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2012 tax software free 17. 2012 tax software free   Individual Retirement Arrangements (IRAs) Table of Contents What's New Reminders Introduction Useful Items - You may want to see: Traditional IRAsWho Can Open a Traditional IRA? When and How Can a Traditional IRA Be Opened? How Much Can Be Contributed? When Can Contributions Be Made? How Much Can You Deduct? Nondeductible Contributions Inherited IRAs Can You Move Retirement Plan Assets? When Can You Withdraw or Use IRA Assets? When Must You Withdraw IRA Assets? (Required Minimum Distributions) Are Distributions Taxable? What Acts Result in Penalties or Additional Taxes? Roth IRAsWhat Is a Roth IRA? When Can a Roth IRA Be Opened? Can You Contribute to a Roth IRA? Can You Move Amounts Into a Roth IRA? Are Distributions Taxable? What's New Traditional IRA contribution and deduction limit. 2012 tax software free  The contribution limit to your traditional IRA for 2013 will be increased to the smaller of the following amounts: $5,500, or Your taxable compensation for the year. 2012 tax software free If you were age 50 or older before 2014, the most that can be contributed to your traditional IRA for 2013 will be the smaller of the following amounts: $6,500, or Your taxable compensation for the year. 2012 tax software free For more information, see How Much Can Be Contributed? later. 2012 tax software free Roth IRA contribution limit. 2012 tax software free  If contributions on your behalf are made only to Roth IRAs, your contribution limit for 2013 will generally be the lesser of: $5,500, or Your taxable compensation for the year. 2012 tax software free If you were age 50 or older before 2014 and contributions on your behalf were made only to Roth IRAs, your contribution limit for 2013 will generally be the lesser of: $6,500, or Your taxable compensation for the year. 2012 tax software free However, if your modified adjusted gross income (AGI) is above a certain amount, your contribution limit may be reduced. 2012 tax software free For more information, see How Much Can Be Contributed? under Can You Contribute to a Roth IRA? later. 2012 tax software free Modified AGI limit for traditional IRA contributions increased. 2012 tax software free  For 2013, if you were covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is: More than $95,000 but less than $115,000 for a married couple filing a joint return or a qualifying widow(er), More than $59,000 but less than $69,000 for a single individual or head of household, or Less than $10,000 for a married individual filing a separate return. 2012 tax software free If you either lived with your spouse or file a joint return, and your spouse was covered by a retirement plan at work, but you were not, your deduction is phased out if your modified AGI is more than $178,000 but less than $188,000. 2012 tax software free If your modified AGI is $188,000 or more, you cannot take a deduction for contributions to a traditional IRA. 2012 tax software free See How Much Can You Deduct , later. 2012 tax software free Modified AGI limit for Roth IRA contributions increased. 2012 tax software free  For 2013, your Roth IRA contribution limit is reduced (phased out) in the following situations. 2012 tax software free Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $178,000. 2012 tax software free You cannot make a Roth IRA contribution if your modified AGI is $188,000 or more. 2012 tax software free Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2013 and your modified AGI is at least $112,000. 2012 tax software free You cannot make a Roth IRA contribution if your modified AGI is $127,000 or more. 2012 tax software free Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. 2012 tax software free You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more. 2012 tax software free See Can You Contribute to a Roth IRA , later. 2012 tax software free Net Investment Income Tax. 2012 tax software free   For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan including IRAs (for example; 401(a), 403(a), 403(b), 408, 408A, or 457(b) plans). 2012 tax software free However, these distributions are taken into account when determining the modified adjusted gross income threshold. 2012 tax software free Distributions from a nonqualified retirement plan are included in net investment income. 2012 tax software free See Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts, and its instructions for more information. 2012 tax software free Name change. 2012 tax software free  All spousal IRAs have been renamed Kay Bailey Hutchison Spousal IRAs. 2012 tax software free There are no changes to the rules regarding these IRAs. 2012 tax software free See Kay Bailey Hutchison Spousal IRA Limit , later, for more information. 2012 tax software free Reminders 2014 limits. 2012 tax software free   You can find information about the 2014 contribution and AGI limits in Publication 590. 2012 tax software free Contributions to both traditional and Roth IRAs. 2012 tax software free   For information on your combined contribution limit if you contribute to both traditional and Roth IRAs, see Roth IRAs and traditional IRAs under How Much Can Be Contributed? in Roth IRAs, later. 2012 tax software free Statement of required minimum distribution. 2012 tax software free  If a minimum distribution from your IRA is required, the trustee, custodian, or issuer that held the IRA at the end of the preceding year must either report the amount of the required minimum distribution to you, or offer to calculate it for you. 2012 tax software free The report or offer must include the date by which the amount must be distributed. 2012 tax software free The report is due January 31 of the year in which the minimum distribution is required. 2012 tax software free It can be provided with the year-end fair market value statement that you normally get each year. 2012 tax software free No report is required for IRAs of owners who have died. 2012 tax software free IRA interest. 2012 tax software free  Although interest earned from your IRA is generally not taxed in the year earned, it is not tax-exempt interest. 2012 tax software free Tax on your traditional IRA is generally deferred until you take a distribution. 2012 tax software free Do not report this interest on your tax return as tax-exempt interest. 2012 tax software free Form 8606. 2012 tax software free   To designate contributions as nondeductible, you must file Form 8606, Nondeductible IRAs. 2012 tax software free The term “50 or older” is used several times in this chapter. 2012 tax software free It refers to an IRA owner who is age 50 or older by the end of the tax year. 2012 tax software free Introduction An individual retirement arrangement (IRA) is a personal savings plan that gives you tax advantages for setting aside money for your retirement. 2012 tax software free This chapter discusses the following topics. 2012 tax software free The rules for a traditional IRA (any IRA that is not a Roth or SIMPLE IRA). 2012 tax software free The Roth IRA, which features nondeductible contributions and tax-free distributions. 2012 tax software free Simplified Employee Pensions (SEPs) and Savings Incentive Match Plans for Employees (SIMPLEs) are not discussed in this chapter. 2012 tax software free For more information on these plans and employees' SEP IRAs and SIMPLE IRAs that are part of these plans, see Publications 560 and 590. 2012 tax software free For information about contributions, deductions, withdrawals, transfers, rollovers, and other transactions, see Publication 590. 2012 tax software free Useful Items - You may want to see: Publication 560 Retirement Plans for Small Business 590 Individual Retirement Arrangements (IRAs) Form (and Instructions) 5329 Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts 8606 Nondeductible IRAs Traditional IRAs In this chapter, the original IRA (sometimes called an ordinary or regular IRA) is referred to as a “traditional IRA. 2012 tax software free ” A traditional IRA is any IRA that is not a Roth IRA or a SIMPLE IRA. 2012 tax software free Two advantages of a traditional IRA are: You may be able to deduct some or all of your contributions to it, depending on your circumstances, and Generally, amounts in your IRA, including earnings and gains, are not taxed until they are distributed. 2012 tax software free Who Can Open a Traditional IRA? You can open and make contributions to a traditional IRA if: You (or, if you file a joint return, your spouse) received taxable compensation during the year, and You were not age 70½ by the end of the year. 2012 tax software free What is compensation?   Generally, compensation is what you earn from working. 2012 tax software free Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services. 2012 tax software free The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). 2012 tax software free   Scholarship and fellowship payments are compensation for this purpose only if shown in box 1 of Form W-2. 2012 tax software free   Compensation also includes commissions and taxable alimony and separate maintenance payments. 2012 tax software free Self-employment income. 2012 tax software free   If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of: The deduction for contributions made on your behalf to retirement plans, and The deductible part of your self-employment tax. 2012 tax software free   Compensation includes earnings from self-employment even if they are not subject to self-employment tax because of your religious beliefs. 2012 tax software free Nontaxable combat pay. 2012 tax software free   For IRA purposes, if you were a member of the U. 2012 tax software free S. 2012 tax software free Armed Forces, your compensation includes any nontaxable combat pay you receive. 2012 tax software free What is not compensation?   Compensation does not include any of the following items. 2012 tax software free Earnings and profits from property, such as rental income, interest income, and dividend income. 2012 tax software free Pension or annuity income. 2012 tax software free Deferred compensation received (compensation payments postponed from a past year). 2012 tax software free Income from a partnership for which you do not provide services that are a material income-producing factor. 2012 tax software free Conservation Reserve Program (CRP) payments reported on Schedule SE (Form 1040), line 1b. 2012 tax software free Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs. 2012 tax software free When and How Can a Traditional IRA Be Opened? You can open a traditional IRA at any time. 2012 tax software free However, the time for making contributions for any year is limited. 2012 tax software free See When Can Contributions Be Made , later. 2012 tax software free You can open different kinds of IRAs with a variety of organizations. 2012 tax software free You can open an IRA at a bank or other financial institution or with a mutual fund or life insurance company. 2012 tax software free You can also open an IRA through your stockbroker. 2012 tax software free Any IRA must meet Internal Revenue Code requirements. 2012 tax software free Kinds of traditional IRAs. 2012 tax software free   Your traditional IRA can be an individual retirement account or annuity. 2012 tax software free It can be part of either a simplified employee pension (SEP) or an employer or employee association trust account. 2012 tax software free How Much Can Be Contributed? There are limits and other rules that affect the amount that can be contributed to a traditional IRA. 2012 tax software free These limits and other rules are explained below. 2012 tax software free Community property laws. 2012 tax software free   Except as discussed later under Kay Bailey Hutchison Spousal IRA limit , each spouse figures his or her limit separately, using his or her own compensation. 2012 tax software free This is the rule even in states with community property laws. 2012 tax software free Brokers' commissions. 2012 tax software free   Brokers' commissions paid in connection with your traditional IRA are subject to the contribution limit. 2012 tax software free Trustees' fees. 2012 tax software free   Trustees' administrative fees are not subject to the contribution limit. 2012 tax software free Qualified reservist repayments. 2012 tax software free   If you are (or were) a member of a reserve component and you were ordered or called to active duty after September 11, 2001, you may be able to contribute (repay) to an IRA amounts equal to any qualified reservist distributions you received. 2012 tax software free You can make these repayment contributions even if they would cause your total contributions to the IRA to be more than the general limit on contributions. 