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File state tax returns 4. File state tax returns   Figuring Depreciation Under MACRS Table of Contents Introduction Useful Items - You may want to see: Which Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS?Rent-to-own dealer. File state tax returns Rent-to-own contract. File state tax returns What Is the Placed in Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies?Recovery Periods Under GDS Recovery Periods Under ADS Additions and Improvements Which Convention Applies? Which Depreciation Method Applies?Depreciation Methods for Farm Property Electing a Different Method How Is the Depreciation Deduction Figured?Using the MACRS Percentage Tables Figuring the Deduction Without Using the Tables Figuring the Deduction for Property Acquired in a Nontaxable Exchange Figuring the Deduction for a Short Tax Year How Do You Use General Asset Accounts?Grouping Property Figuring Depreciation for a GAA Disposing of GAA Property Terminating GAA Treatment Electing To Use a GAA When Do You Recapture MACRS Depreciation? Introduction The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. File state tax returns MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). File state tax returns Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. File state tax returns To be sure you can use MACRS to figure depreciation for your property, see What Method Can You Use To Depreciate Your Property in chapter 1. File state tax returns This chapter explains how to determine which MACRS depreciation system applies to your property. File state tax returns It also discusses other information you need to know before you can figure depreciation under MACRS. File state tax returns This information includes the property's recovery class, placed in service date, and basis, as well as the applicable recovery period, convention, and depreciation method. File state tax returns It explains how to use this information to figure your depreciation deduction and how to use a general asset account to depreciate a group of properties. File state tax returns Finally, it explains when and how to recapture MACRS depreciation. File state tax returns Useful Items - You may want to see: Publication 225 Farmer's Tax Guide 463 Travel, Entertainment, Gift, and Car  Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 587 Business Use of Your Home (Including Use by Daycare Providers) Form (and Instructions) 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 4562 Depreciation and Amortization See chapter 6 for information about getting publications and forms. File state tax returns Which Depreciation System (GDS or ADS) Applies? Your use of either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to depreciate property under MACRS determines what depreciation method and recovery period you use. File state tax returns You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. File state tax returns If you placed your property in service in 2013, complete Part III of Form 4562 to report depreciation using MACRS. File state tax returns Complete section B of Part III to report depreciation using GDS, and complete section C of Part III to report depreciation using ADS. File state tax returns If you placed your property in service before 2013 and are required to file Form 4562, report depreciation using either GDS or ADS on line 17 in Part III. File state tax returns Required use of ADS. File state tax returns   You must use ADS for the following property. File state tax returns Listed property used 50% or less in a qualified business use. File state tax returns See chapter 5 for information on listed property. File state tax returns Any tangible property used predominantly outside the United States during the year. File state tax returns Any tax-exempt use property. File state tax returns Any tax-exempt bond-financed property. File state tax returns All property used predominantly in a farming business and placed in service in any tax year during which an election not to apply the uniform capitalization rules to certain farming costs is in effect. File state tax returns Any property imported from a foreign country for which an Executive Order is in effect because the country maintains trade restrictions or engages in other discriminatory acts. File state tax returns If you are required to use ADS to depreciate your property, you cannot claim any special depreciation allowance (discussed in chapter 3) for the property. File state tax returns Electing ADS. File state tax returns   Although your property may qualify for GDS, you can elect to use ADS. File state tax returns The election generally must cover all property in the same property class that you placed in service during the year. File state tax returns However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. File state tax returns Once you make this election, you can never revoke it. File state tax returns   You make the election by completing line 20 in Part III of Form 4562. File state tax returns Which Property Class Applies Under GDS? The following is a list of the nine property classifications under GDS and examples of the types of property included in each class. File state tax returns These property classes are also listed under column (a) in section B, Part III, of Form 4562. File state tax returns For detailed information on property classes, see Appendix B, Table of Class Lives and Recovery Periods, in this publication. File state tax returns 3-year property. File state tax returns Tractor units for over-the-road use. File state tax returns Any race horse over 2 years old when placed in service. File state tax returns (All race horses placed in service after December 31, 2008, and before January 1, 2014, are deemed to be 3-year property, regardless of age. File state tax returns ) Any other horse (other than a race horse) over 12 years old when placed in service. File state tax returns Qualified rent-to-own property (defined later). File state tax returns 5-year property. File state tax returns Automobiles, taxis, buses, and trucks. File state tax returns Computers and peripheral equipment. File state tax returns Office machinery (such as typewriters, calculators, and copiers). File state tax returns Any property used in research and experimentation. File state tax returns Breeding cattle and dairy cattle. File state tax returns Appliances, carpets, furniture, etc. File state tax returns , used in a residential rental real estate activity. File state tax returns Certain geothermal, solar, and wind energy property. File state tax returns 7-year property. File state tax returns Office furniture and fixtures (such as desks, files, and safes). File state tax returns Agricultural machinery and equipment. File state tax returns Any property that does not have a class life and has not been designated by law as being in any other class. File state tax returns Certain motorsports entertainment complex property (defined later) placed in service before January 1, 2014. File state tax returns Any natural gas gathering line placed in service after April 11, 2005. File state tax returns See Natural gas gathering line and electric transmission property , later. File state tax returns 10-year property. File state tax returns Vessels, barges, tugs, and similar water transportation equipment. File state tax returns Any single purpose agricultural or horticultural structure. File state tax returns Any tree or vine bearing fruits or nuts. File state tax returns Qualified small electric meter and qualified smart electric grid system (defined later) placed in service on or after October 3, 2008. File state tax returns 15-year property. File state tax returns Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges). File state tax returns Any retail motor fuels outlet (defined later), such as a convenience store. File state tax returns Any municipal wastewater treatment plant. File state tax returns Any qualified leasehold improvement property (defined later) placed in service before January 1, 2014. File state tax returns Any qualified restaurant property (defined later) placed in service before January 1, 2014. File state tax returns Initial clearing and grading land improvements for gas utility property. File state tax returns Electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity placed in service after April 11, 2005. File state tax returns See Natural gas gathering line and electric transmission property , later. File state tax returns Any natural gas distribution line placed in service after April 11, 2005 and before January 1, 2011. File state tax returns Any qualified retail improvement property placed in service before January 1, 2014. File state tax returns 20-year property. File state tax returns Farm buildings (other than single purpose agricultural or horticultural structures). File state tax returns Municipal sewers not classified as 25-year property. File state tax returns Initial clearing and grading land improvements for electric utility transmission and distribution plants. File state tax returns 25-year property. File state tax returns This class is water utility property, which is either of the following. File state tax returns Property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to this provision, would be 20-year property. File state tax returns Municipal sewers other than property placed in service under a binding contract in effect at all times since June 9, 1996. File state tax returns Residential rental property. File state tax returns This is any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross rental income for the tax year is from dwelling units. File state tax returns A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. File state tax returns It does not include a unit in a hotel, motel, or other establishment where more than half the units are used on a transient basis. File state tax returns If you occupy any part of the building or structure for personal use, its gross rental income includes the fair rental value of the part you occupy. File state tax returns Nonresidential real property. File state tax returns This is section 1250 property, such as an office building, store, or warehouse, that is neither residential rental property nor property with a class life of less than 27. File state tax returns 5 years. File state tax returns Qualified rent-to-own property. File state tax returns   Qualified rent-to-own property is property held by a rent-to-own dealer for purposes of being subject to a rent-to-own contract. File state tax returns It is tangible personal property generally used in the home for personal use. File state tax returns It includes computers and peripheral equipment, televisions, videocassette recorders, stereos, camcorders, appliances, furniture, washing machines and dryers, refrigerators, and other similar consumer durable property. File state tax returns Consumer durable property does not include real property, aircraft, boats, motor vehicles, or trailers. File state tax returns   If some of the property you rent to others under a rent-to-own agreement is of a type that may be used by the renters for either personal or business purposes, you still can treat this property as qualified property as long as it does not represent a significant portion of your leasing property. File state tax returns However, if this dual-use property does represent a significant portion of your leasing property, you must prove that this property is qualified rent-to-own property. File state tax returns Rent-to-own dealer. File state tax returns   You are a rent-to-own dealer if you meet all the following requirements. File state tax returns You regularly enter into rent-to-own contracts (defined below) in the ordinary course of your business for the use of consumer property. File state tax returns