $113,700 6. 2012 freetaxusa 2% $7,049. 2012 freetaxusa 40 Tier 1 RRTA $113,700 6. 2012 freetaxusa 2% $7,049. 2012 freetaxusa 40 Tier 2 RRTA $84,300 4. 2012 freetaxusa 4% $3,709. 2012 freetaxusa 20 Joint returns. 2012 freetaxusa   If you are filing a joint return, you and your spouse must figure any excess social security or tier 1 RRTA separately. 2012 freetaxusa Note. 2012 freetaxusa All wages are subject to Medicare tax withholding. 2012 freetaxusa Employer's error. 2012 freetaxusa   If you had only one employer and he or she withheld too much social security, Medicare, or tier 1 RRTA tax, ask the employer to refund the excess amount to you. 2012 freetaxusa If the employer refuses to refund the overcollection, ask for a statement indicating the amount of the overcollection to support your claim. 2012 freetaxusa File a claim for refund using Form 843, Claim for Refund and Request for Abatement. 2012 freetaxusa Worksheet for Nonrailroad Employees If you did not work for a railroad during 2013, figure the excess social security withholding on Worksheet 3-1. 2012 freetaxusa Note. 2012 freetaxusa If you worked for both a railroad employer and a nonrailroad employer, use Worksheet 3-2, to figure excess social security and tier 1 RRTA tax. 2012 freetaxusa Where to claim credit for excess social security withholding. 2012 freetaxusa   If you file Form 1040, enter the excess on line 69. 2012 freetaxusa   If you file Form 1040A, include the excess in the total on line 41. 2012 freetaxusa Write “Excess SST” and show the amount of the credit in the space to the left of the line. 2012 freetaxusa   You cannot claim excess social security tax withholding on Form 1040EZ. 2012 freetaxusa Worksheets for Railroad Employees If you worked for a railroad during 2013, figure your excess withholding on Worksheet 3-2 and 3-3, as appropriate. 2012 freetaxusa Where to claim credit for excess tier 1 RRTA withholding. 2012 freetaxusa   If you file Form 1040, enter the excess on line 69. 2012 freetaxusa   If you file Form 1040A, include the excess in the total on line 41. 2012 freetaxusa Write “Excess SST” and show the amount of the credit in the space to the left of the line. 2012 freetaxusa   You cannot claim excess tier 1 RRTA withholding on Form 1040EZ. 2012 freetaxusa How to claim refund of excess tier 2 RRTA. 2012 freetaxusa   To claim a refund of tier 2 tax, use Form 843. 2012 freetaxusa Be sure to attach a copy of all of your Forms W-2. 2012 freetaxusa   See Worksheet 3-3 and the Instructions for Form 843, for more details. 2012 freetaxusa Worksheet 3-1. 2012 freetaxusa Excess Social Security—Nonrailroad Employees 1. 2012 freetaxusa Add all social security tax withheld (but not more than  $7,049. 2012 freetaxusa 40 for each employer). 2012 freetaxusa This tax should be shown  in box 4 of your Forms W-2. 2012 freetaxusa Enter the total here 1. 2012 freetaxusa   2. 2012 freetaxusa Enter any uncollected social security tax on tips or group-term life insurance on Form 1040, line 60, identified by “UT” 2. 2012 freetaxusa   3. 2012 freetaxusa Add lines 1 and 2. 2012 freetaxusa If $7,049. 2012 freetaxusa 40 or less, stop here. 2012 freetaxusa You cannot claim the credit 3. 2012 freetaxusa   4. 2012 freetaxusa Social security limit 4. 2012 freetaxusa $7,049. 2012 freetaxusa 40 5. 2012 freetaxusa Excess. 2012 freetaxusa Subtract line 4 from line 3 5. 2012 freetaxusa   Worksheet 3-2. 2012 freetaxusa Excess Social Security and Tier 1 RRTA—Railroad Employees 1. 2012 freetaxusa Add all social security and tier 1 RRTA tax withheld (but not more than $7,049. 2012 freetaxusa 40 for each employer). 2012 freetaxusa Social security tax should be shown in box 4 and tier 1 RRTA should be shown  in box 14 of your Forms W-2. 2012 freetaxusa Enter the total here 1. 2012 freetaxusa   2. 2012 freetaxusa Enter any uncollected social security and tier 1 RRTA tax on tips or group-term life insurance on Form 1040, line 60, identified by “UT” 2. 2012 freetaxusa   3. 2012 freetaxusa Add lines 1 and 2. 2012 freetaxusa If $7,049. 2012 freetaxusa 40 or less, stop here. 2012 freetaxusa You cannot claim the credit 3. 2012 freetaxusa   4. 2012 freetaxusa Social security and tier 1 RRTA tax limit 4. 2012 freetaxusa $7,049. 2012 freetaxusa 40 5. 2012 freetaxusa Excess. 2012 freetaxusa Subtract line 4 from line 3 5. 2012 freetaxusa   Worksheet 3-3. 2012 freetaxusa Excess Tier 2 RRTA—Railroad Employees 1. 2012 freetaxusa Add all tier 2 RRTA tax withheld (but not more than $3,709. 2012 freetaxusa 20 for each employer). 2012 freetaxusa Box 14 of your Forms W-2 should show tier 2 RRTA tax. 2012 freetaxusa Enter the total here 1. 2012 freetaxusa   2. 2012 freetaxusa Enter any uncollected tier 2 RRTA tax on tips or group-term life insurance on Form 1040, line 60, identified by “UT” 2. 2012 freetaxusa   3. 2012 freetaxusa Add lines 1 and 2. 2012 freetaxusa If $3,709. 2012 freetaxusa 20 or less, stop here. 2012 freetaxusa You cannot claim the credit. 2012 freetaxusa 3. 2012 freetaxusa   4. 2012 freetaxusa Tier 2 RRTA tax limit 4. 2012 freetaxusa $3,709. 2012 freetaxusa 20 5. 2012 freetaxusa Excess. 2012 freetaxusa Subtract line 4 from line 3. 2012 freetaxusa 5. 2012 freetaxusa   Prev  Up  Next   Home   More Online Publications