2012 tax software free To be eligible to make these repayment contributions, you must have received a qualified reservist distribution from an IRA or from a section 401(k) or 403(b) plan or similar arrangement. 2012 tax software free   For more information, see Qualified reservist repayments under How Much Can Be Contributed? in chapter 1 of Publication 590. 2012 tax software free Contributions on your behalf to a traditional IRA reduce your limit for contributions to a Roth IRA. 2012 tax software free (See Roth IRAs, later. 2012 tax software free ) General limit. 2012 tax software free   For 2013, the most that can be contributed to your traditional IRA generally is the smaller of the following amounts. 2012 tax software free $5,500 ($6,500 if you are 50 or older). 2012 tax software free Your taxable compensation (defined earlier) for the year. 2012 tax software free This is the most that can be contributed regardless of whether the contributions are to one or more traditional IRAs or whether all or part of the contributions are nondeductible. 2012 tax software free (See Nondeductible Contributions , later. 2012 tax software free ) Qualified reservist repayments do not affect this limit. 2012 tax software free Example 1. 2012 tax software free Betty, who is 34 years old and single, earned $24,000 in 2013. 2012 tax software free Her IRA contributions for 2013 are limited to $5,500. 2012 tax software free Example 2. 2012 tax software free John, an unmarried college student working part time, earned $3,500 in 2013. 2012 tax software free His IRA contributions for 2013 are limited to $3,500, the amount of his compensation. 2012 tax software free Kay Bailey Hutchison Spousal IRA limit. 2012 tax software free   For 2013, if you file a joint return and your taxable compensation is less than that of your spouse, the most that can be contributed for the year to your IRA is the smaller of the following amounts. 2012 tax software free $5,500 ($6,500 if you are 50 or older). 2012 tax software free The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts. 2012 tax software free Your spouse's IRA contribution for the year to a traditional IRA. 2012 tax software free Any contribution for the year to a Roth IRA on behalf of your spouse. 2012 tax software free This means that the total combined contributions that can be made for the year to your IRA and your spouse's IRA can be as much as $11,000 ($12,000 if only one of you is 50 or older, or $13,000 if both of you are 50 or older). 2012 tax software free When Can Contributions Be Made? As soon as you open your traditional IRA, contributions can be made to it through your chosen sponsor (trustee or other administrator). 2012 tax software free Contributions must be in the form of money (cash, check, or money order). 2012 tax software free Property cannot be contributed. 2012 tax software free Contributions must be made by due date. 2012 tax software free   Contributions can be made to your traditional IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions. 2012 tax software free Age 70½ rule. 2012 tax software free   Contributions cannot be made to your traditional IRA for the year in which you reach age 70½ or for any later year. 2012 tax software free   You attain age 70½ on the date that is 6 calendar months after the 70th anniversary of your birth. 2012 tax software free If you were born on or before June 30, 1943, you cannot contribute for 2013 or any later year. 2012 tax software free Designating year for which contribution is made. 2012 tax software free   If an amount is contributed to your traditional IRA between January 1 and April 15, you should tell the sponsor which year (the current year or the previous year) the contribution is for. 2012 tax software free If you do not tell the sponsor which year it is for, the sponsor can assume, and report to the IRS, that the contribution is for the current year (the year the sponsor received it). 2012 tax software free Filing before a contribution is made. 2012 tax software free   You can file your return claiming a traditional IRA contribution before the contribution is actually made. 2012 tax software free Generally, the contribution must be made by the due date of your return, not including extensions. 2012 tax software free Contributions not required. 2012 tax software free   You do not have to contribute to your traditional IRA for every tax year, even if you can. 2012 tax software free How Much Can You Deduct? Generally, you can deduct the lesser of: The contributions to your traditional IRA for the year, or The general limit (or the Kay Bailey Hutchison Spousal IRA limit, if it applies). 2012 tax software free However, if you or your spouse was covered by an employer retirement plan, you may not be able to deduct this amount. 2012 tax software free See Limit If Covered by Employer Plan , later. 2012 tax software free You may be able to claim a credit for contributions to your traditional IRA. 2012 tax software free For more information, see chapter 37. 2012 tax software free Trustees' fees. 2012 tax software free   Trustees' administrative fees that are billed separately and paid in connection with your traditional IRA are not deductible as IRA contributions. 2012 tax software free However, they may be deductible as a miscellaneous itemized deduction on Schedule A (Form 1040). 2012 tax software free See chapter 28. 2012 tax software free Brokers' commissions. 2012 tax software free   Brokers' commissions are part of your IRA contribution and, as such, are deductible subject to the limits. 2012 tax software free Full deduction. 2012 tax software free   If neither you nor your spouse was covered for any part of the year by an employer retirement plan, you can take a deduction for total contributions to one or more traditional IRAs of up to the lesser of: $5,500 ($6,500 if you are age 50 or older in 2013). 2012 tax software free 100% of your compensation. 2012 tax software free This limit is reduced by any contributions made to a 501(c)(18) plan on your behalf. 2012 tax software free Kay Bailey Hutchison Spousal IRA. 2012 tax software free   In the case of a married couple with unequal compensation who file a joint return, the deduction for contributions to the traditional IRA of the spouse with less compensation is limited to the lesser of the following amounts. 2012 tax software free $5,500 ($6,500 if the spouse with the lower compensation is age 50 or older in 2013). 2012 tax software free The total compensation includible in the gross income of both spouses for the year reduced by the following three amounts. 2012 tax software free The IRA deduction for the year of the spouse with the greater compensation. 2012 tax software free Any designated nondeductible contribution for the year made on behalf of the spouse with the greater compensation. 2012 tax software free Any contributions for the year to a Roth IRA on behalf of the spouse with the greater compensation. 2012 tax software free This limit is reduced by any contributions to a 501(c)(18) plan on behalf of the spouse with the lesser compensation. 2012 tax software free Note. 2012 tax software free If you were divorced or legally separated (and did not remarry) before the end of the year, you cannot deduct any contributions to your spouse's IRA. 2012 tax software free After a divorce or legal separation, you can deduct only contributions to your own IRA. 2012 tax software free Your deductions are subject to the rules for single individuals. 2012 tax software free Covered by an employer retirement plan. 2012 tax software free   If you or your spouse was covered by an employer retirement plan at any time during the year for which contributions were made, your deduction may be further limited. 2012 tax software free This is discussed later under Limit If Covered by Employer Plan . 2012 tax software free Limits on the amount you can deduct do not affect the amount that can be contributed. 2012 tax software free See Nondeductible Contributions , later. 2012 tax software free Are You Covered by an Employer Plan? The Form W-2 you receive from your employer has a box used to indicate whether you were covered for the year. 2012 tax software free The “Retirement plan” box should be checked if you were covered. 2012 tax software free Reservists and volunteer firefighters should also see Situations in Which You Are Not Covered by an Employer Plan , later. 2012 tax software free If you are not certain whether you were covered by your employer's retirement plan, you should ask your employer. 2012 tax software free Federal judges. 2012 tax software free   For purposes of the IRA deduction, federal judges are covered by an employer retirement plan. 2012 tax software free For Which Year(s) Are You Covered by an Employer Plan? Special rules apply to determine the tax years for which you are covered by an employer plan. 2012 tax software free These rules differ depending on whether the plan is a defined contribution plan or a defined benefit plan. 2012 tax software free Tax year. 2012 tax software free   Your tax year is the annual accounting period you use to keep records and report income and expenses on your income tax return. 2012 tax software free For almost all people, the tax year is the calendar year. 2012 tax software free Defined contribution plan. 2012 tax software free   Generally, you are covered by a defined contribution plan for a tax year if amounts are contributed or allocated to your account for the plan year that ends with or within that tax year. 2012 tax software free   A defined contribution plan is a plan that provides for a separate account for each person covered by the plan. 2012 tax software free Types of defined contribution plans include profit-sharing plans, stock bonus plans, and money purchase pension plans. 2012 tax software free Defined benefit plan. 2012 tax software free   If you are eligible to participate in your employer's defined benefit plan for the plan year that ends within your tax year, you are covered by the plan. 2012 tax software free This rule applies even if you: Declined to participate in the plan, Did not make a required contribution, or Did not perform the minimum service required to accrue a benefit for the year. 2012 tax software free   A defined benefit plan is any plan that is not a defined contribution plan. 2012 tax software free Defined benefit plans include pension plans and annuity plans. 2012 tax software free No vested interest. 2012 tax software free   If you accrue a benefit for a plan year, you are covered by that plan even if you have no vested interest in (legal right to) the accrual. 2012 tax software free Situations in Which You Are Not Covered by an Employer Plan Unless you are covered under another employer plan, you are not covered by an employer plan if you are in one of the situations described below. 2012 tax software free Social security or railroad retirement. 2012 tax software free   Coverage under social security or railroad retirement is not coverage under an employer retirement plan. 2012 tax software free Benefits from a previous employer's plan. 2012 tax software free   If you receive retirement benefits from a previous employer's plan, you are not covered by that plan. 2012 tax software free Reservists. 2012 tax software free   If the only reason you participate in a plan is because you are a member of a reserve unit of the armed forces, you may not be covered by the plan. 2012 tax software free You are not covered by the plan if both of the following conditions are met. 2012 tax software free The plan you participate in is established for its employees by: The United States, A state or political subdivision of a state, or An instrumentality of either (a) or (b) above. 2012 tax software free You did not serve more than 90 days on active duty during the year (not counting duty for training). 2012 tax software free Volunteer firefighters. 2012 tax software free   If the only reason you participate in a plan is because you are a volunteer firefighter, you may not be covered by the plan. 2012 tax software free You are not covered by the plan if both of the following conditions are met. 2012 tax software free The plan you participate in is established for its employees by: The United States, A state or political subdivision of a state, or An instrumentality of either (a) or (b) above. 2012 tax software free Your accrued retirement benefits at the beginning of the year will not provide more than $1,800 per year at retirement. 2012 tax software free Limit If Covered by Employer Plan If either you or your spouse was covered by an employer retirement plan, you may be entitled to only a partial (reduced) deduction or no deduction at all, depending on your income and your filing status. 