A substantial portion of these contracts end with the customer returning the property before making all the payments required to transfer ownership. File state tax returns The property is tangible personal property of a type generally used within the home for personal use. File state tax returns Rent-to-own contract. File state tax returns   This is any lease for the use of consumer property between a rent-to-own dealer and a customer who is an individual which— Is titled “Rent-to-Own Agreement,” “Lease Agreement with Ownership Option,” or other similar language. File state tax returns Provides a beginning date and a maximum period of time, not to exceed 156 weeks or 36 months from the beginning date, for which the contract can be in effect (including renewals or options to extend). File state tax returns Provides for regular periodic (weekly or monthly) payments that can be either level or decreasing. File state tax returns If the payments are decreasing, no payment can be less than 40% of the largest payment. File state tax returns Provides for total payments that generally exceed the normal retail price of the property plus interest. File state tax returns Provides for total payments that do not exceed $10,000 for each item of property. File state tax returns Provides that the customer has no legal obligation to make all payments outlined in the contract and that, at the end of each weekly or monthly payment period, the customer can either continue to use the property by making the next payment or return the property in good working order with no further obligations and no entitlement to a return of any prior payments. File state tax returns Provides that legal title to the property remains with the rent-to-own dealer until the customer makes either all the required payments or the early purchase payments required under the contract to acquire legal title. File state tax returns Provides that the customer has no right to sell, sublease, mortgage, pawn, pledge, or otherwise dispose of the property until all contract payments have been made. File state tax returns Motorsports entertainment complex. File state tax returns   This is a racing track facility permanently situated on land that hosts one or more racing events for automobiles, trucks, or motorcycles during the 36-month period after the first day of the month in which the facility is placed in service. File state tax returns The events must be open to the public for the price of admission. File state tax returns Qualified smart electric grid system. File state tax returns   A qualified smart electric grid system means any smart grid property used as part of a system for electric distribution grid communications, monitoring, and management placed in service after October 3, 2008, by a taxpayer who is a supplier of electrical energy or a provider of electrical energy services. File state tax returns Smart grid property includes electronics and related equipment that is capable of: Sensing, collecting, and monitoring data of or from all portions of a utility's electric distribution grid, Providing real-time, two-way communications to monitor or to manage the grid, and Providing real-time analysis of an event prediction based on collected data that can be used to provide electric distribution system reliability, quality, and performance. File state tax returns Retail motor fuels outlet. File state tax returns   Real property is a retail motor fuels outlet if it is used to a substantial extent in the retail marketing of petroleum or petroleum products (whether or not it is also used to sell food or other convenience items) and meets any one of the following three tests. File state tax returns It is not larger than 1,400 square feet. File state tax returns 50% or more of the gross revenues generated from the property are derived from petroleum sales. File state tax returns 50% or more of the floor space in the property is devoted to petroleum marketing sales. File state tax returns A retail motor fuels outlet does not include any facility related to petroleum and natural gas trunk pipelines. File state tax returns Qualified leasehold improvement property. File state tax returns    Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2014) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met. File state tax returns   In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor's death or in any of the following types of transactions. File state tax returns A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or reacquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor's or distributor's basis in the property. File state tax returns Examples include the following. File state tax returns A complete liquidation of a subsidiary. File state tax returns A transfer to a corporation controlled by the transferor. File state tax returns An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. File state tax returns Qualified restaurant property. File state tax returns   Qualified restaurant property is any section 1250 property that is a building placed in service after December 31, 2008, and before January 1, 2014. File state tax returns Also, more than 50% of the building's square footage must be devoted to preparation of meals and seating for on-premises consumption of prepared meals. File state tax returns Qualified smart electric meter. File state tax returns   A qualified smart electric meter is any time-based meter and related communication equipment which is placed in service by a supplier of electric energy or a provider of electric energy services and which is capable of being used by you as part of a system that: Measures and records electricity usage data on a time-differentiated basis in at least 24 separate time segments per day; Provides for the exchange of information between the supplier or provider and the customer's smart electric meter in support of time-based rates or other forms of demand response; Provides data to the supplier or provider so that the supplier or provider can provide energy usage information to customers electronically, and Provides all commercial and residential customers of such supplier or provider with net metering. File state tax returns Net metering means allowing a customer a credit, if any, as complies with applicable federal and state laws and regulations for providing electricity to the supplier or provider. File state tax returns Natural gas gathering line and electric transmission property. File state tax returns   Any natural gas gathering line placed in service after April 11, 2005, is treated as 7-year property, and electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity and any natural gas distribution line placed in service after April 11, 2005, are treated as 15-year property, if the following requirements are met. File state tax returns The original use of the property must have begun with you after April 11, 2005. File state tax returns Original use means the first use to which the property is put, whether or not by you. File state tax returns Therefore, property used by any person before April 12, 2005, is not original use. File state tax returns Original use includes additional capital expenditures you incurred to recondition or rebuild your property. File state tax returns However, original use does not include the cost of reconditioned or rebuilt property you acquired. File state tax returns Property containing used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20% of the total cost of the property. File state tax returns The property must not be placed in service under a binding contract in effect before April 12, 2005. File state tax returns The property must not be self-constructed property (property you manufacture, construct, or produce for your own use), if you began the manufacture, construction, or production of the property before April 12, 2005. File state tax returns Property that is manufactured, constructed, or produced for your use by another person under a written binding contract entered into by you or a related party before the manufacture, construction, or production of the property is considered to be manufactured, constructed, or produced by you. File state tax returns What Is the Placed in Service Date? You begin to claim depreciation when your property is placed in service for either use in a trade or business or the production of income. File state tax returns The placed in service date for your property is the date the property is ready and available for a specific use. File state tax returns It is therefore not necessarily the date it is first used. File state tax returns If you converted property held for personal use to use in a trade or business or for the production of income, treat the property as being placed in service on the conversion date. File state tax returns See Placed in Service under When Does Depreciation Begin and End in chapter 1 for examples illustrating when property is placed in service. File state tax returns What Is the Basis for Depreciation? The basis for depreciation of MACRS property is the property's cost or other basis multiplied by the percentage of business/investment use. File state tax returns For a discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or Income-Producing Activity in chapter 1 . File state tax returns Reduce that amount by any credits and deductions allocable to the property. File state tax returns The following are examples of some credits and deductions that reduce basis. File state tax returns Any deduction for section 179 property. File state tax returns Any deduction under section 179B of the Internal Revenue Code for capital costs to comply with Environmental Protection Agency sulfur regulations. File state tax returns Any deduction under section 179C of the Internal Revenue Code for certain qualified refinery property placed in service after August 8, 2005, and before January 1, 2014. File state tax returns Any deduction under section 179D of the Internal Revenue Code for certain energy efficient commercial building property placed in service after December 31, 2005, and before January 1, 2014. File state tax returns Any deduction under section 179E of the Internal Revenue Code for qualified advanced mine safety equipment property placed in service after December 20, 2006, and before January 1, 2014 . File state tax returns Any deduction for removal of barriers to the disabled and the elderly. File state tax returns Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. File state tax returns Any special depreciation allowance. File state tax returns Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. File state tax returns For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. File state tax returns Enter the basis for depreciation under column (c) in Part III of Form 4562. File state tax returns For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property in chapter 1 . File state tax returns Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. File state tax returns It is determined based on the depreciation system (GDS or ADS) used. File state tax returns Recovery Periods Under GDS Under GDS, property that is not qualified Indian reservation property is depreciated over one of the following recovery periods. File state tax returns Property Class Recovery Period 3-year property   3 years 1   5-year property   5 years     7-year property   7 years     10-year property   10 years     15-year property   15 years 2   20-year property   20 years     25-year property   25 years 3   Residential rental property   27. File state tax returns 5 years     Nonresidential real property   39 years 4   15 years for qualified rent-to-own property placed in service before August 6, 1997. File state tax returns 239 years for property that is a retail motor fuels outlet placed in service before August 20, 1996 (31. File state tax returns 5 years if placed in service before May 13, 1993), unless you elected to depreciate it over 15 years. File state tax returns 320 years for property placed in service before June 13, 1996, or under a binding contract in effect before June 10, 1996. File state tax returns 431. File state tax returns 5 years for property placed in service before May 13, 1993 (or before January 1, 1994, if the purchase or construction of the property is under a binding contract in effect before May 13, 1993, or if construction began before May 13, 1993). File state tax returns The GDS recovery periods for property not listed above can be found in Appendix B, Table of Class Lives and Recovery Periods. File state tax returns Residential rental property and nonresidential real property are defined earlier under Which Depreciation System (GDS or ADS) Applies. File state tax returns Enter the appropriate recovery period on Form 4562 under column (d) in section B of Part III, unless already shown (for 25-year property, residential rental property, and nonresidential real property). File state tax returns Office in the home. File state tax returns   If your home is a personal-use single family residence and you begin to use part of your home as an office, depreciate that part of your home as nonresidential real property over 39 years (31. File state tax returns 5 years if you began using it for business before May 13, 1993). File state tax returns However, if your home is an apartment in an apartment building that you own and the building is residential rental property as defined earlier under Which Depreciation System (GDS or ADS) Applies , depreciate the part used as an office as residential rental property over 27. File state tax returns 5 years. File state tax returns See Publication 587 for a discussion of the tests you must meet to claim expenses, including depreciation, for the business use of your home. File state tax returns Home changed to rental use. File state tax returns   If you begin to rent a home that was your personal home before 1987, you depreciate it as residential rental property over 27. File state tax returns 5 years. File state tax returns Indian Reservation Property The recovery periods for qualified property you placed in service on an Indian reservation after 1993 and before 2014 are shorter than those listed earlier. File state tax returns The following table shows these shorter recovery periods. File state tax returns Property Class Recovery  Period 3-year property 2 years 5-year property 3 years 7-year property 4 years 10-year property 6 years 15-year property 9 years 20-year property 12 years Nonresidential real property 22 years Nonresidential real property is defined earlier under Which Property Class Applies Under GDS . File state tax returns Use this chart to find the correct percentage table to use for qualified Indian reservation property. File state tax returns IF your recovery period is: THEN use the following table in Appendix A: 2 years A-21 3 years A-1, A-2, A-3, A-4, or A-5 4 years A-22 6 years A-23 9 years A-14, A-15, A-16, A-17, or A-18 12 years A-14, A-15, A-16, A-17, or A-18 22 years A-24 Qualified property. File state tax returns   Property eligible for the shorter recovery periods are 3-, 5-, 7-, 10-, 15-, and 20-year property and nonresidential real property. File state tax returns You must use this property predominantly in the active conduct of a trade or business within an Indian reservation. File state tax returns The rental of real property that is located on an Indian reservation is treated as the active conduct of a trade or business within an Indian reservation. File state tax returns   The following property is not qualified property. File state tax returns Property used or located outside an Indian reservation on a regular basis, other than qualified infrastructure property. File state tax returns Property acquired directly or indirectly from a related person. File state tax returns Property placed in service for purposes of conducting or housing class I, II, or III gaming activities. File state tax returns These activities are defined in section 4 of the Indian Regulatory Act (25 U. File state tax returns S. File state tax returns C. File state tax returns 2703). File state tax returns Any property you must depreciate under ADS. File state tax returns Determine whether property is qualified without regard to the election to use ADS and after applying the special rules for listed property not used predominantly for qualified business use (discussed in chapter 5). File state tax returns Qualified infrastructure property. File state tax returns   Item (1) above does not apply to qualified infrastructure property located outside the reservation that is used to connect with qualified infrastructure property within the reservation. File state tax returns Qualified infrastructure property is property that meets all the following rules. File state tax returns It is qualified property, as defined earlier, except that it is outside the reservation. File state tax returns It benefits the tribal infrastructure. File state tax returns It is available to the general public. File state tax returns It is placed in service in connection with the active conduct of a trade or business within a reservation. File state tax returns Infrastructure property includes, but is not limited to, roads, power lines, water systems, railroad spurs, and communications facilities. File state tax returns Related person. File state tax returns   For purposes of item (2) above, see Related persons in the discussion on property owned or used in 1986 under What Method Can You Use To Depreciate Your Property in chapter 1 for a description of related persons. File state tax returns Indian reservation. File state tax returns   The term Indian reservation means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 (25 U. File state tax returns S. File state tax returns C. File state tax returns 1452(d)) or section 4(10) of the Indian Child Welfare Act of 1978 (25 U. File state tax returns S. File state tax returns C. File state tax returns 1903(10)). File state tax returns Section 3(d) of the Indian Financing Act of 1974 defines reservation to include former Indian reservations in Oklahoma. File state tax returns For a definition of the term “former Indian reservations in Oklahoma,” see Notice 98-45 in Internal Revenue Bulletin 1998-35. File state tax returns Recovery Periods Under ADS The recovery periods for most property generally are longer under ADS than they are under GDS. File state tax returns The following table shows some of the ADS recovery periods. File state tax returns Property Recovery  Period Rent-to-own property 4 years Automobiles and light duty trucks 5 years Computers and peripheral equipment 5 years High technology telephone station equipment installed on customer premises 5 years High technology medical equipment 5 years Personal property with no class life 12 years Natural gas gathering lines 14 years Single purpose agricultural and horticultural structures 15 years Any tree or vine bearing fruit or nuts 20 years Initial clearing and grading land  improvements for gas utility property 20 years Initial clearing and grading land  improvements for electric utility  transmission and distribution plants 25 years Electric transmission property used in the transmission at 69 or more kilovolts of electricity 30 years Natural gas distribution lines 35 years Any qualified leasehold improvement property 39 years Any qualified restaurant property 39 years Nonresidential real property 40 years Residential rental property 40 years Section 1245 real property not listed in Appendix B 40 years Railroad grading and tunnel bore 50 years The ADS recovery periods for property not listed above can be found in the tables in Appendix B. File state tax returns Rent-to-own property, qualified leasehold improvement property, qualified restaurant property, residential rental property, and nonresidential real property are defined earlier under Which Property Class Applies Under GDS . File state tax returns Tax-exempt use property subject to a lease. File state tax returns   The ADS recovery period for any property leased under a lease agreement to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership) cannot be less than 125% of the lease term. File state tax returns Additions and Improvements An addition or improvement you make to depreciable property is treated as separate depreciable property. File state tax returns See How Do You Treat Repairs and Improvements in chapter 1 for a definition of improvements. File state tax returns Its property class and recovery period are the same as those that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. File state tax returns The recovery period begins on the later of the following dates. File state tax returns The date you place the addition or improvement in service. File state tax returns The date you place in service the property to which you made the addition or improvement. File state tax returns If the improvement you make is qualified leasehold improvement property, qualified restaurant property, or qualified retail improvement property, the GDS recovery period is 15 years (39 years under ADS). File state tax returns Example. File state tax returns You own a rental home that you have been renting out since 1981. File state tax returns If you put an addition on the home and place the addition in service this year, you would use MACRS to figure your depreciation deduction for the addition. File state tax returns Under GDS, the property class for the addition is residential rental property and its recovery period is 27. File state tax returns 5 years because the home to which the addition is made would be residential rental property if you had placed it in service this year. File state tax returns Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. File state tax returns The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property. File state tax returns The mid-month convention. File state tax returns   Use this convention for nonresidential real property, residential rental property, and any railroad grading or tunnel bore. File state tax returns   Under this convention, you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. File state tax returns This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of. File state tax returns   Your use of the mid-month convention is indicated by the “MM” already shown under column (e) in Part III of Form 4562. File state tax returns The mid-quarter convention. File state tax returns   Use this convention if the mid-month convention does not apply and the total depreciable bases of MACRS property you placed in service during the last 3 months of the tax year (excluding nonresidential real property, residential rental property, any railroad grading or tunnel bore, property placed in service and disposed of in the same year, and property that is being depreciated under a method other than MACRS) are more than 40% of the total depreciable bases of all MACRS property you placed in service during the entire year. File state tax returns   Under this convention, you treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed of at the midpoint of that quarter. File state tax returns This means that 1½ months of depreciation is allowed for the quarter the property is placed in service or disposed of. File state tax returns   If you use this convention, enter “MQ” under column (e) in Part III of Form 4562. File state tax returns    For purposes of determining whether the mid-quarter convention applies, the depreciable basis of property you placed in service during the tax year reflects the reduction in basis for amounts expensed under section 179 and the part of the basis of property attributable to personal