2012 tax software free Your deduction begins to decrease (phase out) when your income rises above a certain amount and is eliminated altogether when it reaches a higher amount. 2012 tax software free These amounts vary depending on your filing status. 2012 tax software free To determine if your deduction is subject to phaseout, you must determine your modified adjusted gross income (AGI) and your filing status. 2012 tax software free See Filing status and Modified adjusted gross income (AGI) , later. 2012 tax software free Then use Table 17-1 or 17-2 to determine if the phaseout applies. 2012 tax software free Social security recipients. 2012 tax software free   Instead of using Table 17-1 or Table 17-2, use the worksheets in Appendix B of Publication 590 if, for the year, all of the following apply. 2012 tax software free You received social security benefits. 2012 tax software free You received taxable compensation. 2012 tax software free Contributions were made to your traditional IRA. 2012 tax software free You or your spouse was covered by an employer retirement plan. 2012 tax software free Use those worksheets to figure your IRA deduction, your nondeductible contribution, and the taxable portion, if any, of your social security benefits. 2012 tax software free Deduction phaseout. 2012 tax software free   If you were covered by an employer retirement plan and you did not receive any social security retirement benefits, your IRA deduction may be reduced or eliminated depending on your filing status and modified AGI as shown in Table 17-1. 2012 tax software free Table 17-1. 2012 tax software free Effect of Modified AGI1 on Deduction if You Are Covered by Retirement Plan at Work If you are covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction. 2012 tax software free IF your filing status is. 2012 tax software free . 2012 tax software free . 2012 tax software free   AND your modified AGI is. 2012 tax software free . 2012 tax software free . 2012 tax software free   THEN you can take. 2012 tax software free . 2012 tax software free . 2012 tax software free single   or  head of household   $59,000 or less   a full deduction. 2012 tax software free   more than $59,000 but less than $69,000   a partial deduction. 2012 tax software free   $69,000 or more   no deduction. 2012 tax software free married filing jointly   or  qualifying widow(er)   $95,000 or less   a full deduction. 2012 tax software free   more than $95,000 but less than $115,000   a partial deduction. 2012 tax software free   $115,000 or more   no deduction. 2012 tax software free married filing separately2   less than $10,000   a partial deduction. 2012 tax software free   $10,000 or more   no deduction. 2012 tax software free 1Modified AGI (adjusted gross income). 2012 tax software free See Modified adjusted gross income (AGI) . 2012 tax software free 2If you did not live with your spouse at any time during the year, your filing status is considered Single for this purpose (therefore, your IRA deduction is determined under the “Single” column). 2012 tax software free If your spouse is covered. 2012 tax software free   If you are not covered by an employer retirement plan, but your spouse is, and you did not receive any social security benefits, your IRA deduction may be reduced or eliminated entirely depending on your filing status and modified AGI as shown in Table 17-2. 2012 tax software free Filing status. 2012 tax software free   Your filing status depends primarily on your marital status. 2012 tax software free For this purpose, you need to know if your filing status is single or head of household, married filing jointly or qualifying widow(er), or married filing separately. 2012 tax software free If you need more information on filing status, see chapter 2. 2012 tax software free Lived apart from spouse. 2012 tax software free   If you did not live with your spouse at any time during the year and you file a separate return, your filing status, for this purpose, is single. 2012 tax software free Table 17-2. 2012 tax software free Effect of Modified AGI1 on Deduction if You Are NOT Covered by Retirement Plan at Work If you are not covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction. 2012 tax software free IF your filing status is. 2012 tax software free . 2012 tax software free . 2012 tax software free   AND your modified AGI is. 2012 tax software free . 2012 tax software free . 2012 tax software free   THEN you can take. 2012 tax software free . 2012 tax software free . 2012 tax software free single, head of household, or qualifying widow(er)   any amount   a full deduction. 2012 tax software free married filing jointly or separately with a spouse who is not covered by a plan at work   any amount   a full deduction. 2012 tax software free married filing jointly with a spouse who is covered by a plan at work   $178,000 or less   a full deduction. 2012 tax software free   more than $178,000 but less than $188,000   a partial deduction. 2012 tax software free   $188,000 or more   no deduction. 2012 tax software free married filing separately with a spouse who is covered by a plan at work2   less than $10,000   a partial deduction. 2012 tax software free   $10,000 or more   no deduction. 2012 tax software free 1Modified AGI (adjusted gross income). 2012 tax software free See Modified adjusted gross income (AGI) . 2012 tax software free 2You are entitled to the full deduction if you did not live with your spouse at any time during the year. 2012 tax software free Modified adjusted gross income (AGI). 2012 tax software free   How you figure your modified AGI depends on whether you are filing Form 1040 or Form 1040A. 2012 tax software free If you made contributions to your IRA for 2013 and received a distribution from your IRA in 2013, see Publication 590. 2012 tax software free You may be able to use Worksheet 17-1 to figure your modified AGI. 2012 tax software free    Do not assume that your modified AGI is the same as your compensation. 2012 tax software free Your modified AGI may include income in addition to your compensation (discussed earlier), such as interest, dividends, and income from IRA distributions. 2012 tax software free Form 1040. 2012 tax software free   If you file Form 1040, refigure the amount on the page 1 “adjusted gross income” line without taking into account any of the following eight amounts. 2012 tax software free IRA deduction. 2012 tax software free Student loan interest deduction. 2012 tax software free Tuition and fees deduction. 2012 tax software free Domestic production activities deduction. 2012 tax software free Foreign earned income exclusion. 2012 tax software free Foreign housing exclusion or deduction. 2012 tax software free Exclusion of qualified savings bond interest shown on Form 8815, Exclusion of Interest From Series EE and I U. 2012 tax software free S. 2012 tax software free Savings Bonds Issued After 1989. 2012 tax software free Exclusion of employer-provided adoption benefits shown on Form 8839, Qualified Adoption Expenses. 2012 tax software free This is your modified AGI. 2012 tax software free Form 1040A. 2012 tax software free   If you file Form 1040A, refigure the amount on the page 1 “adjusted gross income” line without taking into account any of the following amounts. 2012 tax software free IRA deduction. 2012 tax software free Student loan interest deduction. 2012 tax software free Tuition and fees deduction. 2012 tax software free Exclusion of qualified savings bond interest shown on Form 8815. 2012 tax software free This is your modified AGI. 2012 tax software free Both contributions for 2013 and distributions in 2013. 2012 tax software free   If all three of the following apply, any IRA distributions you received in 2013 may be partly tax free and partly taxable. 2012 tax software free You received distributions in 2013 from one or more traditional IRAs. 2012 tax software free You made contributions to a traditional IRA for 2013. 2012 tax software free Some of those contributions may be nondeductible contributions. 2012 tax software free If this is your situation, you must figure the taxable part of the traditional IRA distribution before you can figure your modified AGI. 2012 tax software free To do this, you can use Worksheet 1-5, Figuring the Taxable Part of Your IRA Distribution, in Publication 590. 2012 tax software free   If at least one of the above does not apply, figure your modified AGI using Worksheet 17-1, later. 2012 tax software free    How to figure your reduced IRA deduction. 2012 tax software free   You can figure your reduced IRA deduction for either Form 1040 or Form 1040A by using the worksheets in chapter 1 of Publication 590. 2012 tax software free Also, the instructions for Form 1040 and Form 1040A include similar worksheets that you may be able to use instead. 2012 tax software free Worksheet 17-1. 2012 tax software free Figuring Your Modified AGI Use this worksheet to figure your modified adjusted gross income for traditional IRA purposes. 2012 tax software free 1. 2012 tax software free Enter your adjusted gross income (AGI) from Form 1040, line 38, or Form 1040A, line 22, figured without taking into account the amount from Form 1040, line 32, or Form 1040A, line 17 1. 2012 tax software free   2. 2012 tax software free Enter any student loan interest deduction from Form 1040, line 33, or Form 1040A, line 18 2. 2012 tax software free   3. 2012 tax software free Enter any tuition and fees deduction from Form 1040, line 34, or Form 1040A, line 19 3. 2012 tax software free   4. 2012 tax software free Enter any domestic production activities deduction from Form 1040, line 35 4. 2012 tax software free   5. 2012 tax software free Enter any foreign earned income and/or housing exclusion from Form 2555, line 45, or Form 2555-EZ, line 18 5. 2012 tax software free   6. 2012 tax software free Enter any foreign housing deduction from Form 2555, line 50 6. 2012 tax software free   7. 2012 tax software free Enter any excludable savings bond interest from Form 8815, line 14 7. 2012 tax software free   8. 2012 tax software free Enter any excluded employer-provided adoption benefits from Form 8839, line 28 8. 2012 tax software free   9. 2012 tax software free Add lines 1 through 8. 2012 tax software free This is your Modified AGI for traditional IRA purposes 9. 2012 tax software free   Reporting Deductible Contributions If you file Form 1040, enter your IRA deduction on line 32 of that form. 2012 tax software free If you file Form 1040A, enter your IRA deduction on line 17. 2012 tax software free You cannot deduct IRA contributions on Form 1040EZ. 2012 tax software free Nondeductible Contributions Although your deduction for IRA contributions may be reduced or eliminated, contributions can be made to your IRA up to the general limit or, if it applies, the Kay Bailey Hutchison Spousal IRA limit. 2012 tax software free The difference between your total permitted contributions and your IRA deduction, if any, is your nondeductible contribution. 2012 tax software free Example. 2012 tax software free Mike is 28 years old and single. 2012 tax software free In 2013, he was covered by a retirement plan at work. 2012 tax software free His salary was $57,312. 2012 tax software free His modified AGI was $70,000. 2012 tax software free Mike made a $5,500 IRA contribution for 2013. 2012 tax software free Because he was covered by a retirement plan and his modified AGI was over $69,000, he cannot deduct his $5,500 IRA contribution. 2012 tax software free He must designate this contribution as a nondeductible contribution by reporting it on Form 8606, as explained next. 2012 tax software free Form 8606. 2012 tax software free   To designate contributions as nondeductible, you must file Form 8606. 2012 tax software free   You do not have to designate a contribution as nondeductible until you file your tax return. 2012 tax software free When you file, you can even designate otherwise deductible contributions as nondeductible. 2012 tax software free   You must file Form 8606 to report nondeductible contributions even if you do not have to file a tax return for the year. 2012 tax software free A Form 8606 is not used for the year that you make a rollover from a qualified retirement plan to a traditional IRA and the rollover includes nontaxable amounts. 2012 tax software free In those situations, a Form 8606 is completed for the year you take a distribution from that IRA. 2012 tax software free See Form 8606 under Distributions Fully or Partly Taxable, later. 2012 tax software free Failure to report nondeductible contributions. 2012 tax software free   If you do not report nondeductible contributions, all of the contributions to your traditional IRA will be treated as deductible contributions when withdrawn. 2012 tax software free All distributions from your IRA will be taxed unless you can show, with satisfactory evidence, that nondeductible contributions were made. 2012 tax software free Penalty for overstatement. 2012 tax software free   If you overstate the amount of nondeductible contributions on your Form 8606 for any tax year, you must pay a penalty of $100 for each overstatement, unless it was due to reasonable cause. 2012 tax software free Penalty for failure to file Form 8606. 2012 tax software free   You will have to pay a $50 penalty if you do not file a required Form 8606, unless you can prove that the failure was due to reasonable cause. 2012 tax software free    Tax on earnings on nondeductible contributions. 2012 tax software free   As long as contributions are within the contribution limits, none of the earnings or gains on contributions (deductible or nondeductible) will be taxed until they are distributed. 2012 tax software free See When Can You Withdraw or Use IRA Assets , later. 2012 tax software free Cost basis. 2012 tax software free   You will have a cost basis in your traditional IRA if you made any nondeductible contributions. 2012 tax software free Your cost basis is the sum of the nondeductible contributions to your IRA minus any withdrawals or distributions of nondeductible contributions. 2012 tax software free Inherited IRAs If you inherit a traditional IRA, you are called a beneficiary. 2012 tax software free A beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after he or she dies. 2012 tax software free Beneficiaries of a traditional IRA must include in their gross income any taxable distributions they receive. 2012 tax software free Inherited from spouse. 2012 tax software free   If you inherit a traditional IRA from your spouse, you generally have the following three choices. 2012 tax software free You can: Treat it as your own IRA by designating yourself as the account owner. 2012 tax software free Treat it as your own by rolling it over into your IRA, or to the extent it is taxable, into a: Qualified employer plan, Qualified employee annuity plan (section 403(a) plan), Tax-sheltered annuity plan (section 403(b) plan), or Deferred compensation plan of a state or local government (section 457 plan). 2012 tax software free Treat yourself as the beneficiary rather than treating the IRA as your own. 2012 tax software free Treating it as your own. 2012 tax software free   You will be considered to have chosen to treat the IRA as your own if: Contributions (including rollover contributions) are made to the inherited IRA, or You do not take the required minimum distribution for a year as a beneficiary of the IRA. 2012 tax software free You will only be considered to have chosen to treat the IRA as your own if: You are the sole beneficiary of the IRA, and You have an unlimited right to withdraw amounts from it. 2012 tax software free   However, if you receive a distribution from your deceased spouse's IRA, you can roll that distribution over into your own IRA within the 60-day time limit, as long as the distribution is not a required distribution, even if you are not the sole beneficiary of your deceased spouse's IRA. 2012 tax software free Inherited from someone other than spouse. 2012 tax software free   If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. 2012 tax software free This means that you cannot make any contributions to the IRA. 2012 tax software free It also means you cannot roll over any amounts into or out of the inherited IRA. 2012 tax software free However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary. 2012 tax software free For more information, see the discussion of inherited IRAs under Rollover From One IRA Into Another, later. 2012 tax software free Can You Move Retirement Plan Assets? You can transfer, tax free, assets (money or property) from other retirement plans (including traditional IRAs) to a traditional IRA. 2012 tax software free You can make the following kinds of transfers. 2012 tax software free Transfers from one trustee to another. 2012 tax software free Rollovers. 2012 tax software free Transfers incident to a divorce. 2012 tax software free Transfers to Roth IRAs. 2012 tax software free   Under certain conditions, you can move assets from a traditional IRA or from a designated Roth account to a Roth IRA. 2012 tax software free You can also move assets from a qualified retirement plan to a Roth IRA. 2012 tax software free See Can You Move Amounts Into a Roth IRA? under Roth IRAs, later. 2012 tax software free Trustee-to-Trustee Transfer A transfer of funds in your traditional IRA from one trustee directly to another, either at your request or at the trustee's request, is not a rollover. 2012 tax software free Because there is no distribution to you, the transfer is tax free. 2012 tax software free Because it is not a rollover, it is not affected by the 1-year waiting period required between rollovers, discussed later under Rollover From One IRA Into Another . 2012 tax software free For information about direct transfers to IRAs from retirement plans other than IRAs, see Can You Move Retirement Plan Assets? in chapter 1 and Can You Move Amounts Into a Roth IRA? in chapter 2 of Publication 590. 2012 tax software free Rollovers Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute (roll over) to another retirement plan. 2012 tax software free The contribution to the second retirement plan is called a “rollover contribution. 2012 tax software free ” Note. 2012 tax software free An amount rolled over tax free from one retirement plan to another is generally includible in income when it is distributed from the second plan. 2012 tax software free Kinds of rollovers to a traditional IRA. 2012 tax software free   You can roll over amounts from the following plans into a traditional IRA: A traditional IRA, An employer's qualified retirement plan for its employees, A deferred compensation plan of a state or local government (section 457 plan), or A tax-sheltered annuity plan (section 403(b) plan). 2012 tax software free Treatment of rollovers. 2012 tax software free   You cannot deduct a rollover contribution, but you must report the rollover distribution on your tax return as discussed later under Reporting rollovers from IRAs and under Reporting rollovers from employer plans . 2012 tax software free Kinds of rollovers from a traditional IRA. 2012 tax software free   You may be able to roll over, tax free, a distribution from your traditional IRA into a qualified plan. 2012 tax software free These plans include the federal Thrift Savings Fund (for federal employees), deferred compensation plans of state or local governments (section 457 plans), and tax-sheltered annuity plans (section 403(b) plans). 2012 tax software free The part of the distribution that you can roll over is the part that would otherwise be taxable (includible in your income). 2012 tax software free Qualified plans may, but are not required to, accept such rollovers. 2012 tax software free Time limit for making a rollover contribution. 2012 tax software free   You generally must make the rollover contribution by the 60th day after the day you receive the distribution from your traditional IRA or your employer's plan. 2012 tax software free The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. 2012 tax software free For more information, see Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. 2012 tax software free Extension of rollover period. 2012 tax software free   If an amount distributed to you from a traditional IRA or a qualified employer retirement plan is a frozen deposit at any time during the 60-day period allowed for a rollover, special rules extend the rollover period. 2012 tax software free For more information, see Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. 2012 tax software free More information. 2012 tax software free   For more information on rollovers, see Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. 2012 tax software free Rollover From One IRA Into Another You can withdraw, tax free, all or part of the assets from one traditional IRA if you reinvest them within 60 days in the same or another traditional IRA. 2012 tax software free Because this is a rollover, you cannot deduct the amount that you reinvest in an IRA. 2012 tax software free Waiting period between rollovers. 2012 tax software free   Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. 2012 tax software free You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover. 2012 tax software free   The 1-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA. 2012 tax software free Example. 2012 tax software free You have two traditional IRAs, IRA-1 and IRA-2. 2012 tax software free You make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). 2012 tax software free You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA. 2012 tax software free However, the rollover from IRA-1 into IRA-3 does not prevent you from making a tax-free rollover from IRA-2 into any other traditional IRA. 2012 tax software free This is because you have not, within the last year, rolled over, tax free, any distribution from IRA-2 or made a tax-free rollover into IRA-2. 2012 tax software free Exception. 2012 tax software free   For an exception for distributions from failed financial institutions, see Rollover From One IRA Into Another under Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. 2012 tax software free Partial rollovers. 2012 tax software free   If you withdraw assets from a traditional IRA, you can roll over part of the withdrawal tax free and keep the rest of it. 2012 tax software free The amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions). 2012 tax software free The amount you keep may be subject to the 10% additional tax on early distributions, discussed later under What Acts Result in Penalties or Additional Taxes? . 2012 tax software free Required distributions. 2012 tax software free   Amounts that must be distributed during a particular year under the required distribution rules (discussed later) are not eligible for rollover treatment. 2012 tax software free Inherited IRAs. 2012 tax software free   If you inherit a traditional IRA from your spouse, you generally can roll it over, or you can choose to make the inherited IRA your own. 2012 tax software free See Treating it as your own , earlier. 2012 tax software free Not inherited from spouse. 2012 tax software free   If you inherit a traditional IRA from someone other than your spouse, you cannot roll it over or allow it to receive a rollover contribution. 2012 tax software free You must withdraw the IRA assets within a certain period. 2012 tax software free For more information, see When Must You Withdraw Assets? in chapter 1 of Publication 590. 2012 tax software free Reporting rollovers from IRAs. 2012 tax software free   Report any rollover from one traditional IRA to the same or another traditional IRA on lines 15a and 15b, Form 1040, or lines 11a and 11b, Form 1040A, as follows. 2012 tax software free   Enter the total amount of the distribution on Form 1040, line 15a, or Form 1040A, line 11a. 2012 tax software free If the total amount on Form 1040, line 15a, or Form 1040A, line 11a, was rolled over, enter zero on Form 1040, line 15b, or Form 1040A, line 11b. 2012 tax software free If the total distribution was not rolled over, enter the taxable portion of the part that was not rolled over on Form 1040, line 15b, or Form 1040A, line 11b. 2012 tax software free Put “Rollover” next to Form 1040, line 15b, or Form 1040A, line 11b. 2012 tax software free See your tax return instructions. 2012 tax software free   If you rolled over the distribution into a qualified plan (other than an IRA) or you make the rollover in 2014, attach a statement explaining what you did. 2012 tax software free Rollover From Employer's Plan Into an IRA You can roll over into a traditional IRA all or part of an eligible rollover distribution you receive from your (or your deceased spouse's): Employer's qualified pension, profit-sharing, or stock bonus plan; Annuity plan; Tax-sheltered annuity plan (section 403(b) plan); or Governmental deferred compensation plan (section 457 plan). 2012 tax software free A qualified plan is one that meets the requirements of the Internal Revenue Code. 2012 tax software free Eligible rollover distribution. 2012 tax software free   Generally, an eligible rollover distribution is any distribution of all or part of the balance to your credit in a qualified retirement plan except the following. 