use. File state tax returns However, it does not reflect any reduction in basis for any special depreciation allowance. File state tax returns The half-year convention. File state tax returns   Use this convention if neither the mid-quarter convention nor the mid-month convention applies. File state tax returns   Under this convention, you treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the midpoint of the year. File state tax returns This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of. File state tax returns   If you use this convention, enter “HY” under column (e) in Part III of Form 4562. File state tax returns Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. File state tax returns The 200% declining balance method over a GDS recovery period. File state tax returns The 150% declining balance method over a GDS recovery period. File state tax returns The straight line method over a GDS recovery period. File state tax returns The straight line method over an ADS recovery period. File state tax returns For property placed in service before 1999, you could have elected the 150% declining balance method using the ADS recovery periods for certain property classes. File state tax returns If you made this election, continue to use the same method and recovery period for that property. File state tax returns Table 4–1 lists the types of property you can depreciate under each method. File state tax returns It also gives a brief explanation of the method, including any benefits that may apply. File state tax returns Depreciation Methods for Farm Property If you place personal property in service in a farming business after 1988, you generally must depreciate it under GDS using the 150% declining balance method unless you are a farmer who must depreciate the property under ADS using the straight line method or you elect to depreciate the property under GDS or ADS using the straight line method. File state tax returns You can depreciate real property using the straight line method under either GDS or ADS. File state tax returns Fruit or nut trees and vines. File state tax returns   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a recovery period of 10 years. File state tax returns ADS required for some farmers. File state tax returns   If you elect not to apply the uniform capitalization rules to any plant produced in your farming business, you must use ADS. File state tax returns You must use ADS for all property you place in service in any year the election is in effect. File state tax returns See the regulations under section 263A of the Internal Revenue Code for information on the uniform capitalization rules that apply to farm property. File state tax returns Electing a Different Method As shown in Table 4–1 , you can elect a different method for depreciation for certain types of property. File state tax returns You must make the election by the due date of the return (including extensions) for the year you placed the property in service. File state tax returns However, if you timely filed your return for the year without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). File state tax returns Attach the election to the amended return and write “Filed pursuant to section 301. File state tax returns 9100-2” on the election statement. File state tax returns File the amended return at the same address you filed the original return. File state tax returns Once you make the election, you cannot change it. File state tax returns If you elect to use a different method for one item in a property class, you must apply the same method to all property in that class placed in service during the year of the election. File state tax returns However, you can make the election on a property-by-property basis for nonresidential real and residential rental property. File state tax returns 150% election. File state tax returns   Instead of using the 200% declining balance method over the GDS recovery period for nonfarm property in the 3-, 5-, 7-, and 10-year property classes, you can elect to use the 150% declining balance method. File state tax returns Make the election by entering “150 DB” under column (f) in Part III of Form 4562. File state tax returns Straight line election. File state tax returns   Instead of using either the 200% or 150% declining balance methods over the GDS recovery period, you can elect to use the straight line method over the GDS recovery period. File state tax returns Make the election by entering  “S/L” under column (f) in Part III of Form 4562. File state tax returns Election of ADS. File state tax returns   As explained earlier under Which Depreciation System (GDS or ADS) Applies , you can elect to use ADS even though your property may come under GDS. File state tax returns ADS uses the straight line method of depreciation over fixed ADS recovery periods. File state tax returns Most ADS recovery periods are listed in Appendix B, or see the table under Recovery Periods Under ADS , earlier. File state tax returns   Make the election by completing line 20 in Part III of Form 4562. File state tax returns Farm property. File state tax returns   Instead of using the 150% declining balance method over a GDS recovery period for property you use in a farming business (other than real property), you can elect to depreciate it using either of the following methods. File state tax returns The straight line method over a GDS recovery period. File state tax returns The straight line method over an ADS recovery period. File state tax returns Table 4-1. File state tax returns Depreciation Methods Note. File state tax returns The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. File state tax returns Method Type of Property Benefit GDS using 200% DB • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction GDS using 150% DB • All farm property (except real property) • All 15- and 20-year property (except qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property placed in service before January 1, 2014) • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction1 GDS using SL • Nonresidential real property • Qualified leasehold improvement property placed in service before January 1, 2014 • Qualified restaurant property placed in service before January 1, 2014 • Qualified retail improvement property placed in service before January 1, 2014 • Residential rental property • Trees or vines bearing fruit or nuts • Water utility property • All 3-, 5-, 7-, 10-, 15-, and 20-year property2 • Property for which you elected section 168(k)(4) • Provides for equal yearly deductions (except for the first and last years) ADS using SL • Listed property used 50% or less for business • Property used predominantly outside the U. File state tax returns S. File state tax returns  • Tax-exempt property • Tax-exempt bond-financed property • Farm property used when an election not to apply the uniform capitalization rules is in effect • Imported property3 • Any property for which you elect to use this method4 • Provides for equal yearly deductions (except for the first and last years) 1The MACRS percentage tables in Appendix A have the switch to the straight line method built into their rates 2See section 168(b)(5) of the Internal Revenue Code. File state tax returns 3See section 168(g)(6) of the Internal Revenue Code 4See section 168(g)(7) of the Internal Revenue Code How Is the Depreciation Deduction Figured? To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed in service date, basis amount, recovery period, convention, and depreciation method that applies to your property. File state tax returns Then, you are ready to figure your depreciation deduction. File state tax returns You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table. File state tax returns Using the MACRS Percentage Tables To help you figure your deduction under MACRS, the IRS has established percentage tables that incorporate the applicable convention and depreciation method. File state tax returns These percentage tables are in Appendix A near the end of this publication. File state tax returns Which table to use. File state tax returns    Appendix A contains the MACRS Percentage Table Guide, which is designed to help you locate the correct percentage table to use for depreciating your property. File state tax returns The percentage tables immediately follow the guide. File state tax returns Rules Covering the Use of the Tables The following rules cover the use of the percentage tables. File state tax returns You must apply the rates in the percentage tables to your property's unadjusted basis. File state tax returns You cannot use the percentage tables for a short tax year. File state tax returns See Figuring the Deduction for a Short Tax Year, later, for information on the short tax year rules. File state tax returns Once you start using the percentage tables for any item of property, you generally must continue to use them for the entire recovery period of the property. File state tax returns You must stop using the tables if you adjust the basis of the property for any reason other than— Depreciation allowed or allowable, or An addition or improvement to that property that is depreciated as a separate item of property. File state tax returns Basis adjustments other than those made due to the items listed in (4) include an increase in basis for the recapture of a clean-fuel deduction or credit and a reduction in basis for a casualty loss. File state tax returns Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. File state tax returns   If you increase the basis of your property because of the recapture of part or all of a deduction for clean-fuel vehicles or the credit for clean-fuel vehicle refueling property placed in service before January 1, 2006, you cannot continue to use the percentage tables. File state tax returns For the year of the adjustment and the remaining recovery period, you must figure the depreciation deduction yourself using the property's adjusted basis at the end of the year. File state tax returns See Figuring the Deduction Without Using the Tables, later. File state tax returns Basis adjustment due to casualty loss. File state tax returns   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. File state tax returns For the year of the adjustment and the remaining recovery period, you must figure the depreciation yourself using the property's adjusted basis at the end of the year. File state tax returns See Figuring the Deduction Without Using the Tables, later. File state tax returns Example. File state tax returns On October 26, 2012, Sandra Elm, a calendar year taxpayer, bought and placed in service in her business a new item of 7-year property. File state tax returns It cost $39,000 and she elected a section 179 deduction of $24,000. File state tax returns She also took a special depreciation allowance of $7,500 [50% of $15,000 ($39,000 − $24,000)]. File state tax returns Her unadjusted basis after the section 179 deduction and special depreciation allowance was $7,500 ($15,000 − $7,500). File state tax returns She figured her MACRS depreciation deduction using the percentage tables. File state tax returns For 2012, her MACRS depreciation deduction was $268. File state tax returns In July 2013, the property was vandalized and Sandra had a deductible casualty loss of $3,000. File state tax returns She must adjust the property's basis for the casualty loss, so she can no longer use the percentage tables. File state tax returns Her adjusted basis at the end of 2013, before figuring her 2013 depreciation, is $4,232. File state tax returns She figures that amount by subtracting the 2012 MACRS depreciation of $268 and the casualty loss of $3,000 from the unadjusted basis of $7,500. File state tax returns She must now figure her depreciation for 2013 without using the percentage tables. File