2012 tax software free A required minimum distribution (explained later under When Must You Withdraw IRA Assets? (Required Minimum Distributions) ). 2012 tax software free A hardship distribution. 2012 tax software free Any of a series of substantially equal periodic distributions paid at least once a year over: Your lifetime or life expectancy, The lifetimes or life expectancies of you and your beneficiary, or A period of 10 years or more. 2012 tax software free Corrective distributions of excess contributions or excess deferrals, and any income allocable to the excess, or of excess annual additions and any allocable gains. 2012 tax software free A loan treated as a distribution because it does not satisfy certain requirements either when made or later (such as upon default), unless the participant's accrued benefits are reduced (offset) to repay the loan. 2012 tax software free Dividends on employer securities. 2012 tax software free The cost of life insurance coverage. 2012 tax software free Any nontaxable amounts that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. 2012 tax software free To recover your basis when you take distributions from your IRA, you must complete Form 8606 for the year of the distribution. 2012 tax software free See Form 8606 under Distributions Fully or Partly Taxable, later. 2012 tax software free Rollover by nonspouse beneficiary. 2012 tax software free   A direct transfer from a deceased employee's qualified pension, profit-sharing, or stock bonus plan; annuity plan; tax-sheltered annuity (section 403(b)) plan; or governmental deferred compensation (section 457) plan to an IRA set up to receive the distribution on your behalf can be treated as an eligible rollover distribution if you are the designated beneficiary of the plan and not the employee's spouse. 2012 tax software free The IRA is treated as an inherited IRA. 2012 tax software free For more information about inherited IRAs, see Inherited IRAs , earlier. 2012 tax software free Reporting rollovers from employer plans. 2012 tax software free    Enter the total distribution (before income tax or other deductions were withheld) on Form 1040, line 16a, or Form 1040A, line 12a. 2012 tax software free This amount should be shown in box 1 of Form 1099-R. 2012 tax software free From this amount, subtract any contributions (usually shown in box 5 of Form 1099-R) that were taxable to you when made. 2012 tax software free From that result, subtract the amount that was rolled over either directly or within 60 days of receiving the distribution. 2012 tax software free Enter the remaining amount, even if zero, on Form 1040, line 16b, or Form 1040A, line 12b. 2012 tax software free Also, enter "Rollover" next to Form 1040, line 16b, or Form 1040A, line 12b. 2012 tax software free Transfers Incident to Divorce If an interest in a traditional IRA is transferred from your spouse or former spouse to you by a divorce or separate maintenance decree or a written document related to such a decree, the interest in the IRA, starting from the date of the transfer, is treated as your IRA. 2012 tax software free The transfer is tax free. 2012 tax software free For detailed information, see Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. 2012 tax software free Converting From Any Traditional IRA to a Roth IRA Allowable conversions. 2012 tax software free   You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. 2012 tax software free The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a conversion contribution. 2012 tax software free If properly (and timely) rolled over, the 10% additional tax on early distributions will not apply. 2012 tax software free However, a part or all of the conversion contribution from your traditional IRA is included in your gross income. 2012 tax software free Required distributions. 2012 tax software free   You cannot convert amounts that must be distributed from your traditional IRA for a particular year (including the calendar year in which you reach age 70½) under the required distribution rules (discussed later). 2012 tax software free Income. 2012 tax software free   You must include in your gross income distributions from a traditional IRA that you would have had to include in income if you had not converted them into a Roth IRA. 2012 tax software free These amounts are normally included in income on your return for the year that you converted them from a traditional IRA to a Roth IRA. 2012 tax software free   You do not include in gross income any part of a distribution from a traditional IRA that is a return of your basis, as discussed later. 2012 tax software free   You must file Form 8606 to report 2013 conversions from traditional, SEP, or SIMPLE IRAs to a Roth IRA in 2013 (unless you recharacterized the entire amount) and to figure the amount to include in income. 2012 tax software free   If you must include any amount in your gross income, you may have to increase your withholding or make estimated tax payments. 2012 tax software free See chapter 4. 2012 tax software free Recharacterizations You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. 2012 tax software free This is called recharacterizing the contribution. 2012 tax software free See Can You Move Retirement Plan Assets? in chapter 1 of Publication 590 for more detailed information. 2012 tax software free How to recharacterize a contribution. 2012 tax software free   To recharacterize a contribution, you generally must have the contribution transferred from the first IRA (the one to which it was made) to the second IRA in a trustee-to-trustee transfer. 2012 tax software free If the transfer is made by the due date (including extensions) for your tax return for the year during which the contribution was made, you can elect to treat the contribution as having been originally made to the second IRA instead of to the first IRA. 2012 tax software free If you recharacterize your contribution, you must do all three of the following. 2012 tax software free Include in the transfer any net income allocable to the contribution. 2012 tax software free If there was a loss, the net income you must transfer may be a negative amount. 2012 tax software free Report the recharacterization on your tax return for the year during which the contribution was made. 2012 tax software free Treat the contribution as having been made to the second IRA on the date that it was actually made to the first IRA. 2012 tax software free No deduction allowed. 2012 tax software free   You cannot deduct the contribution to the first IRA. 2012 tax software free Any net income you transfer with the recharacterized contribution is treated as earned in the second IRA. 2012 tax software free Required notifications. 2012 tax software free   To recharacterize a contribution, you must notify both the trustee of the first IRA (the one to which the contribution was actually made) and the trustee of the second IRA (the one to which the contribution is being moved) that you have elected to treat the contribution as having been made to the second IRA rather than the first. 2012 tax software free You must make the notifications by the date of the transfer. 2012 tax software free Only one notification is required if both IRAs are maintained by the same trustee. 2012 tax software free The notification(s) must include all of the following information. 2012 tax software free The type and amount of the contribution to the first IRA that is to be recharacterized. 2012 tax software free The date on which the contribution was made to the first IRA and the year for which it was made. 2012 tax software free A direction to the trustee of the first IRA to transfer in a trustee-to-trustee transfer the amount of the contribution and any net income (or loss) allocable to the contribution to the trustee of the second IRA. 2012 tax software free The name of the trustee of the first IRA and the name of the trustee of the second IRA. 2012 tax software free Any additional information needed to make the transfer. 2012 tax software free Reporting a recharacterization. 2012 tax software free   If you elect to recharacterize a contribution to one IRA as a contribution to another IRA, you must report the recharacterization on your tax return as directed by Form 8606 and its instructions. 2012 tax software free You must treat the contribution as having been made to the second IRA. 2012 tax software free When Can You Withdraw or Use IRA Assets? There are rules limiting use of your IRA assets and distributions from it. 2012 tax software free Violation of the rules generally results in additional taxes in the year of violation. 2012 tax software free See What Acts Result in Penalties or Additional Taxes , later. 2012 tax software free Contributions returned before the due date of return. 2012 tax software free   If you made IRA contributions in 2013, you can withdraw them tax free by the due date of your return. 2012 tax software free If you have an extension of time to file your return, you can withdraw them tax free by the extended due date. 2012 tax software free You can do this if, for each contribution you withdraw, both of the following conditions apply. 2012 tax software free You did not take a deduction for the contribution. 2012 tax software free You withdraw any interest or other income earned on the contribution. 2012 tax software free You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn. 2012 tax software free If there was a loss, the net income earned on the contribution may be a negative amount. 2012 tax software free Note. 2012 tax software free To calculate the amount you must withdraw, see Worksheet 1-4 under When Can You Withdraw or Use Assets? in chapter 1 of Publication 590. 2012 tax software free Earnings includible in income. 2012 tax software free   You must include in income any earnings on the contributions you withdraw. 2012 tax software free Include the earnings in income for the year in which you made the contributions, not in the year in which you withdraw them. 2012 tax software free Generally, except for any part of a withdrawal that is a return of nondeductible contributions (basis), any withdrawal of your contributions after the due date (or extended due date) of your return will be treated as a taxable distribution. 2012 tax software free Excess contributions can also be recovered tax free as discussed under What Acts Result in Penalties or Additional Taxes?, later. 2012 tax software free    Early distributions tax. 2012 tax software free   The 10% additional tax on distributions made before you reach age 59½ does not apply to these tax-free withdrawals of your contributions. 2012 tax software free However, the distribution of interest or other income must be reported on Form 5329 and, unless the distribution qualifies as an exception to the age 59½ rule, it will be subject to this tax. 2012 tax software free When Must You Withdraw IRA Assets? (Required Minimum Distributions) You cannot keep funds in a traditional IRA indefinitely. 2012 tax software free Eventually they must be distributed. 2012 tax software free If there are no distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required. 2012 tax software free See Excess Accumulations (Insufficient Distributions) , later. 2012 tax software free The requirements for distributing IRA funds differ depending on whether you are the IRA owner or the beneficiary of a decedent's IRA. 2012 tax software free Required minimum distribution. 2012 tax software free   The amount that must be distributed each year is referred to as the required minimum distribution. 2012 tax software free Required distributions not eligible for rollover. 2012 tax software free   Amounts that must be distributed (required minimum distributions) during a particular year are not eligible for rollover treatment. 2012 tax software free IRA owners. 2012 tax software free   If you are the owner of a traditional IRA, you must generally start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70½. 2012 tax software free April 1 of the year following the year in which you reach age 70½ is referred to as the required beginning date. 2012 tax software free Distributions by the required beginning date. 2012 tax software free   You must receive at least a minimum amount for each year starting with the year you reach age 70½ (your 70½ year). 2012 tax software free If you do not (or did not) receive that minimum amount in your 70½ year, then you must receive distributions for your 70½ year by April 1 of the next year. 2012 tax software free   If an IRA owner dies after reaching age 70½, but before April 1 of the next year, no minimum distribution is required because death occurred before the required beginning date. 2012 tax software free Even if you begin receiving distributions before you attain age 70½, you must begin calculating and receiving required minimum distributions by your required beginning date. 2012 tax software free Distributions after the required beginning date. 2012 tax software free   The required minimum distribution for any year after the year you turn 70½ must be made by December 31 of that later year. 2012 tax software free    Beneficiaries. 2012 tax software free   If you are the beneficiary of a decedent's traditional IRA, the requirements for distributions from that IRA generally depend on whether the IRA owner died before or after the required beginning date for distributions. 2012 tax software free More information. 2012 tax software free   For more information, including how to figure your minimum required distribution each year and how to figure your required distribution if you are a beneficiary of a decedent's IRA, see When Must You Withdraw Assets? in chapter 1 of Publication 590. 2012 tax software free Are Distributions Taxable? In general, distributions from a traditional IRA are taxable in the year you receive them. 2012 tax software free Exceptions. 2012 tax software free   Exceptions to distributions from traditional IRAs being taxable in the year you receive them are: Rollovers, Qualified charitable distributions (QCD), discussed later, Tax-free withdrawals of contributions, discussed earlier, and The return of nondeductible contributions, discussed later under Distributions Fully or Partly Taxable . 2012 tax software free    Although a conversion of a traditional IRA is considered a rollover for Roth IRA purposes, it is not an exception to the rule that distributions from a traditional IRA are taxable in the year you receive them. 2012 tax software free Conversion distributions are includible in your gross income subject to this rule and the special rules for conversions explained in Converting From Any Traditional IRA Into a Roth IRA under Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. 2012 tax software free Qualified charitable distributions (QCD). 2012 tax software free   A QCD is generally a nontaxable distribution made directly by the trustee of your IRA to an organization eligible to receive tax-deductible contributions. 2012 tax software free Special rules apply if you made a qualified charitable distribution in January 2013 that you elected to treat as made in 2012. 2012 tax software free See Qualified Charitable Distributions in Publication 590 for more information. 2012 tax software free Ordinary income. 2012 tax software free   Distributions from traditional IRAs that you include in income are taxed as ordinary income. 2012 tax software free No special treatment. 2012 tax software free   In figuring your tax, you cannot use the 10-year tax option or capital gain treatment that applies to lump-sum distributions from qualified retirement plans. 2012 tax software free Distributions Fully or Partly Taxable Distributions from your traditional IRA may be fully or partly taxable, depending on whether your IRA includes any nondeductible contributions. 2012 tax software free Fully taxable. 2012 tax software free   If only deductible contributions were made to your traditional IRA (or IRAs, if you have more than one), you have no basis in your IRA. 2012 tax software free Because you have no basis in your IRA, any distributions are fully taxable when received. 2012 tax software free See Reporting taxable distributions on your return , later. 2012 tax software free Partly taxable. 2012 tax software free    If you made nondeductible contributions or rolled over any after-tax amounts to any of your traditional IRAs, you have a cost basis (investment in the contract) equal to the amount of those contributions. 2012 tax software free These nondeductible contributions are not taxed when they are distributed to you. 2012 tax software free They are a return of your investment in your IRA. 2012 tax software free   Only the part of the distribution that represents nondeductible contributions and rolled over after-tax amounts (your cost basis) is tax free. 2012 tax software free If nondeductible contributions have been made or after-tax amounts have been rolled over to your IRA, distributions consist partly of nondeductible contributions (basis) and partly of deductible contributions, earnings, and gains (if there are any). 2012 tax software free Until all of your basis has been distributed, each distribution is partly nontaxable and partly taxable. 2012 tax software free Form 8606. 2012 tax software free   You must complete Form 8606 and attach it to your return if you receive a distribution from a traditional IRA and have ever made nondeductible contributions or rolled over after-tax amounts to any of your traditional IRAs. 2012 tax software free Using the form, you will figure the nontaxable distributions for 2013 and your total IRA basis for 2013 and earlier years. 2012 tax software free Note. 2012 tax software free If you are required to file Form 8606, but you are not required to file an income tax return, you still must file Form 8606. 2012 tax software free Send it to the IRS at the time and place you would otherwise file an income tax return. 2012 tax software free Distributions reported on Form 1099-R. 2012 tax software free   If you receive a distribution from your traditional IRA, you will receive Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. 2012 tax software free , or a similar statement. 2012 tax software free IRA distributions are shown in boxes 1 and 2a of Form 1099-R. 2012 tax software free A number or letter code in box 7 tells you what type of distribution you received from your IRA. 2012 tax software free Withholding. 2012 tax software free   Federal income tax is withheld from distributions from traditional IRAs unless you choose not to have tax withheld. 2012 tax software free See chapter 4. 2012 tax software free IRA distributions delivered outside the United States. 2012 tax software free   In general, if you are a U. 2012 tax software free S. 2012 tax software free citizen or resident alien and your home address is outside the United States or its possessions, you cannot choose exemption from withholding on distributions from your traditional IRA. 2012 tax software free Reporting taxable distributions on your return. 2012 tax software free    Report fully taxable distributions, including early distributions on Form 1040, line 15b, or Form 1040A, line 11b (no entry is required on Form 1040, line 15a, or Form 1040A, line 11a). 2012 tax software free If only part of the distribution is taxable, enter the total amount on Form 1040, line 15a, or Form 1040A, line 11a, and the taxable part on Form 1040, line 15b, or Form 1040A, line 11b. 2012 tax software free You cannot report distributions on Form 1040EZ. 2012 tax software free What Acts Result in Penalties or Additional Taxes? The tax advantages of using traditional IRAs for retirement savings can be offset by additional taxes and penalties if you do not follow the rules. 2012 tax software free There are additions to the regular tax for using your IRA funds in prohibited transactions. 2012 tax software free There are also additional taxes for the following activities. 2012 tax software free Investing in collectibles. 2012 tax software free Making excess contributions. 2012 tax software free Taking early distributions. 2012 tax software free Allowing excess amounts to accumulate (failing to take required distributions). 2012 tax software free There are penalties for overstating the amount of nondeductible contributions and for failure to file a Form 8606, if required. 2012 tax software free Prohibited Transactions Generally, a prohibited transaction is any improper use of your traditional IRA by you, your beneficiary, or any disqualified person. 2012 tax software free Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendent, and any spouse of a lineal descendent). 2012 tax software free The following are examples of prohibited transactions with a traditional IRA. 2012 tax software free Borrowing money from it. 2012 tax software free Selling property to it. 2012 tax software free Receiving unreasonable compensation for managing it. 2012 tax software free Using it as security for a loan. 2012 tax software free Buying property for personal use (present or future) with IRA funds. 2012 tax software free Effect on an IRA account. 2012 tax software free   Generally, if you or your beneficiary engages in a prohibited transaction in connection with your traditional IRA account at any time during the year, the account stops being an IRA as of the first day of that year. 2012 tax software free Effect on you or your beneficiary. 2012 tax software free   If your account stops being an IRA because you or your beneficiary engaged in a prohibited transaction, the account is treated as distributing all its assets to you at their fair market values on the first day of the year. 2012 tax software free If the total of those values is more than your basis in the IRA, you will have a taxable gain that is includible in your income. 2012 tax software free For information on figuring your gain and reporting it in income, see Are Distributions Taxable , earlier. 2012 tax software free The distribution may be subject to additional taxes or penalties. 2012 tax software free Taxes on prohibited transactions. 2012 tax software free   If someone other than the owner or beneficiary of a traditional IRA engages in a prohibited transaction, that person may be liable for certain taxes. 2012 tax software free In general, there is a 15% tax on the amount of the prohibited transaction and a 100% additional tax if the transaction is not corrected. 2012 tax software free More information. 2012 tax software free   For more information on prohibited transactions, see What Acts Result in Penalties or Additional Taxes? in chapter 1 of Publication 590. 2012 tax software free Investment in Collectibles If your traditional IRA invests in collectibles, the amount invested is considered distributed to you in the year invested. 2012 tax software free You may have to pay the 10% additional tax on early distributions, discussed later. 2012 tax software free Collectibles. 2012 tax software free   These include: Artworks, Rugs, Antiques, Metals, Gems, Stamps, Coins, Alcoholic beverages, and Certain other tangible personal property. 2012 tax software free Exception. 2012 tax software free    Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U. 2012 tax software free S. 2012 tax software free gold coins, or one-ounce silver coins minted by the Treasury Department. 2012 tax software free It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion. 2012 tax software free Excess Contributions Generally, an excess contribution is the amount contributed to your traditional IRA(s) for the year that is more than the smaller of: The maximum deductible amount for the year. 2012 tax software free For 2013, this is $5,500 ($6,500 if you are 50 or older), or Your taxable compensation for the year. 2012 tax software free Tax on excess contributions. 2012 tax software free   In general, if the excess contributions for a year are not withdrawn by the date your return for the year is due (including extensions), you are subject to a 6% tax. 2012 tax software free You must pay the 6% tax each year on excess amounts that remain in your traditional IRA at the end of your tax year. 2012 tax software free The tax cannot be more than 6% of the combined value of all your IRAs as of the end of your tax year. 2012 tax software free Excess contributions withdrawn by due date of return. 2012 tax software free   You will not have to pay the 6% tax if you withdraw an excess contribution made during a tax year and you also withdraw interest or other income earned on the excess contribution. 2012 tax software free You must complete your withdrawal by the date your tax return for that year is due, including extensions. 2012 tax software free How to treat withdrawn contributions. 2012 tax software free   Do not include in your gross income an excess contribution that you withdraw from your traditional IRA before your tax return is due if both the following conditions are met. 2012 tax software free No deduction was allowed for the excess contribution. 2012 tax software free You withdraw the interest or other income earned on the excess contribution. 2012 tax software free You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn. 2012 tax software free If there was a loss, the net income you must withdraw may be a negative amount. 2012 tax software free How to treat withdrawn interest or other income. 2012 tax software free   You must include in your gross income the interest or other income that was earned on the excess contribution. 2012 tax software free Report it on your return for the year in which the excess contribution was made. 2012 tax software free Your withdrawal of interest or other income may be subject to an additional 10% tax on early distributions, discus