state tax returns Figuring the Unadjusted Basis of Your Property You must apply the table rates to your property's unadjusted basis each year of the recovery period. File state tax returns Unadjusted basis is the same basis amount you would use to figure gain on a sale, but you figure it without reducing your original basis by any MACRS depreciation taken in earlier years. File state tax returns However, you do reduce your original basis by other amounts, including the following. File state tax returns Any amortization taken on the property. File state tax returns Any section 179 deduction claimed. File state tax returns Any special depreciation allowance taken on the property. File state tax returns For business property you purchase during the year, the unadjusted basis is its cost minus these and other applicable adjustments. File state tax returns If you trade property, your unadjusted basis in the property received is the cash paid plus the adjusted basis of the property traded minus these adjustments. File state tax returns MACRS Worksheet You can use this worksheet to help you figure your depreciation deduction using the percentage tables. File state tax returns Use a separate worksheet for each item of property. File state tax returns Then, use the information from this worksheet to prepare Form 4562. File state tax returns Do not use this worksheet for automobiles. File state tax returns Use the Depreciation Worksheet for Passenger Automobiles in chapter 5. File state tax returns MACRS Worksheet Part I   1. File state tax returns MACRS system (GDS or ADS)   2. File state tax returns Property class   3. File state tax returns Date placed in service   4. File state tax returns Recovery period   5. File state tax returns Method and convention   6. File state tax returns Depreciation rate (from tables)   Part II   7. File state tax returns Cost or other basis* $     8. File state tax returns Business/investment use   %   9. File state tax returns Multiply line 7 by line 8   $ 10. File state tax returns Total claimed for section 179 deduction and other items   $ 11. File state tax returns Subtract line 10 from line 9. File state tax returns This is your tentative basis for depreciation   $ 12. File state tax returns Multiply line 11 by . File state tax returns 50 if the 50% special depreciation allowance applies. File state tax returns This is your special depreciation allowance. File state tax returns Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   $ 13. File state tax returns Subtract line 12 from line 11. File state tax returns This is your basis for depreciation     14. File state tax returns Depreciation rate (from line 6)     15. File state tax returns Multiply line 13 by line 14. File state tax returns This is your MACRS depreciation deduction   $ *If real estate, do not include cost (basis) of land. File state tax returns The following example shows how to figure your MACRS depreciation deduction using the percentage tables and the MACRS worksheet. File state tax returns Example. File state tax returns You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2013. File state tax returns You use the furniture only for business. File state tax returns This is the only property you placed in service this year. File state tax returns You did not elect a section 179 deduction and the property is not qualified property for purposes of claiming a special depreciation allowance so your property's unadjusted basis is its cost, $10,000. File state tax returns You use GDS and the half-year convention to figure your depreciation. File state tax returns You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. File state tax returns Multiply your property's unadjusted basis each year by the percentage for 7-year property given in Table A-1. File state tax returns You figure your depreciation deduction using the MACRS worksheet as follows. File state tax returns MACRS Worksheet Part I 1. File state tax returns MACRS system (GDS or ADS) GDS 2. File state tax returns Property class 7-year 3. File state tax returns Date placed in service 8/11/13 4. File state tax returns Recovery period 7-Year 5. File state tax returns Method and convention 200%DB/Half-Year 6. File state tax returns Depreciation rate (from tables) . File state tax returns 1429 Part II 7. File state tax returns Cost or other basis* $10,000     8. File state tax returns Business/investment use 100 %   9. File state tax returns Multiply line 7 by line 8   $10,000 10. File state tax returns Total claimed for section 179 deduction and other items   -0- 11. File state tax returns Subtract line 10 from line 9. File state tax returns This is your tentative basis for depreciation   $10,000 12. File state tax returns Multiply line 11 by . File state tax returns 50 if the 50% special depreciation allowance applies. File state tax returns This is your special depreciation allowance. File state tax returns Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   -0- 13. File state tax returns Subtract line 12 from line 11. File state tax returns This is your basis for depreciation   $10,000 14. File state tax returns Depreciation rate (from line 6)   . File state tax returns 1429 15. File state tax returns Multiply line 13 by line 14. File state tax returns This is your MACRS depreciation deduction   $1,429 *If real estate, do not include cost (basis) of land. File state tax returns If there are no adjustments to the basis of the property other than depreciation, your depreciation deduction for each subsequent year of the recovery period will be as follows. File state tax returns Year   Basis Percentage Deduction 2014 $ 10,000 24. File state tax returns 49%   $2,449   2015   10,000 17. File state tax returns 49   1,749   2016   10,000 12. File state tax returns 49   1,249   2017   10,000 8. File state tax returns 93   893   2018   10,000 8. File state tax returns 92   892   2019   10,000 8. File state tax returns 93   893   2020   10,000 4. File state tax returns 46   446   Examples The following examples are provided to show you how to use the percentage tables. File state tax returns In both examples, assume the following. File state tax returns You use the property only for business. File state tax returns You use the calendar year as your tax year. File state tax returns You use GDS for all the properties. File state tax returns Example 1. File state tax returns You bought a building and land for $120,000 and placed it in service on March 8. File state tax returns The sales contract showed that the building cost $100,000 and the land cost $20,000. File state tax returns It is nonresidential real property. File state tax returns The building's unadjusted basis is its original cost, $100,000. File state tax returns You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. File state tax returns March is the third month of your tax year, so multiply the building's unadjusted basis, $100,000, by the percentages for the third month in Table A-7a. File state tax returns Your depreciation deduction for each of the first 3 years is as follows: Year   Basis Percentage Deduction 1st $ 100,000 2. File state tax returns 033%   $2,033   2nd   100,000 2. File state tax returns 564   2,564   3rd   100,000 2. File state tax returns 564   2,564   Example 2. File state tax returns During the year, you bought a machine (7-year property) for $4,000, office furniture (7-year property) for $1,000, and a computer (5-year property) for $5,000. File state tax returns You placed the machine in service in January, the furniture in September, and the computer in October. File state tax returns You do not elect a section 179 deduction and none of these items is qualified property for purposes of claiming a special depreciation allowance. File state tax returns You placed property in service during the last 3 months of the year, so you must first determine if you have to use the mid-quarter convention. File state tax returns The total bases of all property you placed in service during the year is $10,000. File state tax returns The $5,000 basis of the computer, which you placed in service during the last 3 months (the fourth quarter) of your tax year, is more than 40% of the total bases of all property ($10,000) you placed in service during the year. File state tax returns Therefore, you must use the mid-quarter convention for all three items. File state tax returns You refer to the MACRS Percentage Table Guide in Appendix A to determine which table you should use under the mid-quarter convention. File state tax returns The machine is 7-year property placed in service in the first quarter, so you use Table A-2. File state tax returns The furniture is 7-year property placed in service in the third quarter, so you use Table A-4. File state tax returns Finally, because the computer is 5-year property placed in service in the fourth quarter, you use Table A-6. File state tax returns Knowing what table to use for each property, you figure the depreciation for the first 2 years as follows. File state tax returns Year Property Basis Percentage Deduction 1st Machine $4,000 25. File state tax returns 00 $1,000   2nd Machine 4,000 21. File state tax returns 43 857   1st Furniture 1,000 10. File state tax returns 71 107   2nd Furniture 1,000 25. File state tax returns 51 255   1st Computer 5,000 5. File state tax returns 00 250   2nd Computer 5,000 38. File state tax returns 00 1,900   Sale or Other Disposition Before the Recovery Period Ends If you sell or otherwise dispose of your property before the end of its recovery period, your depreciation deduction for the year of the disposition will be only part of the depreciation amount for the full year. File state tax returns You have disposed of your property if you have permanently withdrawn it from use in your business or income-producing activity because of its sale, exchange, retirement, abandonment, involuntary conversion, or destruction. File state tax returns After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property. File state tax returns Half-year convention used. File state tax returns   For property for which you used a half-year convention, the depreciation deduction for the year of the disposition is half the depreciation determined for the full year. File state tax returns Mid-quarter convention used. File state tax returns   For property for which you used the mid-quarter convention, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter in which you disposed of the property. File state tax returns Quarter Percentage First 12. File state tax returns 5% Second 37. File state tax returns 5 Third 62. File state tax returns 5 Fourth 87. File state tax returns 5 Example. File state tax returns On December 2, 2010, you placed in service an item of 5-year property costing $10,000. File state tax returns You did not claim a section 179 deduction and the property does not qualify for a special depreciation allowance. File state tax returns Your unadjusted basis for the property was $10,000. File state tax returns You used the mid-quarter convention because this was the only item of business property you placed in service in 2010 and it was placed in service during the last 3 months of your tax year. File state tax returns Your property is in the 5-year property class, so you used Table A-5 to figure your depreciation deduction. File state tax returns Your deductions for 2010, 2011, and 2012 were $500 (5% of $10,000), $3,800 (38% of $10,000), and $2,280 (22. File state tax returns 80% of $10,000). File state tax returns You disposed of the property on April 6, 2013. File state tax returns To determine your depreciation deduction for 2013, first figure the deduction for the full year. File state tax returns This is $1,368 (13. File state tax returns 68% of $10,000). File state tax returns April is in the second quarter of the year, so you multiply $1,368 by 37. File state tax returns 5% to get your depreciation deduction of $513 for 2013. File state tax returns Mid-month convention used. File state tax returns   If you dispose of residential rental or nonresidential real property, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by a fraction. File state tax returns The numerator of the fraction is the number of months (including partial months) in the year that the property is considered in service. File state tax returns The denominator is 12. File state tax returns Example. File state tax returns On July 2, 2011, you purchased and placed in service residential rental property. File state tax returns The property cost $100,000, not including the cost of land. File state tax returns You used Table A-6 to figure your MACRS depreciation for this property. File state tax returns You sold the property on March 2, 2013. File state tax returns You file your tax return based on the calendar year. File state tax returns A full year of depreciation for 2013 is $3,636. File state tax returns This is $100,000 multiplied by . File state tax returns 03636 (the percentage for the seventh month of the third recovery year) from Table A-6 . File state tax returns You then apply the mid-month convention for the 2½ months of use in 2013. File state tax returns Treat the month of disposition as one-half month of use. File state tax returns Multiply $3,636 by the fraction, 2. File state tax returns 5 over 12, to get your 2013 depreciation deduction of $757. File state tax returns 50. File state tax returns Figuring the Deduction Without Using the Tables Instead of using the rates in the percentage tables to figure your depreciation deduction, you can figure it yourself. File state tax returns Before making the computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year. File state tax returns Figuring MACRS deductions without using the tables generally will result in a slightly different amount than using the tables. File state tax returns Declining Balance Method When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property. File state tax returns You must use the applicable convention for the first tax year and you must switch to the straight line method beginning in the first year for which it will give an equal or greater deduction. File state tax returns The straight line method is explained later. File state tax returns You figure depreciation for the year you place property in service as follows. File state tax returns Multiply your adjusted basis in the property by the declining balance rate. File state tax returns Apply the applicable convention. File state tax returns You figure depreciation for all other years (before the year you switch to the straight line method) as follows. File state tax returns Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years. File state tax returns Multiply this new adjusted basis by the same declining balance rate used in earlier years. File state tax returns If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to figure depreciation for the year you dispose of it. File state tax returns Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1 , later, under Examples. File state tax returns Declining balance rate. File state tax returns   You figure your declining balance rate by dividing the specified declining balance percentage (150% or 200% changed to a decimal) by the number of years in the property's recovery period. File state tax returns For example, for 3-year property depreciated using the 200% declining balance method, divide 2. File state tax returns 00 (200%) by 3 to get 0. File state tax returns 6667, or a 66. File state tax returns 67% declining balance rate. File state tax returns For 15-year property depreciated using the 150% declining balance method, divide 1. File state tax returns 50 (150%) by 15 to get 0. File state tax returns 10, or a 10% declining balance rate. File state tax returns   The following table shows the declining balance rate for each property class and the first year for which the straight line method gives an equal or greater deduction. File state tax returns Property Class Method Declining Balance Rate Year 3-year 200% DB 66. File state tax returns 667% 3rd 5-year 200% DB 40. File state tax returns 0 4th 7-year 200% DB 28. File state tax returns 571 5th 10-year 200% DB 20. File state tax returns 0 7th 15-year 150% DB 10. File state tax returns 0 7th 20-year 150% DB 7. File state tax returns 5 9th Straight Line Method When using the straight line method, you apply a different depreciation rate each year to the adjusted basis of your property. File state tax returns You must use the applicable convention in the year you place the property in service and the year you dispose of the property. File state tax returns You figure depreciation for the year you place property in service as follows. File state tax returns Multiply your adjusted basis in the property by the straight line rate. File state tax returns Apply the applicable convention. File state tax returns You figure depreciation for all other years (including the year you switch from the declining balance method to the straight line method) as follows. File state tax returns Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method). File state tax returns Determine the depreciation rate for the year. File state tax returns Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2). File state tax returns If you dispose of property before the end of its recovery period, see Using the Applicable Convention , later, for information on how to figure depreciation for the year you dispose of it. File state tax returns Straight line rate. File state tax returns   You determine the straight line depreciation rate for any tax year by dividing the number 1 by the years remaining in the recovery period at the beginning of that year. File state tax returns When figuring the number of years remaining, you must take into account the convention used in the year you placed the property in service. File state tax returns If the number of years remaining is less than 1, the depreciation rate for that tax year is 1. File state tax returns 0 (100%). File state tax returns Using the Applicable Convention The applicable convention (discussed earlier under Which Convention Applies ) affects how you figure your depreciation deduction for the year you place your property in service and for the year you dispose of it. File state tax returns It determines how much of the recovery period remains at the beginning of each year, so it also affects the depreciation rate for property you depreciate under the straight line method. File state tax returns See Straight line rate in the previous discussion. File state tax returns Use the applicable convention as explained in the following discussions. File state tax returns Half-year convention. File state tax returns   If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate the property. File state tax returns You deduct a full year of depreciation for any other year during the recovery period. File state tax returns   Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for a full year by 2. File state tax returns If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. File state tax returns If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final 6 months of the recovery period is the amount of your unrecovered basis in the property. File state tax returns Mid-quarter convention. File state tax returns   If this convention applies, the depreciation you can deduct for the first year you depreciate the property depends on the quarter in which you place the property in service. File state tax returns   A quarter of a full 12-month tax year is a period of 3 months. File state tax returns The first quarter in a year begins on the first day of the tax year. File state tax returns The second quarter begins on the first day of the fourth month of the tax year. File state tax returns The third quarter begins on the first day of the seventh month of the tax year. File state tax returns The fourth quarter begins on the first day of the tenth month of the tax year. File state tax returns A calendar year is divided into the following quarters. File state tax returns Quarter Months First January, February, March Second April, May, June Third July, August, September Fourth October, November, December   Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by the percentage listed below for the quarter you place the property in service. File state tax returns Quarter Percentage First 87. File state tax returns 5% Second 62. File state tax returns 5 Third 37. File state tax returns 5 Fourth 12. File state tax returns 5   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter you dispose of the property. File state tax returns Quarter Percentage First 12. File state tax returns 5% Second 37. File state tax returns 5 Third 62. File state tax returns 5 Fourth 87. File state tax returns 5   If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final quarter of the recovery period is the amount of your unrecovered basis in the property. File state tax returns Mid-month convention. File state tax returns   If this convention applies, the depreciation you can deduct for the first year that you depreciate the property depends on the month in which you place the property in service. File state tax returns Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by a fraction. File state tax returns The numerator of the fraction is the number of full months in the year that the property is in service plus ½ (or 0. File state tax returns 5). File state tax returns The denominator is 12. File state tax returns   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. File state tax returns If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final month of the recovery period is the amount of your unrecovered basis in the property. File state tax returns Example. File state tax returns You use the calendar year and place nonresidential real property in service in August. File state tax returns The property is in service 4 full months (September, October, November, and December). File state tax returns Your numerator is 4. File state tax returns 5 (4 full months plus 0. File state tax returns 5). File state tax returns You multiply the depreciation for a full year by 4. File state tax returns 5/12, or 0. File state tax returns 375. File state tax returns Examples The following examples show how to figure depreciation under MACRS without using the percentage tables. File state tax returns Figures are rounded for purposes of the examples. File state tax returns Assume for all the examples that you use a calendar year as your tax year. File state tax returns Example 1—200% DB method and half-year convention. File state tax returns In February, you placed in service depreciable property with a 5-year recovery period and a basis of $1,000. File state tax returns You do not elect to take the section 179 deduction and the property does not qualify for a special depreciation allowance. File state tax returns You use GDS and the 200% declining balance (DB) method to figure your depreciation. File state tax returns When the straight line (SL) method results in an equal or larger deduction, you switch to the SL method. File state tax returns You did not place any property in service in the last 3 months of the year, so you must use the half-year convention. File state tax returns First year. File state tax returns You figure the depreciation rate under the 200% DB method by dividing 2 (200%) by 5 (the number of years in the recovery period). File state tax returns The result is 40%. File state tax returns You multiply the adjusted basis of the property ($1,000) by the 40% DB rate. File state tax returns You apply the half-year convention