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2012 tax software free 2. 2012 tax software free   Accounting Periods and Methods Table of Contents Introduction Useful Items - You may want to see: Accounting Periods Accounting MethodsCash Method Accrual Method Combination Method Inventories Uniform Capitalization Rules Special Methods Change in Accounting Method Introduction You must figure your taxable income and file an income tax return for an annual accounting period called a tax year. 2012 tax software free Also, you must consistently use an accounting method that clearly shows your income and expenses for the tax year. 2012 tax software free Useful Items - You may want to see: Publication 538 Accounting Periods and Methods See chapter 12 for information about getting publications and forms. 2012 tax software free Accounting Periods When preparing a statement of income and expenses (generally your income tax return), you must use your books and records for a specific interval of time called an accounting period. 2012 tax software free The annual accounting period for your income tax return is called a tax year. 2012 tax software free You can use one of the following tax years. 2012 tax software free A calendar tax year. 2012 tax software free A fiscal tax year. 2012 tax software free Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. 2012 tax software free A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. 2012 tax software free Calendar tax year. 2012 tax software free   A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. 2012 tax software free   You must adopt the calendar tax year if any of the following apply. 2012 tax software free You do not keep books. 2012 tax software free You have no annual accounting period. 2012 tax software free Your present tax year does not qualify as a fiscal year. 2012 tax software free Your use of the calendar tax year is required under the Internal Revenue Code or the Income Tax Regulations. 2012 tax software free   If you filed your first income tax return using the calendar tax year and you later begin business as a sole proprietor, you must continue to use the calendar tax year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval. 2012 tax software free For more information, see Change in tax year, later. 2012 tax software free   If you adopt the calendar tax year, you must maintain your books and records and report your income and expenses for the period from January 1 through December 31 of each year. 2012 tax software free Fiscal tax year. 2012 tax software free   A fiscal tax year is 12 consecutive months ending on the last day of any month except December. 2012 tax software free A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month. 2012 tax software free   If you adopt a fiscal tax year, you must maintain your books and records and report your income and expenses using the same tax year. 2012 tax software free   For more information on a fiscal tax year, including a 52-53-week tax year, see Publication 538. 2012 tax software free Change in tax year. 2012 tax software free   Generally, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year, to request IRS approval to change your tax year. 2012 tax software free See the Instructions for Form 1128 for exceptions. 2012 tax software free If you qualify for an automatic approval request, a user fee is not required. 2012 tax software free If you do not qualify for automatic approval, a ruling must be requested. 2012 tax software free See the instructions for Form 1128 for information about user fees if you are requesting a ruling. 2012 tax software free Accounting Methods An accounting method is a set of rules used to determine when and how income and expenses are reported. 2012 tax software free Your accounting method includes not only the overall method of accounting you use, but also the accounting treatment you use for any material item. 2012 tax software free You choose an accounting method for your business when you file your first income tax return that includes a Schedule C for the business. 2012 tax software free After that, if you want to change your accounting method, you must generally get IRS approval. 2012 tax software free See Change in Accounting Method, later. 2012 tax software free Kinds of methods. 2012 tax software free   Generally, you can use any of the following accounting methods. 2012 tax software free Cash method. 2012 tax software free An accrual method. 2012 tax software free Special methods of accounting for certain items of income and expenses. 2012 tax software free Combination method using elements of two or more of the above. 2012 tax software free You must use the same accounting method to figure your taxable income and to keep your books. 2012 tax software free Also, you must use an accounting method that clearly shows your income. 2012 tax software free Business and personal items. 2012 tax software free   You can account for business and personal items under different accounting methods. 2012 tax software free For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. 2012 tax software free Two or more businesses. 2012 tax software free   If you have two or more separate and distinct businesses, you can use a different accounting method for each if the method clearly reflects the income of each business. 2012 tax software free They are separate and distinct only if you maintain complete and separate books and records for each business. 2012 tax software free Cash Method Most individuals and many sole proprietors with no inventory use the cash method because they find it easier to keep cash method records. 2012 tax software free However, if an inventory is necessary to account for your income, you must generally use an accrual method of accounting for sales and purchases. 2012 tax software free For more information, see Inventories, later. 2012 tax software free Income Under the cash method, include in your gross income all items of income you actually or constructively receive during your tax year. 2012 tax software free If you receive property or services, you must include their fair market value in income. 2012 tax software free Example. 2012 tax software free On December 30, 2012, Mrs. 2012 tax software free Sycamore sent you a check for interior decorating services you provided to her. 2012 tax software free You received the check on January 2, 2013. 2012 tax software free You must include the amount of the check in income for 2013. 2012 tax software free Constructive receipt. 2012 tax software free   You have constructive receipt of income when an amount is credited to your account or made available to you without restriction. 2012 tax software free You do not need to have possession of it. 2012 tax software free If you authorize someone to be your agent and receive income for you, you are treated as having received it when your agent received it. 2012 tax software free Example. 2012 tax software free Interest is credited to your bank account in December 2013. 2012 tax software free You do not withdraw it or enter it into your passbook until 2014. 2012 tax software free You must include it in your gross income for 2013. 2012 tax software free Delaying receipt of income. 2012 tax software free   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. 2012 tax software free You must report the income in the year the property is received or made available to you without restriction. 2012 tax software free Example. 2012 tax software free Frances Jones, a service contractor, was entitled to receive a $10,000 payment on a contract in December 2013. 2012 tax software free She was told in December that her payment was available. 2012 tax software free At her request, she was not paid until January 2014. 2012 tax software free She must include this payment in her 2013 income because it was constructively received in 2013. 2012 tax software free Checks. 2012 tax software free   Receipt of a valid check by the end of the tax year is constructive receipt of income in that year, even if you cannot cash or deposit the check until the following year. 2012 tax software free Example. 2012 tax software free Dr. 2012 tax software free Redd received a check for $500 on December 31, 2013, from a patient. 2012 tax software free She could not deposit the check in her business account until January 2, 2014. 2012 tax software free She must include this fee in her income for 2013. 2012 tax software free Debts paid by another person or canceled. 2012 tax software free   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. 2012 tax software free If you receive income in this way, you constructively receive the income when the debt is canceled or paid. 2012 tax software free For more information, see Canceled Debt under Kinds of Income in chapter 5. 2012 tax software free Repayment of income. 2012 tax software free   If you include an amount in income and in a later year you have to repay all or part of it, you can usually deduct the repayment in the year in which you make it. 2012 tax software free If the amount you repay is over $3,000, a special rule applies. 2012 tax software free For details about the special rule, see Repayments in chapter 11 of Publication 535, Business Expenses. 2012 tax software free Expenses Under the cash method, you generally deduct expenses in the tax year in which you actually pay them. 2012 tax software free This includes business expenses for which you contest liability. 2012 tax software free However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. 2012 tax software free Expenses paid in advance. 2012 tax software free   You can deduct an expense you pay in advance only in the year to which it applies. 2012 tax software free Example. 2012 tax software free You are a calendar year taxpayer and you pay $1,000 in 2013 for a business insurance policy effective for one year, beginning July 1. 2012 tax software free You can deduct $500 in 2013 and $500 in 2014. 2012 tax software free Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. 2012 tax software free The purpose of an accrual method of accounting is to match income and expenses in the correct year. 2012 tax software free Income—General Rule Under an accrual method, you generally include an amount in your gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy. 2012 tax software free Example. 2012 tax software free You are a calendar year accrual method taxpayer. 2012 tax software free You sold a computer on December 28, 2013. 2012 tax software free You billed the customer in the first week of January 2014, but you did not receive payment until February 2014. 2012 tax software free You must include the amount received for the computer in your 2013 income. 2012 tax software free Income—Special Rules The following are special rules that apply to advance payments, estimating income, and changing a payment schedule for services. 2012 tax software free Estimated income. 2012 tax software free   If you include a reasonably estimated amount in gross income, and later determine the exact amount is different, take the difference into account in the tax year in which you make the determination. 2012 tax software free Change in payment schedule for services. 2012 tax software free   If you perform services for a basic rate specified in a contract, you must accrue the income at the basic rate, even if you agree to receive payments at a lower rate until you complete the services and then receive the difference. 2012 tax software free Advance payments for services. 2012 tax software free   Generally, you report an advance payment for services to be performed in a later tax year as income in the year you receive the payment. 2012 tax software free However, if you receive an advance payment for services you agree to perform by the end of the next tax year, you can elect to postpone including the advance payment in income until the next tax year. 2012 tax software free However, you cannot postpone including any payment beyond that tax year. 2012 tax software free   For more information, see Advance Payment for Services under Accrual Method in Publication 538. 2012 tax software free That publication also explains special rules for reporting the following types of income. 2012 tax software free Advance payments for service agreements. 2012 tax software free Prepaid rent. 2012 tax software free Advance payments for sales. 2012 tax software free   Special rules apply to including income from advance payments on agreements for future sales or other dispositions of goods you hold primarily for sale to your customers in the ordinary course of your business. 2012 tax software free If the advance payments are for contracts involving both the sale and service of goods, it may be necessary to treat them as two agreements. 2012 tax software free An agreement includes a gift certificate that can be redeemed for goods. 2012 tax software free Treat amounts that are due and payable as amounts you received. 2012 tax software free   You generally include an advance payment in income for the tax year in which you receive it. 2012 tax software free However, you can use an alternative method. 2012 tax software free For information about the alternative method, see Publication 538. 2012 tax software free Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. 2012 tax software free The all-events test has been met. 2012 tax software free The test has been met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. 2012 tax software free Economic performance has occurred. 2012 tax software free Economic performance. 2012 tax software free   You generally cannot deduct or capitalize a business expense until economic performance occurs. 2012 tax software free If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. 2012 tax software free If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. 2012 tax software free An exception allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. 2012 tax software free For more information on economic performance, see Economic Performance under Accrual Method in Publication 538. 2012 tax software free Example. 2012 tax software free You are a calendar year taxpayer and use an accrual method of accounting. 2012 tax software free You buy office supplies in December 2013. 2012 tax software free You receive the supplies and the bill in December, but you pay the bill in January 2014. 2012 tax software free You can deduct the expense in 2013 because all events that fix the fact of liability have occurred, the amount of the liability could be reasonably determined, and economic performance occurred in that year. 2012 tax software free Your office supplies may qualify as a recurring expense. 2012 tax software free In that case, you can deduct them in 2013 even if the supplies are not delivered until 2014 (when economic performance occurs). 2012 tax software free Keeping inventories. 2012 tax software free   When the production, purchase, or sale of merchandise is an income-producing factor in your business, you must generally take inventories into account at the beginning and the end of your tax year. 2012 tax software free If you must account for an inventory, you must generally use an accrual method of accounting for your purchases and sales. 2012 tax software free For more information, see Inventories , later. 2012 tax software free Special rule for related persons. 2012 tax software free   You cannot deduct business expenses and interest owed to a related person who uses the cash method of accounting until you make the payment and the corresponding amount is includible in the related person's gross income. 2012 tax software free Determine the relationship, for this rule, as of the end of the tax year for which the expense or interest would otherwise be deductible. 2012 tax software free If a deduction is not allowed under this rule, the rule will continue to apply even if your relationship with the person ends before the expense or interest is includible in the gross income of that person. 2012 tax software free   Related persons include members of your immediate family, including only brothers and sisters (either whole or half), your spouse, ancestors, and lineal descendants. 2012 tax software free For a list of other related persons, see section 267 of the Internal Revenue Code. 2012 tax software free Combination Method You can generally use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. 2012 tax software free However, the following restrictions apply. 2012 tax software free If an inventory is necessary to account for your income, you must generally use an accrual method for purchases and sales. 2012 tax software free (See, however, Inventories, later. 2012 tax software free ) You can use the cash method for all other items of income and expenses. 2012 tax software free If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. 2012 tax software free If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. 2012 tax software free If you use a combination method that includes the cash method, treat that combination method as the cash method. 2012 tax software free Inventories Generally, if you produce, purchase, or sell merchandise in your business, you must keep an inventory and use the accrual method for purchases and sales of merchandise. 2012 tax software free However, the following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. 2012 tax software free These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). 2012 tax software free A qualifying taxpayer under Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. 2012 tax software free A qualifying small business taxpayer under Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18. 2012 tax software free Qualifying taxpayer. 2012 tax software free   You are a qualifying taxpayer if: Your average annual gross receipts for each prior tax year ending on or after December 17, 1998, is $1 million or less. 2012 tax software free (Your average annual gross receipts for a tax year is figured by adding the gross receipts for that tax year and the 2 preceding tax years and dividing by 3. 2012 tax software free ) Your business is not a tax shelter, as defined under section 448(d)(3) of the Internal Revenue Code. 2012 tax software free Qualifying small business taxpayer. 2012 tax software free   You are a qualifying small business taxpayer if: Your average annual gross receipts for each prior tax year ending on or after December 31, 2000, is more than $1 million but not more than $10 million. 2012 tax software free (Your average annual gross receipts for a tax year is figured by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3. 2012 tax software free ) You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. 2012 tax software free Your principal business activity is an eligible business (described in Publication 538 and Revenue Procedure 2002-28). 2012 tax software free Business not owned or not in existence for 3 years. 2012 tax software free   If you did not own your business for all of the 3-tax-year period used in figuring your average annual gross receipts, include the period of any predecessor. 2012 tax software free If your business has not been in existence for the 3-tax-year period, base your average on the period it has existed including any short tax years, annualizing the short tax year's gross receipts. 2012 tax software free Materials and supplies that are not incidental. 2012 tax software free   If you account for inventoriable items as materials and supplies that are not incidental, you will deduct the cost of the items you would otherwise include in inventory in the year you sell the items, or the year you pay for them, whichever is later. 2012 tax software free If you are a producer, you can use any reasonable method to estimate the raw material in your work in process and finished goods on hand at the end of the year to determine the raw material used to produce finished goods that were sold during the year. 2012 tax software free Changing accounting method. 2012 tax software free   If you are a qualifying taxpayer or qualifying small business taxpayer and want to change to the cash method or to account for inventoriable items as non-incidental materials and supplies, you must file Form 3115, Application for Change in Accounting Method. 2012 tax software free See Change in Accounting Method, later. 2012 tax software free More information. 2012 tax software free    For more information about the qualifying taxpayer exception, see Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. 2012 tax software free For more information about the qualifying small business taxpayer exception, see Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18. 2012 tax software free Items included in inventory. 2012 tax software free   If you are required to account for inventories, include the following items when accounting for your inventory. 2012 tax software free Merchandise or stock in trade. 2012 tax software free Raw materials. 2012 tax software free Work in process. 2012 tax software free Finished products. 2012 tax software free Supplies that physically become a part of the item intended for sale. 2012 tax software free Valuing inventory. 2012 tax software free   You must value your inventory at the beginning and end of each tax year to determine your cost of goods sold (Schedule C, line 42). 2012 tax software free To determine the value of your inventory, you need a method for identifying the items in your inventory and a method for valuing these items. 2012 tax software free   Inventory valuation rules cannot be the same for all kinds of businesses. 2012 tax software free The method you use to value your inventory must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. 2012 tax software free Your inventory practices must be consistent from year to year. 2012 tax software free More information. 2012 tax software free   For more information about inventories, see Publication 538. 2012 tax software free Uniform Capitalization Rules Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for production or resale activities. 2012 tax software free Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. 2012 tax software free You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. 2012 tax software free Activities subject to the uniform capitalization rules. 2012 tax software free   You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit. 2012 tax software free Produce real or tangible personal property. 2012 tax software free For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. 2012 tax software free Acquire property for resale. 2012 tax software free Exceptions. 2012 tax software free   These rules do not apply to the following property. 2012 tax software free Personal property you acquire for resale if your average annual gross receipts are $10 million or less. 2012 tax software free Property you produce if you meet either of the following conditions. 2012 tax software free Your indirect costs of producing the property are $200,000 or less. 2012 tax software free You use the cash method of accounting and do not account for inventories. 2012 tax software free For more information, see Inventories, earlier. 2012 tax software free Special Methods There are special methods of accounting for certain items of income or expense. 2012 tax software free These include the following. 2012 tax software free Amortization, discussed in chapter 8 of Publication 535, Business Expenses. 2012 tax software free Bad debts, discussed in chapter 10 of Publication 535. 2012 tax software free Depletion, discussed in chapter 9 of Publication 535. 2012 tax software free Depreciation, discussed in Publication 946, How To Depreciate Property. 2012 tax software free Installment sales, discussed in Publication 537, Installment Sales. 2012 tax software free Change in Accounting Method Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. 2012 tax software free A change in your accounting method includes a change in: Your overall method, such as from cash to an accrual method, and Your treatment of any material item. 2012 tax software free To get approval, you must file Form 3115, Application for Change in Accounting Method. 2012 tax software free You can get IRS approval to change an accounting method under either the automatic change procedures or the advance consent request procedures. 2012 tax software free You may have to pay a user fee. 2012 tax software free For more information, see the form instructions. 2012 tax software free Automatic change procedures. 2012 tax software free   Certain taxpayers can presume to have IRS approval to change their method of accounting. 2012 tax software free The approval is granted for the tax year for which the taxpayer requests a change (year of change), if the taxpayer complies with the provisions of the automatic change procedures. 2012 tax software free No user fee is required for an application filed under an automatic change procedure generally covered in Revenue Procedure 2002-9. 2012 tax software free   Generally, you must use Form 3115 to request an automatic change. 2012 tax software free For more information, see the Instructions for Form 3115. 2012 tax software free Prev  Up  Next   Home   More Online Publications