by dividing the result ($400) by 2. File state tax returns Depreciation for the first year under the 200% DB method is $200. File state tax returns You figure the depreciation rate under the straight line (SL) method by dividing 1 by 5, the number of years in the recovery period. File state tax returns The result is 20%. File state tax returns You multiply the adjusted basis of the property ($1,000) by the 20% SL rate. File state tax returns You apply the half-year convention by dividing the result ($200) by 2. File state tax returns Depreciation for the first year under the SL method is $100. File state tax returns The DB method provides a larger deduction, so you deduct the $200 figured under the 200% DB method. File state tax returns Second year. File state tax returns You reduce the adjusted basis ($1,000) by the depreciation claimed in the first year ($200). File state tax returns You multiply the result ($800) by the DB rate (40%). File state tax returns Depreciation for the second year under the 200% DB method is $320. File state tax returns You figure the SL depreciation rate by dividing 1 by 4. File state tax returns 5, the number of years remaining in the recovery period. File state tax returns (Based on the half-year convention, you used only half a year of the recovery period in the first year. File state tax returns ) You multiply the reduced adjusted basis ($800) by the result (22. File state tax returns 22%). File state tax returns Depreciation under the SL method for the second year is $178. File state tax returns The DB method provides a larger deduction, so you deduct the $320 figured under the 200% DB method. File state tax returns Third year. File state tax returns You reduce the adjusted basis ($800) by the depreciation claimed in the second year ($320). File state tax returns You multiply the result ($480) by the DB rate (40%). File state tax returns Depreciation for the third year under the 200% DB method is $192. File state tax returns You figure the SL depreciation rate by dividing 1 by 3. File state tax returns 5. File state tax returns You multiply the reduced adjusted basis ($480) by the result (28. File state tax returns 57%). File state tax returns Depreciation under the SL method for the third year is $137. File state tax returns The DB method provides a larger deduction, so you deduct the $192 figured under the 200% DB method. File state tax returns Fourth year. File state tax returns You reduce the adjusted basis ($480) by the de
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File state tax returns 1. File state tax returns   Scholarships, Fellowships, Grants, and Tuition Reductions Table of Contents Reminder Introduction Scholarships and FellowshipsTax-Free Scholarships and Fellowships Taxable Scholarships and Fellowships Reporting Scholarships and Fellowships Other Types of Educational AssistanceFulbright Grants Pell Grants and Other Title IV Need-Based Education Grants Payment to Service Academy Cadets Veterans' Benefits Qualified Tuition Reduction Reminder Individual retirement arrangements (IRAs). File state tax returns  You can set up and make contributions to an IRA if you receive taxable compensation. File state tax returns Under this rule, a taxable scholarship or fellowship is compensation only if it is shown in box 1 of your Form W-2, Wage and Tax Statement. File state tax returns For more information about IRAs, see Publication 590. File state tax returns Introduction This chapter discusses the income tax treatment of various types of educational assistance you may receive if you are studying, teaching, or researching in the United States. File state tax returns The educational assistance can be for a primary or secondary school, a college or university, or a vocational school. File state tax returns Included are discussions of: Scholarships, Fellowships, Need-based education grants, such as a Pell Grant, and Qualified tuition reductions. File state tax returns Many types of educational assistance are tax free if they meet the requirements discussed here. File state tax returns Special rules apply to U. File state tax returns S. File state tax returns citizens and resident aliens who have received scholarships or fellowships for studying, teaching, or researching abroad. File state tax returns For information about these rules, see Publication 54, Tax Guide for U. File state tax returns S. File state tax returns Citizens and Resident Aliens Abroad. File state tax returns Scholarships and Fellowships A scholarship is generally an amount paid or allowed to, or for the benefit of, a student (whether an undergraduate or a graduate) at an educational institution to aid in the pursuit of his or her studies. File state tax returns A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research. File state tax returns Amount of scholarship or fellowship. File state tax returns   The amount of a scholarship or fellowship includes the following: The value of contributed services and accommodations. File state tax returns This includes such services and accommodations as room (lodging), board (meals), laundry service, and similar services or accommodations that are received by an individual as a part of a scholarship or fellowship. File state tax returns The amount of tuition, matriculation, and other fees that are paid or remitted to the student to aid the student in pursuing study or research. File state tax returns Any amount received in the nature of a family allowance as a part of a scholarship or fellowship. File state tax returns Tax-Free Scholarships and Fellowships A scholarship or fellowship is tax free (excludable from gross income) only if you are a candidate for a degree at an eligible educational institution. File state tax returns A scholarship or fellowship is tax free only to the extent: It does not exceed your expenses; It is not designated or earmarked for other purposes (such as room and board), and does not require (by its terms) that it cannot be used for qualified education expenses; and It does not represent payment for teaching, research, or other services required as a condition for receiving the scholarship. File state tax returns (But for exceptions, see Payment for services,later. File state tax returns Use Worksheet 1–1 to figure the amount of a scholarship or fellowship you can exclude from gross income. File state tax returns Candidate for a degree. File state tax returns   You are a candidate for a degree if you: Attend a primary or secondary school or are pursuing a degree at a college or university, or Attend an educational institution that: Provides a program that is acceptable for full credit toward a bachelor's or higher degree, or offers a program of training to prepare students for gainful employment in a recognized occupation; and Is authorized under federal or state law to provide such a program and is accredited by a nationally recognized accreditation agency. File state tax returns Eligible educational institution. File state tax returns   An eligible educational institution is one whose primary function is the presentation of formal instruction and that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities. File state tax returns Qualified education expenses. File state tax returns   For purposes of tax-free scholarships and fellowships, these are expenses for: Tuition and fees required to enroll at or attend an eligible educational institution, and Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. File state tax returns These items must be required of all students in your course of instruction. File state tax returns Expenses that do not qualify. File state tax returns   Qualified education expenses do not include the cost of: Room and board, Travel, Research, Clerical help, or Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution. File state tax returns Payment for services. File state tax returns   Generally, you cannot exclude from your gross income the part of any scholarship or fellowship that represents payment for teaching, research, or other services required as a condition for receiving the scholarship. File state tax returns This applies even if all candidates for a degree must perform the services to receive the degree. File state tax returns (See exceptions next. File state tax returns ) Exceptions. File state tax returns   You do not have to treat as payment for services the part of any scholarship or fellowship that represents payment for teaching, research, or other services if you receive the amount under: The National Health Service Corps Scholarship Program, or The Armed Forces Health Professions Scholarship and Financial Assistance Program. File state tax returns Example 1. File state tax returns You received a scholarship of $2,500. File state tax returns The scholarship was not received under either of the exceptions mentioned above. File state tax returns As a condition for receiving the scholarship, you must serve as a part-time teaching assistant. File state tax returns Of the $2,500 scholarship, $1,000 represents payment for teaching. File state tax returns The provider of your scholarship gives you a Form W-2 showing $1,000 as income. File state tax returns Your qualified education expenses were at least $1,500. File state tax returns Assuming that all other conditions are met, $1,500 of your scholarship is tax free. File state tax returns The $1,000 you received for teaching is taxable. File state tax returns Example 2. File state tax returns You are a candidate for a degree at a medical school. File state tax returns You receive a scholarship (not under either of the exceptions mentioned above) for your medical education and training. File state tax returns The terms of your scholarship require you to perform future services. File state tax returns A substantial penalty applies if you do not comply. File state tax returns The entire amount of your grant is taxable as payment for services in the year it is received. File state tax returns Athletic Scholarships An athletic scholarship is tax free only if and to the extent it meets the requirements discussed later. File state tax returns Worksheet 1-1. File state tax returns    You can use Worksheet 1-1, Taxable Scholarship and Fellowship Income , later, to figure the tax-free and taxable parts of your athletic scholarship. File state tax returns    Worksheet 1-1. File state tax returns Taxable Scholarship and Fellowship Income 1. File state tax returns Enter the total amount of any scholarship or fellowship for 2013. File state tax returns See Amount of scholarship or fellowship, earlier. File state tax returns 1. File state tax returns       If you are a degree candidate at an eligible educational institution, go to line 2. File state tax returns If you are not a degree candidate at an eligible educational institution, stop here. File state tax returns The entire amount is taxable. File state tax returns For information on how to report this amount on your tax return, see Reporting Scholarships and Fellowships , earlier, in this chapter. File state tax returns       2. File state tax returns Enter the amount from line 1 that was for teaching, research, or any other services required as a condition for receiving the scholarship. File state tax returns (Do not include amounts received for these items under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program. File state tax returns ) 2. File state tax returns     3. File state tax returns Subtract line 2 from line 1 3. File state tax returns     4. File state tax returns Enter the amount from line 3 that your scholarship or fellowship required you to use for other than qualified education expenses 4. File state tax returns     5. File state tax returns Subtract line 4 from line 3 5. File state tax returns     6. File state tax returns Enter the amount of your qualified education expenses 6. File state tax returns     7. File state tax returns Enter the smaller of line 5 or line 6. File state tax returns This amount is the most you can exclude from your gross income (the tax-free part of the scholarship or fellowship) 7. File state tax returns     8. File state tax returns Subtract line 7 from line 5 8. File state tax returns     9. File state tax returns Taxable part. File state tax returns Add lines 2, 4, and 8. File state tax returns See Reporting Scholarships and Fellowships , earlier, for how to report this amount on your tax return 9. File state tax returns     Taxable Scholarships and Fellowships If and to the extent your scholarship or fellowship does not meet the requirements described earlier, it is taxable and must be included in gross income. File state tax returns You can use Worksheet 1–1, Taxable Scholarship and Fellowship Income, later, to figure the tax-free and taxable parts of your scholarship or fellowship. File state tax returns Reporting Scholarships and Fellowships Whether you must report your scholarship or fellowship depends on whether you must file a return and whether any part of your scholarship or fellowship is taxable. File state tax returns If your only income is a completely tax-free scholarship or fellowship, you do not have to file a tax return and no reporting is necessary. File state tax returns If all or part of your scholarship or fellowship is taxable and you are required to file a tax return, report the taxable amount as explained below. File state tax returns You must report the taxable amount whether or not you received a Form W-2. File state tax returns If you receive an incorrect Form W-2, ask the payer for a corrected one. File state tax returns For information on whether you must file a return, see Publication 501, Exemptions, Standard Deduction, and Filing Information, or your income tax form instructions. File state tax returns How To Report How you report any taxable scholarship or fellowship income depends on which return you file. File state tax returns Form 1040EZ. File state tax returns   If you file Form 1040EZ, include the taxable amount in the total on line 1. File state tax returns If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount in the space to the left of line 1. File state tax returns Form 1040A. File state tax returns   If you file Form 1040A, include the taxable amount in the total on line 7. File state tax returns If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount in the space to the left of line 7. File state tax returns Form 1040. File state tax returns   If you file Form 1040, include the taxable amount in the total on line 7. File state tax returns If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount on the dotted line next to line 7. File state tax returns Schedule SE (Form 1040). File state tax returns   To determine your net earnings from self-employment, include amounts you receive under a scholarship as pay for your services that are reported to you on Form 1099-MISC, Miscellaneous Income. File state tax returns If your net earnings are $400 or more, you must pay self-employment tax. File state tax returns Use Schedule SE, Self-Employment Tax, to figure this tax. File state tax returns Form 1040NR. File state tax returns   If you file Form 1040NR, report the taxable amount on line 12. File state tax returns Generally, you must report the amount shown in box 2 of Form(s) 1042-S, Foreign Person's U. File state tax returns S. File state tax returns Source Income Subject to Withholding. File state tax returns See the Instructions for Form 1040NR for more information. File state tax returns Form 1040NR-EZ. File state tax returns   If you file Form 1040NR-EZ, report the taxable amount on line 5. File state tax returns Generally, you must report the amount shown in box 2 of Form(s) 1042-S. File state tax returns See the Instructions for Form 1040NR-EZ for more information. File state tax returns Other Types of Educational Assistance The following discussions deal with other common types of educational assistance. File state tax returns Fulbright Grants A Fulbright grant is generally treated as a scholarship or fellowship in figuring how much of the grant is tax free. File state tax returns Pell Grants and Other Title IV Need-Based Education Grants These need-based grants are treated as scholarships for purposes of determining their tax treatment. File state tax returns They are tax free to the extent used for qualified education expenses during the period for which a grant is awarded. File state tax returns Payment to Service Academy Cadets An appointment to a United States military academy is not a scholarship or fellowship. File state tax returns Payment you receive as a cadet or midshipman at an armed services academy is pay for personal services and will be reported to you in box 1 of Form W-2. File state tax returns Include this pay in your income in the year you receive it unless one of the exceptions, discussed earlier under Payment for services , applies. File state tax returns Veterans' Benefits Payments you receive for education, training, or subsistence under any law administered by the Department of Veterans Affairs (VA) are tax free. File state tax returns Do not include these payments as income on your federal tax return. File state tax returns If you qualify for one or more of the education benefits discussed in chapters 2 through 12, you may have to reduce the amount of education expenses qualifying for a specific benefit by part or all of your VA payments. File state tax returns This applies only to the part of your VA payments that is required to be used for education expenses. File state tax returns You may want to visit the Veteran's Administration website at www. File state tax returns gibill. File state tax returns va. File state tax returns gov for specific information about the various VA benefits for education. File state tax returns Example. File state tax returns You have returned to college and are receiving two education benefits under the latest GI Bill: (1) a $1,534 monthly basic housing allowance (BHA) that is directly deposited to your checking account, and (2) $3,840 paid directly to your college for tuition. File state tax returns Neither of these benefits is taxable and you do not report them on your tax return. File state tax returns You also want to claim an American opportunity credit on your return. File state tax returns You paid $5,000 in qualified education expenses (see chapter 2, American Opportunity Credit , later). File state tax returns To figure the amount of credit, you must first subtract the $3,840 from your qualified education expenses because this payment under the GI Bill was required to be used for education expenses. File state tax returns You do not subtract any amount of the BHA because it was paid to you and its use was not restricted. File state tax returns Qualified Tuition Reduction If you are allowed to study tuition free or for a reduced rate of tuition, you may not have to pay tax on this benefit. File state tax returns This is called a “tuition reduction. File state tax returns ” You do not have to include a qualified tuition reduction in your income. File state tax returns A tuition reduction is qualified only if you receive it from, and use it at, an eligible educational institution. File state tax returns You do not have to use the tuition reduction at the eligible educational institution from which you received it. File state tax returns In other words, if you work for an eligible educational institution and the institution arranges for you to take courses at another eligible educational institution without paying any tuition, you may not have to include the value of the free courses in your income. File state tax returns The rules for determining if a tuition reduction is qualified, and therefore tax free, are different if the education provided is below the graduate level or is graduate education. File state tax returns You must include in your income any tuition reduction you receive that is payment for your services. File state tax returns Eligible educational institution. File state tax returns   An eligible educational institution is one that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities. File state tax returns Officers, owners, and highly compensated employees. File state tax returns   Qualified tuition reductions apply to officers, owners, or highly compensated employees only if benefits are available to employees on a nondiscriminatory basis. File state tax returns This means that the tuition reduction benefits must be available on substantially the same basis to each member of a group of employees. File state tax returns The group must be defined under a reasonable classification set up by the employer. File state tax returns The classification must not discriminate in favor of owners, officers, or highly compensated employees. File state tax returns Payment for services. File state tax returns   Generally, you must include in income the part of any qualified tuition reduction that represents payment for teaching, research, or other services by the student required as a condition of receiving the qualified tuition reduction. File state tax returns This applies even if all candidates for a degree must perform the services to receive the degree. File state tax returns (See below for exceptions. File state tax returns ) Exceptions. File state tax returns   You do not have to include in income the part of any scholarship or fellowship that represents payment for teaching, research, or other services if you receive the amount under: The National Health Service Corps Scholarship Program, or The Armed Forces Health Professions Scholarship and Financial Assistance Program. File state tax returns Education Below the Graduate Level If you receive a tuition reduction for education below the graduate level (including primary, secondary, or high school), it is a qualified tuition reduction, and therefore tax free, only if your relationship to the educational institution providing the benefit is described below. File state tax returns You are an employee of the eligible educational institution. File state tax returns You were an employee of the eligible educational institution, but you retired or left on disability. File state tax returns You are a widow or widower of an individual who died while an employee of the eligible educational institution or who retired or left on disability. File state tax returns You are the dependent child or spouse of an individual described in (1) through (3), above. File state tax returns Child of deceased parents. File state tax returns   For purposes of the qualified tuition reduction, a child is a dependent child if the child is under age 25 and both parents have died. File state tax returns Child of divorced parents. File state tax returns   For purposes of the qualified tuition reduction, a dependent child of divorced parents is treated as the dependent of both parents. File state tax returns Graduate Education A tuition reduction you receive for graduate education is qualified, and therefore tax free, if both of the following requirements are met. File state tax returns It is provided by an eligible educational institution. File state tax returns You are a graduate student who performs teaching or research activities for the educational institution. File state tax returns You must include in income any other tuition reductions for graduate education that you receive. File state tax returns How To Report Any tuition reduction that is taxable should be included as wages in box 1 of your Form W-2. File state tax returns Report the amount from Form W-2, box 1, on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ). File state tax returns Prev  Up  Next   Home   More Online Publications